Transcript Service Tax – Recent Budget Amendments

Service Tax Valuation
Rules, 2006
1
By:
A.Saiprasad
B.Com, LLB, ACA, DISA, AMIMA
Advocate
2
Session Overview
 Valuation Vis-à-Vis Negative List
 Historical Background
 Valuation Section
 Valuation Rules
 Alternative Valuation Mechanisms
 Service Tax Rules, 94 (word document)
 Abatement
 Notification No.26/12 ST (word document)
Valuation Vis-à-vis Negative List
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 Broad Scheme remains as before
 Marginal changes to align with new system of taxation
Works Contract
Previously - Rule 2A of Valn Rules or Composition scheme – Alternative/
Mutually exclusive
Presently – Unified scheme – Subsumes Composition Scheme
Catering Service/ Restaurant Service
Previously – Abatement – Ntfn No. 1/06 ST
Presently – New Rule 2C of Valuation Rules
Additions to inclusions/ exclusions - Rule 6
Abatement Notification – Provision of Credit
4
Historical Background
Section 67 – Initial Avatar – Separate valuation for
each service.
FA, 2001 Inserted New S. 67
Value = Gross amount charged by the service provider
for such service rendered by him.
Explanation – Inclusions and Exclusions.
FA, 2006 w.e.f.18.4.2006
Present S.67 inserted.
ST Valuation Rules Notified
Press Release (II) F.No.B1/4/2006-TRU dt.19.4.06
Sec.67 – Valuation Provision - I
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Where consideration is entirely in monetary terms:
Value = Gross amount charged
By the service provider
For such service provided or
To be provided by him;
Sec. 67(i)
Significance of ‘provided or to be provided’
R/w Rule 3 of POTR, 2011
Sec.67 – Valuation Provision – II
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Where consideration is not entirely in money:
Consideration not wholly or partly consisting of money,
Be such amount in money as,
With the addition of service tax charged,
Is equivalent to the consideration;
 Sec 67(ii)
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Sec.67 – Valuation Provision – III
Where consideration is not ascertainable:
Be the amount
As may be determined
In the prescribed manner
Prescription – Service Tax Valuation Rules, 2006
Sec 67(iii)
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Sec.67 – Valuation Provision – IV
 What is Gross Amount when service tax not
charged separately?
Sec 67(2)
 Cum Duty Value
 MRF Case – 1987 (27) ELT 553 (SC)
Value = (Cum Duty Price)/ (1 +R)
R = Rate of Tax
 For those demands where ST has not been
charged.
Sec.67 – Valuation Provision – V
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Meaning of Sec 67(2)
CCE & C V. Advantage Media Consultant, 2008 10 (STR),
449 (T)
Amount collected should be considered as inclusive of
service tax. – But Why?
Municipal Corporation of Delhi V. CST, 2009 16 STR 654
(T)
Bholanath Oberoi Sons V. CCE & ST, 2009 15 STR 61 (T)
Sec.67 – Valuation Provision – VI
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 The gross amount charged shall include
 Any amount received
 Towards the taxable service
 Before, During or After
 Provision of such service.
 Advance sought to be taxed
 Sec 67(3)
Sec.67 – Valuation Provision – VII
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 Subject to sub-sections (1), (2) and (3), the value shall be
determined in such manner as may be prescribed
 Prescription is as per Service Tax (Determination of Value) Rules,
2006
 Valuation Rules is applicable only if value not ascertainable as
per S.67(1),(2) & (3) or In addition to Sec 67 ?
 Similar to S.4(1)(a) & 4(1)(b) of CEA, 1944 or Section 14 of
Customs Act, 1962 ?
 S.67(4)
Sec.67 – Valuation Provision – VIII
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 Consideration includes any amount that is payable for
the taxable services provided or to be provided;
 Expln (a) to S.67
 Actual Meaning – Quid Pro Quo
 Contract’s Act – S.2(d)
 Service V. Declared Service
 S.65B(44) V. S.66E
 Agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act
 S.66E(e)
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Sec.67 – Valuation Provision – X
 Explanation (c) to Sec 67:
 Gross amount charged includes
 Payment by cheque, credit card,
 Deduction from account and
 Any form of payment by issue of credit notes or debit
notes and
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Sec.67 – Valuation Provision – XI
 Gross Amount charged - Associated Enterprises:
 Book adjustment, and
 Any amount credited or debited,
 To any account, whether called “Suspense account” or by any
other name,
 In the books of account of
 A person liable to pay service tax,
 Where the transaction of taxable service is with any associated
enterprise.
 Inserted w.e.f. 10.5.2008
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Sec.67 – Valuation Provision –
XII
 Associated Enterprise means AE as per Sec.92A of the IT
Act, 1961.
 Person Liable to pay tax – Defined U/r 2(1)(d) of STR, 94 – 8
categories of persons
 To avoid transactions where service is rendered but
payment is not made
 Book Adjustment and A/c Cr & Dr applicable only for AE
 Circular No.334/1/2008-TRU dt.29.2.08
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Sec.67 – Valuation Provision –
XIII
 Money defined – S.65B(33)
 “money” means legal tender,
 cheque, promissory note, bill of exchange,
 letter of credit, draft, pay order, traveller cheque
 money order, postal or electronic remittance or
 any such similar instrument
 but shall not include
 any currency that is held for its numismatic value
 Transaction in money – S.65B(44)
Valuation Concepts - I
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 If service performed free of charge?
 Fee Collected by Public Authority for performing statutory
functions/ duties?
 Required to perform as per law
 Collect fee, which is deposited to Govt A/c.
 Circular No.96/7/2007-ST dt.23.8.07.
Audit by C & AG
Regional Reference Std Laboratories
RTO
Directorate of Boilers
Department to certify petroleum storage tanks
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Valuation Concepts - II
 Consideration vis-à-vis Donation
 With obligation
 Without any obligation
 CKP Mandal V. CCE, 2006 5 STT 1 (Bom.)
 Consideration Vis-à-vis Grants for R & D
 Cultural Society of Angamally V. CCE, 2007 8 STR 155 (T)
 Circular No.127/9/2010-ST dt.16.8.10
 Amount must be charged for provision of service
 Amounts other than for provision of service
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Service Tax (Determination of
Value), Rules 2006
 Inserted w.e.f. 19.4.06 a/w new S. 67
 Notification No.12/06-ST
 Power to Notify - U/s 94(2)(aa)
 Section 94 – Power delegated to CG to make rules
 S.94(2)(aa) - The determination of amount and value
of taxable service under section 67
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Service Tax (Determination of
Value), Rules 2006 – Rule 2A
Valuation of Works Contract – Rule 2A
Amended by Ntfn No.24/12 ST dt.6.6.12
Value of service portion of Works Contract
(Gross amount charged - Value of transfer of property in goods
transferred)
Gross amount charged shall not include Value Added Tax
(VAT) or sales tax paid on transfer of property in goods.
Explanation (a) to Rule 2A(i)
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
Value of works contract service shall include, (i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and
services;
(iii) charges for planning, designing and architect’s fees;
(iv) charges for obtaining on hire or otherwise,
machinery and tools used for the execution of the
works contract
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
(v) cost of consumables such as water, electricity, fuel,
used in the execution of the works contract;
(vi) cost of establishment of the contractor relatable to
supply of labour and services;
(vii) other similar expenses relatable to supply of labour
and services; and
(viii) profit earned by the service provider relatable to
supply of labour and services;
Explanation (b) to Rule 2A(i)
Gannon Dunkerley & Co V. State of Rajasthan, 1993 (88) STC
204 (SC)
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
 Where VAT paid on actual value of goods,
 Such value adopted for VAT
 Taken as value of goods transferred
 Reduced from Gross Amount
 Rule 2A(ii)
 If VAT not paid for any reason?
 If VAT paid but on composition scheme?
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
 Valuation – Step I
 Where VAT paid on actual value of goods:
Such value adopted for the purposes of VAT,
Shall be value of transfer of property
 W/C = (Gross Value – Value of goods adopted for VAT)
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
Valuation – Step II
When not determined as per Step I, and not merely as
an option:
(A) - Original works: 40% of the total amount
(B) - Maintenance or Repair or Reconditioning or Restoration or
Servicing of goods: 70% of total amount
Other that (A) & (B) – 60% of total amount
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Service Tax (Determination of
Value), Rules 2006 - Rule 2A
Original works means : Expln 1 to Rule 2A(ii)(C)
All new constructions;
Additions and alterations to abandoned or damaged structures
on land, required to make them workable
Erection, Commissioning or Installation of plant, machinery or
Eqpt or Structure, pre-fabricated or otherwise
Cenvat Credit on inputs – Expln 2 to Rule 2A(ii)(D)
Input Definition - Rule 2(k) of CCR, 04
It allows Cr in certain cases for W/c, Construction Service!!
How to reconcile the aforesaid provisions?
27
Service Tax (Determination of
Value), Rules 2006 - Rule 2A
Total Amount – Rule 2A(ii)(D)
Gross Amt Charged and
Fair Market Value of all goods and services supplied
In or in relation to execution of W/c
Whether or not supplied under the same contract or any
other contract
After deducting
Amount charged for such goods and services
VAT or ST levied thereon
Determination of Total Amount
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 1. Gross amount received excluding taxes
80,00,000
 2. Fair market value of goods supplied by the
service receiver excluding taxes 50,00,000
 3. Amount charged by service receiver for (2)
above 10,00,000
 4.Total amount charged (1+2-3) 1,20,00,000
 5.Value of service portion(40% of 4 in case of
original works) 48,00,000
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Service Tax (Determination of
Value), Rules 2006 - Rule 2B
 Foreign Exchange Broking Service & Banking & Other Financial
Service
 R.2B -Valuation of Sale of Foreign Currency
 $1,000 sold @ Rs.45/$
 RBI Reference Rate Rs.45.50
 Taxable Value = (Selling Rate - RBI reference Rate) X Total Units of Currency
 (Rs.45.50 – Rs.45) X 1,000 = Rs.500
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Service Tax (Determination of
Value), Rules 2006 - Rule 2B
 R.2B – Valuation of Purchase of Foreign Currency
 INR 70,000 changed for GBP @ Rs.70/GBP
 Hence 1,000 GBP exchanged
 RBI Reference Rate – Rs.69
 Taxable Value = (Rs.70 – Rs.69) X 1,000 = Rs.1,000
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Service Tax (Determination of
Value), Rules 2006 - Rule 2B
RBI Reference Rate not available
Taxable Value = 1% of the Gross Amount of INR
PROVIDED OR RECEIVED
Neither Currency exchanged in INR
Taxable Value = 1% of the LESSER of the two amounts
the person charging the money would have RECEIVED
by converting any of the two currencies into INR at
the reference rate provided by RBI
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Service Tax (Determination of
Value), Rules 2006 - Rule 2C
New Rule 2C inserted in Valuation Rules, 2006 by
Notification No.24/12 ST dt.6.6.12
Service portion in an activity of serving food
Restaurant – 40% of Total Amount
Outdoor Caterer – 60% of Total Amount
Cenvat available ?
On Capital Goods, Input Services ?
On Inputs from chapter 1 to 22 of CETA, 85
Total Amount – Similar to works contract.
Bundled Service – Food + Premise – Ntfn 26/12
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Service Tax (Determination of
Value), Rules 2006 - Rule 3
 Consideration received is not wholly or partly in money
 Value = 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;
 Nat Steel Equipment Pvt Ltd V. CCE, 1988 (34) ELT 8 (SC)
 Meaning of the term ‘similar’
 Rule 3(a)
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Service Tax (Determination of
Value), Rules 2006 – Rule 3
 When value finally not determinable
 Value = Equivalent Money Value
 Which shall, in no case be less than the cost of
provision of such taxable service.
 Cost V. Value - Difference
 Rule 3(b)
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Service Tax (Determination of
Value), Rules 2006 - Rule 4
 Value can be verified by CEO
 Rule 4(1)
 When value is not determined according to Sec 67 and Rules
then;
 SCN to be issued
 When can SCN be issued?
 What does SCN ask ?
 Value provided in SCN should not be adopted
 Rule 4(2)
 CEO shall determine value after hearing
 Rule 4(3)
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
Expenditure or Cost
Incurred by Service Provider & Not Receiver
In course of providing taxable service
Treated as Consideration
Shall be included in the value
Rule 5(1)
 Circular No.B1/4/2006-TRU dt.19.4.06
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
 Intercontinental Consultants & Technocrats P Ltd V. UOI, 2013 (29)
STR 9 (Del)
 Sercon India Pvt Ltd V. CST, 2013 (30) STR 454 (Del)
Rule 5(1) struck down as Ultra vires S. 67
Gross amount charged does not cover expenditure or
costs
Rule 5(1)
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
Expenditure or Cost incurred by ‘Pure Agent’
Excluded from Value of Taxable Services
 Conditions:
Service Recipient actually uses the goods or services
Service Recipient actually liable to make payment to the third
party;
Service Recipient authorises service provider to incur
expenditure or Cost;
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
 Service Recipient aware that goods and services for which
payment is made by service receiver is actually provided by a
third party
 Such payment separately indicated in the invoice issued by the
service provider to the Service Recipient;
 Only Actual amount recovered by service provider
 Goods or services procured by the service provider are in addition
to the actual services provided.
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
Meaning of Pure Agent:
 Contractual agreement with Service Recipient to act as pure
agent and to incur expenditure or costs
 Neither intends to hold nor holds any title to the goods or
services so procured or provided
 Service provider does not use such goods or services for himself
 Receives only actual amount from Service Recipient
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
Re-imbursement not includable in value:
Bhagyanagar Services v. CCE, 2006 (4) S.T.R. 22
E.V. Mathai & Co. v. CCE 2006 (3) S.T.R. 116
Keralam Enterprises v. CCE 2008 (9) S.T.R. 503
U.M. Thariath & Co. v. CCE 2007 (8) S.T.R. 161
Nandhini Warehousing Crop. v. CCE 2007 (8) S.T.R. 511
Jaylaxmi Enterprises v. CCE 2008 (9) S.T.R. 19
B.S. Refrigeration Ltd. v. CCE 2006 (4) S.T.R. 103
Rolex Logistics P. Ltd. v. CST 2009 (13) S.T.R. 147
42
Service Tax (Determination of Value),
Rules 2006 - Rule 5
Re-imbursement includable in value:
 Naresh Kumar & Co. Pvt. Ltd. 2008 (11) S.T.R. 578
 Kirloskar Pneumatics Co. Ltd. 2011-TIOL-453-CESTAT-MUM and
 Harveen & Co. [2011-TIOL-848-CESTAT-DEL]
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Service Tax (Determination of
Value), Rules 2006 - Rule 5
 Rule 5 – Basically relates to re-imbursement of expenses
 Legal or contractual Obligation of service receiver
 To pay to third party
 The said amount paid by service provider
 The amount is paid on behalf of service recipient
 Whether the expense was in the nature of inputs or input
services?
If yes – not a reimbursement.
Cr may be available as input/ input service
Service Tax (Determination of Value),
44
Rules 2006 - Rule 5
 Costs in the nature of inputs and input services cannot be treated
as reimbursements.
 No legal justification to artificially split cost:
 Partly as cost of services (inputs + input service)
 Rest as reimbursable expenses
 Sri Bhagavathy Traders V. CCE, 2011 (24) STR 290 (T - LB)
 When will re-imbursement arise?
 Service provider under no obligation, but pays & recovers from
service receiver – reimbursement
 Then not included in the value of service
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Service Tax (Determination of
Value), Rules 2006 - Rule 6
 Inclusions: - Rule 6(1)
 Commission or Brokerage charged by Broker
 Premium charged by the insurer from the policy holder;
 Commission received by the air travel agent from the airline;
 Commission, received by an actuary, or intermediary or insurance
intermediary or insurance agent from the insurer;
 Reimbursement received by the ` service station, from
manufacturer for carrying out service of any motor car
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Service Tax (Determination of
Value), Rules 2006 - Rule 6
 Commission - rail travel agent from the Railways or the customer;
 Remuneration or commission, paid to a C & F agent
 Commission - insurance auxiliary services provided by an
insurance agent.
 Demurrage charges - service beyond period originally contracted –
Inserted w.e.f. 1.7.12
47
Service Tax (Determination of
Value), Rules 2006 - Rule 6
Exclusions:- Rule 6(2)
 Initial deposit made by the subscriber at the time of application
for telephone connection or pager or FAX or telegraph or telex or
for leased circuit;
 Airfare collected by air travel agent in respect of service provided
by him;
 Rail fare collected by [rail travel agent] in respect of service
provided by him;
 Interest on loans.
48
Service Tax (Determination of
Value), Rules 2006 - Rule 6
 Taxes levied by Government on passenger traveling by air, if shown
separately on the ticket
 Inserted w.e.f. 1.7.12
Accidental damages due to unforeseen action not relatable to
the provision of service;
Subsidies or grants disbursed by the Government, not in the
nature of directly influencing the value of service.
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Thank You