S. 67 was
introduced in 2006 w.e.f. 18.04.2006
1.
Introduction
In cases
where the service provider received any part of the consideration in non
monetary form or by way of reimbursement , such item did not figure in the invoice
raised, thereby depressing the real value of taxable service.
Section 67
was recast in order to cater to situations where any part of the consideration
or the full consideration itself for service provided or to be provided is not
received in money.
Statutory
Provision – S. 67
(1) Subject
to the provisions of this Chapter, service tax chargeable on any taxable
service with reference to its value shall—
(i) in a
case where the provision of service is for a consideration in money, be the
gross amount charged by the service provider for such service provided or to be
provided by him;
(ii) in a
case where the provision of service is for a consideration not wholly or partly
consisting of money, be such amount in money, with the addition of service tax
charged, is equivalent to the consideration;
(iii) in a
case where the provision of service is for a consideration which is not
ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where
the gross amount charged by a service provider, for the service provided or to
be provided is inclusive of service tax payable, the value of such taxable
service shall be such amount as, with the addition of tax payable, is equal to
the gross amount charged.
(3) The
gross amount charged for the taxable service shall include any amount received
towards the taxable service before, during or after provision of such service.
(4) Subject
to the provisions of sub-sections (1), (2) and (3), the value shall be
determined in such manner as may be prescribed.
Explanation.—For
the purposes of this section,—
(a)
“consideration” includes any amount that is payable for the taxable services
provided or to be provided;
(b) [ * * *
]
(c) “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 [book
adjustment, and any amount credited or debited, as the case may be, 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.
1.
Service tax chargeable with reference to its value
S. 67 as
substituted , does not speak about its ‘value of taxable service’ but uses the
expression ‘ service tax chargeable on any taxable service with reference to
its value’
2.
Consideration may be monetary
S. 65 B (33)
of the Act , defines ‘ money ’ means legal tender , cheque , promissory notes,
full of exchange , letter of credit, draft, pay order, travelers cheque, money
order, postal or electronic remittance or any similar instrument but shall not
include any currency that is held for its numismatic value.
3.
Tax is payable on the value of taxable service and not on entire value of
contract.
It should be
carefully noted that S.67[1][i] of the Act uses the world ‘such service’ and
not ‘the service’ . Such means having the particular quality or character
specified; representing or referring to object as already particularized in
terms which are not mentioned.
As per
Webster dictionary “ such ” mean ‘of kind specified or understood’
The charge
should be for taxable service provided or to be provided. Thus, if any other
amount is charged which is not for taxable service provided or to be provided,
service tax will not be payable on such charge.
Amount of
mess charges collected from student has no nexus with coaching activity.
Aditya
college of competitive examination v. CCE [ Banglore CESTAT]
Agra Steel
Corporation V. CCE [ New Delhi- CESTAT ]
4.
Consideration may be non monetary
In this
situation , clause (ii) of section 67(1) of the Act, provides that the value
shall be such amount in money as , with the addition of service tax charged, is
equivalent to the consideration .
Example :
Supply of goods or service in return for provision of services- A agrees to
provide a tax opinion in return of second hand car from B.
5.
Gross amount charged to include service tax payable
Sub section
2 of Section 67 provides that where the gross amount charged by a service
provider, for the service provided or to be provided is inclusive of services
tax payable, the value of such taxable services shall be such amount, as with
the addition of tax payable, is equal to the gross amount charged.
CCE v
Advantage media consultants [2008] CESTAT – KOL.
Municipal
Corporation of Delhi v CST[2010] CESTAT New Delhi.
6.
Tax is payable as soon as the advance is received
Sub section
3 of S. 67 provides that the gross amount charged for the taxable service shall
include any amount received towards the taxable services before, during or
after the provision of such services. Thus the service tax shall be payable on
receipt of advances.
7.
Meaning of Consideration need to be understood
As per S.
65B(44) of the Act,
“service”
means any activity carried out by a person for another for consideration, and
includes a declared service, but shall not include—
(a) an
activity which constitutes merely,––
(i) a
transfer of title in goods or immovable property, by way of sale, gift or in
any other manner; or
(ii) such
transfer, delivery or supply of any goods which is deemed to be a sale within
the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a
transaction in money or actionable claim;
(b) a
provision of service by an employee to the employer in the course of or in
relation to his employment;
(c) fees
taken in any Court or tribunal established under any law for the time being in
force.
Explanation
1.— For the removal of doubts, it is hereby declared that nothing contained in
this clause shall apply to,––
(A) the
functions performed by the Members of Parliament, Members of State Legislative,
Members of Panchayats, Members of Municipalities and Members of other local
authorities who receive any consideration in performing the functions of that
office as such member; or
(B) the
duties performed by any person who holds any post in pursuance of the
provisions of the Constitution in that capacity; or
(C) the
duties performed by any person as a Chairperson or a Member or a Director in a
body established by the Central Government or State Governments or local
authority and who is not deemed as an employee before the commencement of this
section.
Explanation
2.–– For the purposes of this clause, transaction in money shall not include any
activity relating to the use of money or its conversion by cash or by any other
mode, from one form, currency or denomination, to another form, currency or
denomination for which a separate consideration is charged.
Explanation
3.–– For the purposes of this Chapter,—
(a) an
unincorporated association or a body of persons, as the case may be, and a
member thereof shall be treated as distinct persons;
(b) an
establishment of a person in the taxable territory and any of his other
establishment in a non-taxable territory shall be treated as establishments of
distinct persons.
Explanation
4.— A person carrying on a business through a branch or agency or representational
office in any territory shall be treated as having an establishment in that
territory;
Consideration
is the essential ingredients of the definition of service. In other word if the
service is provided free of cost i.e. without consideration then the activity
would not fall within the purview of service tax. Accordingly , activities such
as donation, gifs and free charities are outside the ambit of service .
However, it is important to note that the phrase consideration has not been
defined in the Act. Therefore definition of ‘consideration’ can be adopted from
Indian Contract Act,1872.
8.
Meaning of ‘money’ has been omitted from S. 67
Explanation
B of S.67 which defines the term ‘money’ has been deleted w.e.f July 1,2012.
However from the same date new definition has been provided by S. 65B (33).
Where ‘money’ means;
Money means
legal tender, cheque, promissory note, bill of exchange, letter of credit,
draft , pay order, travelers cheque, money order, postal or electronic
remittance or any such similar instruments but shall not include any currency
that is held for its numismatic value.
9.
Valuation can be only with reference to Valuation Rules
Sub section
4 of section 67 of the Act provides that subject to the provision of section
[1][2][3] of Section 67 of the Act, the value shall be determined in such
manner as may be prescribed. By virtue of Section 94[2] of the Act, the Service
Tax (Determination of Value) Rules , 2006 have been issued.
It
is to be note that the Valuation Rules can not overrule the provisions given in
Section 67.
Rule
-2A, Valuation for work contract service
Erstwhile
rule 2A has been replaced with the New Rule 2A for valuation of works contract
service vide notification no. 24/2012 dated 06.06.2012.
Meaning of
Work Contract:
As per
Section 65B[54] of the Act, work contract means where in transfer of property
in goods involved in the execution of such contract is leviable to tax as sale
of goods and such contract is for the purpose of carrying out construction ,
erection , commissioning, installation , completion , fitting out, repair,
maintenance , renovation and alteration of any movable or immovable property or
for carrying out any other similar activity or part thereof in relation to such
property.
2A.
Determination of value of service portion in the execution of a works
contract.- Subject to
the provisions of section 67, the value of service portion in the execution of
a works contract , referred to in clause (h) of section 66E of the Act, shall
be determined in the following manner, namely:-
(i) Value of
service portion in the execution of a works contract shall be equivalent to the
gross amount charged for the works contract less the value of property in goods
transferred in the execution of the said works contract.
Explanation.-
For the purposes of this clause,-
(a) gross
amount charged for the works contract shall not include value added tax or
sales tax, as the case may be, paid or payable, if any, on transfer of property
in goods involved in the execution of the said works contract;
(b) 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;
(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;
(c) Where
value added tax or sales tax has been paid or payable on the actual value of
property in goods transferred in the execution of the works contract, then,
such value adopted for the purposes of payment of value added tax or sales tax,
shall be taken as the value of property in goods transferred in the execution
of the said works contract for determination of the value of service portion in
the execution of works contract under this clause.
(ii) Where
the value has not been determined under clause (i), the person liable to pay
tax on the service portion involved in the execution of the works contract
shall determine the service tax payable in the following manner, namely:-
(A) in case
of works contracts entered into for execution of original works, service tax
shall be payable on forty per cent. of the total amount charged for the works
contract;
(B) in case
of works contract entered into for maintenance or repair or reconditioning or
restoration or servicing of any goods, service tax shall be payable on seventy
percent. of the total amount charged for the works contract;
(C) in case
of other works contracts, not covered under sub-clauses (A) and (B), including
maintenance, repair, completion and finishing services such as glazing,
plastering, floor and wall tiling, installation of electrical fittings of an
immovable property , service tax shall be payable on sixty per cent. of the
total amount charged for the works contract;
Explanation
1.- For the purposes of this rule,-
(a)
“original works” means-
(i) all new
constructions;
(ii) all
types of additions and alterations to abandoned or damaged structures on land
that are required to make them workable;
(iii)
erection, commissioning or installation of plant, machinery or equipment or
structures, whether pre-fabricated or otherwise;
(d) “total
amount” means the sum total of the gross amount charged for the works contract
and the fair market value of all goods and services supplied in or in relation
to the execution of the works contract, whether or not supplied under the same
contract or any other contract, after deducting-
(i) the
amount charged for such goods or services, if any; and
(ii) the
value added tax or sales tax, if any, levied thereon:
Provided
that the fair market value of goods and services so supplied may be determined
in accordance with the generally accepted accounting principles.
Explanation
2.- For the removal of doubts, it is clarified that the provider of taxable
service shall not take CENVAT credit of duties or cess paid on any inputs, used
in or in relation to the said works contract, under the provisions of CENVAT
Credit Rules, 2004.
2B.
Determination of value of service in relation to money changing.-
Subject to
the provisions of section 67, the value of taxable service provided for the services
so far as it pertains to purchase or sale of foreign currency, including money
changing, shall be determined by the service provider in the following manner:-
For a
currency, when exchanged from, or to, Indian Rupees (INR), the value shall be
equal to the difference in the buying rate or the selling rate, as the case may
be, and the Reserve Bank of India (RBI) reference rate for that currency at
that time, multiplied by the total units of currency.
Example I:
US$1000 are sold by a customer at the rate of Rupees 45 per US$.
RBI
reference rate for US$ is Rupees 45.50 for that day.
The taxable
value shall be Rupees 500.
Example II:
INR70000 is changed into Great Britain Pound (GBP) and the exchange rate
offered is Rupees 70, thereby giving GBP 1000.
RBI
reference rate for that day for GBP is Rupees 69.
The taxable
value shall be Rupees 1000.
Provided
that in case where the RBI reference rate for a currency is not available, the
value shall be 1% of the gross amount of Indian Rupees provided or received, by
the person changing the money:
Provided
further that in case where neither of the currencies exchanged is Indian Rupee,
the value shall be equal to 1% of the lesser of the two amounts the person
changing the money would have received by converting any of the two currencies
into Indian Rupee on that day at the reference rate provided by RBI;
2C. Determination
of value of service portion involved in supply of food or any other article of
human consumption or any drink in a restaurant or as outdoor catering.- Subject
to the provisions of section 67, the value of service portion, in an activity
wherein goods being food or any other article of human consumption or any drink
(whether or not intoxicating) is supplied in any manner as a part of the
activity at a restaurant or as outdoor catering, shall be the specified
percentage of the total amount charged for such supply, in terms of the
following Table, namely:-
|
S.N.
|
Description
|
% of total amount
|
|
1
|
Service portion in an Activity
wherein goods , being food or any other article of human consumption or any
drink [ whether or not intoxicating] supplied in any manner a part of
activity, at a restaurant.
|
40
|
|
2.
|
Service portion in outdoor
catering , wherein goods , being food or any other article of human
consumption or any drink [ whether or not intoxicating] supplied in any
manner a part of such outdoor catering
|
60
|
Explanation
1.- For the
purposes of this rule, “total amount” means the sum total of the gross amount
charged and the fair market value of all goods and services supplied in or in
relation to the supply of food or any other article of human consumption or any
drink(whether or not intoxicating), whether or not supplied under the same
contract or any other contract, after deducting-
(i) the
amount charged for such goods or services, if any; and
(ii) the
value added tax or sales tax, if any, levied thereon:
Provided
that the fair market value of goods and services so supplied may be determined
in accordance with the generally accepted accounting principles.
Explanation
2.- For the
removal of doubts, it is clarified that the provider of taxable service shall
not take CENVAT credit of duties or cess paid on any goods classifiable under
Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986).
Value
is not ascertainable – Rule 3
Subject to
the provisions of section 67, 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.
Rule -3[a]
Nat Steel
Equipment P Ltd V. Collector of Central Excise 1988[34] ELT8 in Supreme Court
stated that the similar does not mean identical but resemblance between two
services n order to constitute the services as similar services.
Rule -3[b]
Determining
the equivalent money value of consideration. Rule does not devise any method of
costing. The Cost Accounting Standard -4 lay down the principal for
determination of cost of manufacture of goods for captive consumption.
Rejection
of Value by Central Excise Officer – Rule 4
Rule 4(1) –
Central excise officer can call for information and documents to satisfy
himself that the value as determined by the service provider is correct as per
the provision of the Act.
Rule 4(2)
& 4(3) empowers the central excise officer to issue show cause for the
amount to be fixed for taxable services and provide opportunity to be heard.
Make
provision for certain specific inclusion and exclusions of cost – Rule -5
Rule 5(1)
lays down the general principal while Rule 5(2) deals with the expenditure
incurred by the service provider as a pure agent.
Rule 5 (1)
of the Valuation Rule : Where certain expenditure or cost are incurred by
service provider while providing the taxable service, all such expenditure or
cost shall be treated as consideration for taxable services and shall be
included in the value for the purpose of charging of service tax.
Explanation
: [inserted vide notification no. 24/2012 dated 6.6.2012] for the removable of
doubt it is hereby clarified that for the value of taxable service shall be
gross amount paid by the person to whom the telecom service is provided by the
telegraph authority.
Reimbursement
of out of pocket expenses:
Rule 5(1)
makes clear departure from the earlier position in respect of out of pocket
expenses ( such as travelling, boarding , conveyance and lodging) incurred by
the service provider during the course of providing the taxable services.
Earlier such expenses were not required to be included in to taxable services.
Illustration
: A contract with B for building a house. A, an Architect , during the course
of providing the services, incurred expenses such as telephone, travel ticket,
hotel accommodation , conveyance etc. to perform his services and charge the
same in invoice raised to B. Here weather the expenses are charged separately
or included in the gross fee shall be subject to service tax. Value of the
taxable service for charging service tax is what B pays to A.
Pure Agent – Rule 5(2)
of the valuation rules provides that expenditure or cost that service provider
incurs , as pure agent on behalf of the client, shall be excluded from the
value , if service provider fulfill prescribed conditions.
i) the
service provider acts as a pure agent of the recipient of service when he makes
payment to third party for the goods or services procured;
(ii) the
recipient of service receives and uses the goods or services so procured by the
service provider in his capacity as pure agent of the recipient of service;
(iii) the
recipient of service is liable to make payment to the third party;
(iv) the
recipient of service authorises the service provider to make payment on his
behalf;
(v) the
recipient of service knows that the goods and services for which payment has
been made by the service provider shall be provided by the third party;
(vi) the
payment made by the service provider on behalf of the recipient of service has
been separately indicated in the invoice issued by the service provider to the
recipient of service;
(vii) the
service provider recovers from the recipient of service only such amount as has
been paid by him to the third party; and
(viii) the
goods or services procured by the service provider from the third party as a
pure agent of the recipient of service are in addition to the services he
provides on his own account.
Explanation
1. – For the purposes of sub-rule (2), “pure agent” means a person who -
(a)
enters into a contractual agreement with the recipient of service to act as his
pure agent to incur expenditure or costs in the course of providing taxable
service;
(b)
neither intends to hold nor holds any title to the goods or services so procured
or provided as pure agent of the recipient of service;
(c)
does not use such goods or services so procured; and
(d)
receives only the actual amount incurred to procure such goods or services.
Explanation
2. – For the removal of doubts it is clarified that the value of the taxable
service is the total amount of consideration consisting of all components of
the taxable service and it is immaterial that the details of individual
components of the total consideration is indicated separately in the invoice.
illustration
of Pure agents ;
- Octroi or entry fees paid by
C&F agent, CHA or transporter on behalf of owner of goods.
- Expenses incurred by C&F
agent and reimbursed by principal such as freight ,labour, godown charges
and loading and unloading charges.
- Custom duty, dock dues,
transport charges paid by CHA on behalf of client.
In view of
the above prospective, one must have the following arrangement ;
- Contractual arrangement : this
does not mean in writing as the contract act does not requires that
agreement should be in writing. However it is advisable to have simple
agreement for the services to be rendered as agent on behalf of the
client.
- Disclosure to Act as agent.
- Break up of consideration is
not relevant.
INTERCONTINENTAL
CONSULTANTS AND TECHNORATS PVT. LTD. V U.O.I. & ANR – Delhi High Court –
November 30,2012
Above case
on Rule 5 has been decided against the revenue. In this writ petition, the
petitioner challenges the constitutional validity of Rule 5 of the Service
Tax (Determination of Value) Rules, 2006 to the extent it includes
re-imbursement of expenses in the value of taxable services for the purposes of
levy of service tax. The petitioner also contends, in the alternative that the
said rule is ultra vires of the provisions of Section 66 and 67 of Chapter V
of the Finance Act, 1994.
Specific
inclusions and exclusions – Rule -6
(1) Subject
to the provisions of section 67, the value of the taxable services shall
include‚ -
(i) the
commission or brokerage charged by a broker on the sale or purchase of
securities including the commission or brokerage paid by the stock-broker to
any sub-broker;
(ii) the
adjustments made by the telegraph authority from any deposits made by the
subscriber at the time of application for telephone connection or pager or
facsimile or telegraph or telex or for leased circuit;
(iii) the
amount of premium charged by the insurer from the policy holder;
(iv) the
commission received by the air travel agent from the airline;
(v) the
commission, fee or any other sum received by an actuary, or intermediary or
insurance intermediary or insurance agent from the insurer;
(vi) the
reimbursement received by the authorised service station, from manufacturer for
carrying out any service of any motor car, light motor vehicle or two wheeled
motor vehicle manufactured by such manufacturer;
(vii) the
commission or any amount received by the rail travel agent from the Railways or
the customer;
(viii) the
remuneration or commission, by whatever name called, paid to such agent by the
client engaging such agent for the services provided by a clearing and
forwarding agent to a client rendering services of clearing and forwarding
operations in any manner
(ix) the
commission, fee or any other sum, by whatever name called, paid to such agent
by the insurer appointing such agent in relation to insurance auxiliary
services provided by an insurance agent and.
(x)
the amount realised as demurrage or by any other name whatever called for the
provision of a service beyond the period originally contracted or in any other
manner relatable to the provision of service.
(2) Subject
to the provisions contained in sub-rule (1), the value of any taxable service,
as the case may be, does not include -
(i) initial
deposit made by the subscriber at the time of application for telephone
connection or pager or facsimile (FAX) or telegraph or telex or for leased
circuit;
(ii) the
airfare collected by air travel agent in respect of service provided by him;
(iii) the
rail fare collected by rail travel agent in respect of service provided by him;
and
(iv)
interest on delayed payment of any consideration for the provision of services or
sale of property, whether moveable or immoveable
(v) the
taxes levied by any Government on any passenger travelling by air, if shown
separately on the ticket, or the invoice for such ticket, issued to the
passenger.
(vi)
accidental damages due to unforeseen actions not relatable to the provision of
service; and
(vii)
subsidies and grants disbursed by the Government, not directly affecting the
value of service.
Exclusion
from value mean zero rated ; Exclusion from service means that the service is
neither taxable nor exempt. It means that service tax is payable on these
activities as these have been removed from the activities. Accordingly, if
there are some accidental damages , then the revenue to such an extent would
not be subject to reversal of input tax credit. The situation in case of
banking and financial company is quite different as specific provisions have
been laid down separately in the CENVAT Rules for credit reversal in case of
banking and financial institutes.
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