Special Story – Valuation under Indirect Tax Laws
CA Sunil Gabhawalla
Valuation of Taxable Services – Section 67
1.
Introduction
1.1 Section 66B of the Finance Act, 1994 levies
a charge of service tax at a prescribed percentage
of the value of taxable services provided or
agreed to be provided. Therefore, service tax is
payable on 'value of taxable services'.
1.2 Unlike section 3 of the Central Excise Act,
1944 which does not integrate the valuation of
excisable goods within the charging provision,
under the service tax regime, the value of
taxable service is integrated within the charging
provision itself. This therefore implies that
in case there is no value, there cannot be any
service tax. Unlike Central Excise, where goods
manufactured but supplied free are liable for
payment of duty, there can be no service tax on
services which are provided free of cost.
1.3 Further, since both the value as well as the
rate of service tax is integrated into the charging
provision itself, any collection of service tax on
an alternative basis like composition, abatement,
etc. can be optional only. Further, the charge
under such alternative scheme cannot exceed
the charge of service tax as prescribed under the
normal mechanism of section 66B i.e. 12% of the
value.
1.4 Section 67 of the Act read with the
Service Tax (Determination of Value) Rules,
2006 exhaustively deal with the principles of
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valuation of taxable services. This article deals
with the provisions of section 67 of the Act. The
Service Tax (Determination of Value) Rules, 2006
are not discussed in this article.
2.
Broad Scheme of Valuation
2.1 Section 67 of the Finance Act, 1994
provides for the valuation of taxable service.
2.2 Sub-section (1) thereof visualises three
alternate situations as summarised in the table
below:
Situation
Valuation
Mechanism
(i)
Where the provision
of service is for a
consideration
in
money
Gross
amount
charged by the service
provider for such
service provided or
to be provided by him
(ii)
Where the provision
of service is for a
consideration not
wholly or partly
consisting of money
Such amount in
money, with the
addition of service
tax charged, as is
equivalent to the
consideration
(iii)
Where the provision The amount as may
of service is for a be determined in the
consideration which prescribed manner
is not ascertainable
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2.3 Sub-section (2) permits the assessee to
calculate service tax based on reverse working
in a situation where in the amount charged is
inclusive of service tax. Sub-section (3) deines
the gross amount to include any amount
received towards the taxable service before,
during or after provision of such service.
2.4 Sub-section (4) empowers the Central
Government to prescribe rules to determine the
value of taxable services. In exercise of these
powers, the Central Government has prescribed
the Service Tax (Determination of Value) Rules,
2006 effective from 19-4-2006 to determine the
value of taxable services. It may be noted that
the said provisions, being in the nature of Rules,
are subservient to the provisions of section
67, which command a more stronger statutory
backing and should therefore prevail in case of
any internal conlicts
3.
Tax to be imposed on gross
amount charged
3.1 The basic principle of valuation is that
the value shall be the gross amount charged.
There are no rules for notional valuation. On
a perusal of section 67, it is very evident that
there is no mechanism to move away from the
consideration exchanging hands. This is because
of multiple reasons.
•
The general understanding of the term
“service” itself denotes contract as
compared to merely an activity. Therefore,
there is no scope from deviating from the
concept of consideration under section 25
of the Contract Act and demanding tax on
any value other than the said value
•
The statutory definition of service
under section 65B(44) also endorses this
view that a service is defined by the
consideration exchanging hands
•
The charging section 66B of the Act also
clearly integrates within itself the concept
of value of services exchanging hands.
3.2 In view of the above principles, it is
evident that in cases where no amount is
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charged to the client, i.e. when services are
provided free of cost, there could be no levy
towards service tax.
3.3 Similarly, if the services are provided at
a value which is lower than the market value
or the MRP, service tax can be demanded only
on the amount actually charged and not on
the gross MRP. Similarly, no service tax can be
demanded on discounts offered at the time of
entering into the contract of service.
3.4 Since the tax has to be paid on the
gross amount charged, it is not possible for
the assessee to deduct the expenses from the
gross taxable amount. In fact, rule 5(1) of the
Service Tax (Determination of Value) Rules, 2006
reiterates this axiomatic position.
3.5 This principle of taxation of gross amount
received implies that even in cases where the
exact amount of cost incurred is charged to the
customers, service tax is still applicable. In cases
where the services are subsidised, service tax is
applicable only on the subsidised value.
4.
Valuation of
consideration
non-monetary
4.1 Section 67(1)(ii) deals with situations
where the consideration is not wholly in money.
In such cases, it has been provided that the
value of taxable services shall be such amount
in money, with the addition of service tax
charged, as is equivalent to the consideration (i.e.
equivalent market value of the non-monetary
consideration)
4.2 It is clariied through the Education Guide
that ‘consideration’ means everything received in
return for a provision of service which includes
monetary payment and any consideration
of non-monetary nature as well as deferred
consideration.
4.3 Section 2(d) of the Indian Contract Act,
1872 deines consideration as follows —
"When, at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, or does or abstains from
doing, or promises to do or abstains from doing,
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Special Story – Valuation under Indirect Tax Laws
something, such act or abstinence or promise is
called a consideration for the promise"
4.4 Accordingly, it is clarified that
'consideration' means everything received
or recoverable in return for a provision of
service which includes monetary payment and
any consideration of non-monetary nature or
deferred consideration as well as recharges
between establishments located in a non-taxable
territory on one hand and taxable territory on
the other hand.
4.5 It is further clarified that monetary
consideration means any consideration received
in the form of money. 'Money' has been deined
in section 65B and includes not only cash but
also cheque, promissory note, bill of exchange,
letter of credit, draft, pay order, traveller's
cheque, money order, postal or electronic
remittance or any such similar instrument while
non-monetary consideration essentially means
compensation in kind.
4.6 Some examples of non-monetary
consideration include:
•
Supply of goods and services in return for
provision of service
•
Refraining or forbearing to do an act in
return for provision of service
•
Tolerating an act or a situation in return
for provision of a service
•
Doing or agreeing to do an act in return
for provision of service
4.7 The non-monetary consideration also
needs to be valued as per Section 67 of the Act
for determining the tax payable on the taxable
service since service tax is levied on the value
of consideration received which includes both
monetary consideration and money value of
non-monetary consideration.
5.
Valuation
in
case
the
consideration is not ascertainable
5.1 Section 67(1)(iii) deals with situations
where the consideration is not ascertainable.
In such cases, it has been provided that the
value of taxable services shall be as prescribed.
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Accordingly, the Service Tax (Determination of
Value) Rules, 2006 have prescribed mechanism
for valuation in such cases.
5.2
There may be several situations wherein it
may be difficult to determine the consideration
received by service provider for provision of a
service. Such situations can arise on account of
several factors such as consideration of service
being embedded in the total amount received as
consideration for a composite activity involving
elements of provisions of service and element of sale
of goods or consideration for service being included
in the gross amount charged for a particular
transaction or consideration of service being
wholly or partly in the nature of non-monetary
consideration and such non-monetary consideration
cannot be converted into monetary terms.
5.3 The manner of determining the value
has been prescribed under Service Tax
(Determination of Value) Rules, 2006. Rule 3
specifically provides that the value of taxable
service where such value is not ascertainable,
shall be determined by the service provider in
the following manner:–
(a)
the value of such taxable service shall be
equivalent to the gross amount charged
by the service provider to provide similar
service to any other person in the ordinary
course of trade and the gross amount
charged is the sole consideration;
(b)
where the value cannot be determined
in accordance with clause (a), the service
provider shall determine the equivalent
money value of such consideration which
shall, in no case be less than the cost of
provision of such taxable service
6.
Billing inclusive of Service Tax
6.1 Service tax is payable on the value of
services irrespective of the realisation of service
tax amount. If the billing is done inclusive of
service tax, the assessee can claim that the bill
amount should be bifurcated into value and
service tax components. Accordingly the service
tax payable shall be (12.36 x 100/112.36)
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Valuation of Taxable Services – Section 67
6.2 However, one will also have to consider
the impact of violation of Rule 4A of the Service
Tax Rules which requires the service provider
to separately indicate the value of the taxable
services and the service tax thereon. The
CENVAT Credit claim of the service recipient is
also prejudiced in case of an inclusive billing and
therefore it is preferable to avoid billing inclusive
of service tax.
7.
Applicable rate for foreign
currency transactions
7.1 Section 67A has been inserted with effect
from 28-5-2012 to specifically provide that the
rate of service tax, value of a taxable service
and rate of exchange, if any, shall be the rate of
service tax or value of a taxable service or rate
of exchange, as the case may be, in force or as
applicable at the time when the taxable service
has been provided or agreed to be provided. An
Explanation to the said Section further clariies
that for the purposes of this section, "rate of
exchange" means the rate of exchange referred to
in the Explanation to section 14 of the Customs
Act, 1962 (52 of 1962). This is discussed in detail
in a separate article
8.
Specific deviations from the
general rules of valuation
8.1 While the general principle is that service
tax has to be paid at the rate of 12% of the
value of taxable services charged, there are
some specific deviations from the general rule
of valuation. Since the general rule of valuation
and the rate of service tax is embedded in the
charging provision of Section 66B itself, it is
important to note that each of these deviations
are optional and the assessee can choose the
generic mechanism of discharging service tax at
the rate of 12% on the value of taxable services.
Valuation of service portion in composite
contracts:
8.2 In general, a composite contract should not
be vivisected. However, based on the principles
laid down by the Supreme Court, in certain
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cases, the service component in composite
contracts can be taxed. It may not be easy to
determine such service component and therefore
the Service Tax (Determination of Value) Rules,
2006 provide for mechanism of valuation of the
service component of a composite contract. The
following table summarises the said Rules:
Situation
Rule
Service Component of Works Contract
2A
Service Component in Supply of Food
as a part of Service
2C
Service Component in the money
changing activities
2B
Abatements
8.3 In addition to the specific rules to
determine the value of the service embedded
in the composite contracts, the abatement
notification has a bearing on the valuation of
services. All such abatements for specified
category of services have been merged into
a single Notification No. 26/2102-ST, dated
20-6-2012.
Compounding schemes
8.4 The law also provides for simplified
compounding mechanism for determining the
amount of service tax payable. These sub-rules
either specify the service tax payable as a certain
percentage of the gross amount of a specified
sum received by the service provider or also
provide for manner of determination of value of
taxable service for other speciied services. This
facility is normally available as an option to the
person responsible to pay service tax.
9.
Conclusion
9.1 With the comprehensive definition of
service, the issues in the field of valuation
will now receive more attention than ever
before. Due to the intangible and personalised
nature of the services, it may not be easy to ind
comparables and many disputes may arise in
this regard.
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