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Valuation under Service Tax Regulation Mrityunjay Acharjee.

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1 Valuation under Service Tax Regulation Mrityunjay Acharjee

2 AGENDA Statutory provisions relating to Valuation of Taxable Services. Statutory provisions relating to Valuation of Taxable Services. Service Tax (Determination of Value) Rules Service Tax (Determination of Value) Rules Latest amendments in Valuation Rules with the introduction of Negative List Latest amendments in Valuation Rules with the introduction of Negative List Determination of value of service portion in the execution of a works contract. Determination of value of service portion in the execution of a works contract.

3 VALUATION OF SERVICES Value of Taxable Service shall be the Gross amount charged by the service provider for such services provided or to be provided rendered by him. Value of Taxable Service shall be the Gross amount charged by the service provider for such services provided or to be provided rendered by him. Tax is payable as soon as advances, if any, is received Tax is payable as soon as advances, if any, is received

4 VALUATION OF TAXABLE SERVICES U/s. 67 Where consideration for providing services is entirely in money, gross amount charged by service provider/ to be provided shall be the value of Service. Where consideration is not wholly or partly in terms of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration

5 VALUATION OF TAXABLE SERVICES U/s. 67 Where provision of services is for a consideration which is not ascertainable, the value would be determined in the prescribed manner and as per the Valuation Rules.

6 VALUATION OF TAXABLE Where consideration is not wholly or partly in terms of money ( or value not ascertainable) terms of money ( or value not ascertainable) Service Tax is payable : Service Tax is payable : a) Value of taxable services shall be equivalent to the Gross amount charged by the Service Provider to provide similar services to other persons in ordinary course of trade, where Gross amount charged is Sole Consideration b) In other cases, (not above), Value shall not be less than the Cost of Provision of such Services

7 Non-Monetary Consideration Supply of goods and service in return for provision of service Supply of goods and service in return for provision of service Refraining or forbearing to do an Act 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 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 Doing or agreeing to do an Act in return for provision of service Service Tax is payable on the fair value of non- monetary consideration, which is equivalent money value as determined as per Rules. value as determined as per Rules.

8 PROVISION OF VALUATION U/s. 67. Where Service Tax is inclusive and not charged separately - value shall be determined on back calculation basis calculation basis Gross amount charged shall include any amount received before / during / after such services

9 DETERMINATION OF VALUE - RULES Thee Central Excise / Service Tax Officer can reject the value determined by the service provider and determined value separately. In case of service provided/ to be provided from outside India, actual consideration received shall be relevant for valuation [Rule 7] [Rule 7]

10 PRINCIPLES OF COST ANALYSIS 1. Determination of Cost of Taxable Services 2. Cost would be worked out on the basis of usual Cost Accounting principles 3. Certification of Cost / Chartered Accountants for determination of Cost of Services 4. Specific Guidelines from ICAI for the purpose of determination of Cost of Services is needed

11 PRINCIPLES OF COST ANALYSIS 1. Value based on Cost of Provision of Services – where reasonable profit (industry average or 10%) shall be added on total cost of services 2. For captive consumption of services – principles laid down in CAS-4 issued by ICAI and CBEC Circular No. 692/8/2003 may be followed 3. All expenditure and cost relating to provision of service incurred by service provider is includable in the value – Rule 5(1) – and shall be treated as consideration for the taxable services

12 INCLUSION/EXCLUSION FROM VALUE 1. Where any expenditure/cost has been incurred by the service provider in the course of providing taxable service – all such exp. / costs shall be treated as consideration for taxable service provided / to be provided and shall be included in the value for the purpose of charging Service Tax. 1. Where any expenditure or cost incurred by service provider as Pure Agent of the recipient of service – such amount shall be excluded, subject to fulfillment of all eight conditions

13 VALUE OF TAXABLE SERVICES 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. In other words, Gross consideration is taxable (Explanation to Rule 5).

14 Non-Monetary Consideration Supply of goods and service in return for provision of service Supply of goods and service in return for provision of service Refraining or forbearing to do an Act 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 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 Doing or agreeing to do an Act in return for provision of service Service Tax is payable on the fair value of non- monetary consideration, which is equivalent money value as determined as per Rules. value as determined as per Rules.

15 PRINCIPLES FOR VALUE DETERMINATION 1. Circular no. B1/4/2006 – TRU dated :- Value for the purposes of charging Service Tax is the gross amount received as consideration for provision of service. All expenditure or cost incurred by the service provider in the course of providing taxable services forms integral part of the taxable value and includable. It is not relevant that various expenditure or cost has separately indicated in the invoice or bill issued by the service provider to his client. 2. All earlier circulars stands withdrawn

16 VALUE OF TAXABLE SERVICES Re-imbursement of expenses incurred on behalf of client is not includible – Rule 5(2) - Glaxo Smithkline Pharma Ltd. Vs. CCE Deduction available, if conditions for Pure Agent are fulfilled are fulfilled

17 LIABILITY OF SERVICE RECEIVER – NOT INCLUDIBLE Re-imbursement of expenses claimed by the service provider as per agreement, which is a liability of the service receiver – the same should not be included in the value – Re-imbursement of expenses claimed by the service provider as per agreement, which is a liability of the service receiver – the same should not be included in the value – Scott Wilson Kirkpatrick India Ltd. Vs. CCE Scott Wilson Kirkpatrick India Ltd. Vs. CCE

18 MEANING OF PURE AGENT MEANING OF 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; (d) receives only the actual amount incurred to procure such goods or services

19 CONDITIONS FOR EXEMPTION AS PURE AGENT 1. SP acts as a pure agent while making payment of third party for goods/services procured. 2. The SR received and uses the goods so procured by the SP in his capacity as pure agent of SR 3. The SR is liable to make payment to the third party 4. The SR authorises the SP to make payment on his behalf 5. The SR is aware that the goods and services for which payment has been made by SP shall be provided by a third party

20 CONDITIONS FOR EXEMPTION AS PURE AGENT 6. Payment made by SP on behalf of the SR has been separately indicated in the invoice issued by the SP 7. The SP recovers from the SR only such amount as has been paid by him to the third party 8. The goods and services procured by the SP from third party as pure agent are in addition to the services provided by him on his own capacity.

21 VALUATION OF SERVICES – EXAMPLE 1 X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. What would value of Taxable Services. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent

22 VALUATION OF SERVICES – EXAMPLE 2 In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. What would be the value of taxable services. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

23 VALUATION OF SERVICES – EXAMPLE 3 A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B..

24 VALUATION OF SERVICES – EXAMPLE 4 Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.

25 NO SERVICE TAX ON FREE SERVICE 1. If service is provided free of charges – No Service Tax is payable – Bharti Cellular Ltd. Vs. CCE 1. Free Service provided by authorised vehicle service stations (at the time of sale) for which no payment is received from anyone and price is included in sale price of such vehicle, the same could not be subjected to Service Tax - Indus Motor Company vs. CCE(2008)

26 LEVY OF SERVICE TAX AND EXCISE DUTY LEVY OF SERVICE TAX SERVICE TAXON INDIVISIBLE CONTRACTS INDIVISIBLE CONTRACTS

27 LEVY OF SERVICE TAX AND EXCISE DUTY Though, Service Tax and Excise Duty, both independent taxes, in certain situation ST is payable even ED has been paid on the same amount. Lincoln Helios India Ltd. Vs CCE, it was held that Service Tax is payable in erecting and commissioning charges even if excise Duty has been paid on entire value of contract including erection and commissioning

28 VALUATION – INDIVISIBLE CONTRACTS 1. If such service is covered under Works Contract Service – valuation shall as per Rule 2A of Valuation Rules [Amended through Notification No 24 of 2012 dated 6 th June 2012 ] 2. In other cases – value of the goods cant be included in the value of services - Bharat Sanchar Nigam ltd. Vs. UOI - Imagic Creative Pvt. Ltd Vs. CCT

29 VALUATION OF SERVICES LEVY OF SERVICE TAX SERVICE TAXON WORKS CONTRACT WORKS CONTRACT Notification No 24 of 2012 dt 6 June 2012

30 Determination of Value in Works Contract as notified by Notification No 24 of 2012 dt 6 June 2012 Works contract has been defined in section 65B(54) to mean a contractWorks contract has been defined in section 65B(54) to mean a contract wherein transfer of property in goods involved in the execution of such wherein transfer of property in goods involved in the execution of such contract is levyable to tax as sale of goods and such contract is for the contract is levyable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any alteration of any building or structure on land or for carrying out any other similar activity or part thereof in relation to any building or other similar activity or part thereof in relation to any building or structure. structure. Value of taxable service is also determined in accordance with Service Value of taxable service is also determined in accordance with Service Tax (Determination of value) Rules, 2012 as amended from time to time. Tax (Determination of value) Rules, 2012 as amended from time to time. The amended Service tax (Determination of value) Rules, 2012 shall The amended Service tax (Determination of value) Rules, 2012 shall be effective from [vide notification no 24/2012 dated ]. be effective from [vide notification no 24/2012 dated ].

31 VALUATION OF SERVICES – WORKS CONTRACT Where Value Added Tax, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, such value adopted for the purposes of payment of VAT, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service.

32 Determination of Value in Works Contract Value of works contract as per amended Rule for valuation of taxable Services in the execution of a works contract (from ) includes Services in the execution of a works contract (from ) includes the followings : (i) labour charges for execution of the works; (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 architects 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;

33 Determination of Value in Works Contract Value of service portion in the execution of a works contract Value of service portion in the execution of a works contract [section 66E(h)] shall be equivalent to the gross amount [section 66E(h)] shall be equivalent to the gross amount charged for the works contract less the value of property in charged for the works contract less the value of property in goods transferred in the execution of the said works contract. goods transferred in the execution of the said works contract. Where VAT/Sales Tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, such value adopted for the purposes of payment of VAT/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. Where VAT/Sales Tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, such value adopted for the purposes of payment of VAT/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.

34 Determination of Value of Works Contract in other cases Where the value could not been determined as above, the amount of service tax payable shall be : Works Contract relating to ….. Taxable portion as a % of the total amount For execution of original works. For execution of original works. original works means and includes - original works means and includes - all new constructions, all types of additions and alterations to abandoned or damaged structures to make them workable, erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise all new constructions, all types of additions and alterations to abandoned or damaged structures to make them workable, erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise 40% of total amount charged for the Works Contract. ( i.e, 12.36% on 40%) For maintenance or repair or reconditioning or restoration or servicing of any goods, 70% of total amount charged for the Works Contract For any other contract (other than above) including maintenance, repair, finishing services like glazing etc., installation of electrical fittings etc 60% of total amount charged for the Works Contract

35 Determination of Value of Works Contract in other cases Total Amount for the contracts shall be the sum total of Total Amount for the contracts shall be the sum total of gross amount charged plus the fair market value of all goods gross amount charged plus the fair market value of all goods and services supplied in or in relation to the execution of the and services supplied in or in relation to the execution of the same contract, or any other contract, after deducting the amount charged for such goods or services and the VAT/Sales Tax levied thereon. same contract, or any other contract, after deducting the amount charged for such goods or services and the VAT/Sales Tax levied thereon. Fair Market value of goods and services shall be determined in accordance with generally accepted accounting principles. Fair Market value of goods and services shall be determined in accordance with generally accepted accounting principles.

36 CENVAT Credit - Works Contract Services The Provider of taxable service could not take CENVAT credit of duties/cess paid on any inputs used in or in relation to the said works contract. However, credit in respect of taxes paid on capital goods and input services shall be available. The Provider of taxable service could not take CENVAT credit of duties/cess paid on any inputs used in or in relation to the said works contract. However, credit in respect of taxes paid on capital goods and input services shall be available. Credit in respect of taxes paid on capital goods and input services shall also be available in those cases where taxable value is determined on Specified percentage basis.

37 Value of Works Contract Question Would labour contract in relation to building or structure is treated as works contract? No. Labour contract do not fall in the definition of works contract. There should be a transfer of property in goods involved in the execution of works scontract which is leviable to VAT. Pure labour contract is not a works contract and would be leviable to Service Tax like any other service on its full value of consideration.

38 Value of Works Contract Question : Would contracts for tailoring of clothes or development of photographs also be treated as works contracts as these are also for carrying out a particular work? No. The phrase used is works contract and not work contract. Works has a defined and accepted legal meaning. As per Blacks Law dictionary works means buildings or structures on land. Moreover works contract has been defined in the Act as contract for carrying out specified activity, like construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration etc., or a part thereof in relation to any building or structure on land. Therefore contracts which do not pertain to building or structures on land. would be out of the ambit of works contracts.

39 Value of Works Contract Question : Would contracts for construction of a pipe-line or conduit be covered under works contract? Yes. As pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract

40 Value of Works Contract Question : Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract? Such contracts would be treated as works contracts if – Transfer of property in goods is involved in such a contract; and The machinery equipment structures are attached or embedded to earth after erection commissioning or installation.

41 Value of Works Contract What is the scope of building or structure on land? Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth. Hence covered under Works Contract Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under works contract? Yes, if such contracts involve provision of materials as well.

42 Determination of value of service involved in supply of food or any article of human consumption D etermination of value of taxable service involved in supply of food and drinks in any restaurant or as outdoor catering. 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/drinks whether or not supplied under the same contract or any other contract, after deducting therefrom, the amount charged for such goods or services, if any; and the amount VAT/Sales Tax levied thereon 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/drinks whether or not supplied under the same contract or any other contract, after deducting therefrom, the amount charged for such goods or services, if any; and the amount VAT/Sales Tax levied thereon Description Taxable portion as a % of the total amount Service portion in the supply of food or any other article of human consumption or any drink (whether or not intoxicating), at a restaurant 40% Service portion in outdoor catering supply of food or any other article of human consumption or any drink (whether or not intoxicating), Service portion in outdoor catering supply of food or any other article of human consumption or any drink (whether or not intoxicating), 60%

43 VALUATION – INDIVISIBLE CONTRACTS 1. Service Tax is payable on value of services and not on the value of the material/input used while providing service 2. Notification no. 12/2003-ST- if amount charged includes value of goods and material sold, Service Tax will not be payable on value of such goods and material 3. In case of AMC, if Sales Tax has been paid on components and parts, Service Tax would not be payable on that value. – Kone Elevators Ltd. Vs. CST

44 VALUATION OF SERVICES Elements to be Included for Determining Taxable Value

45 VALUATION OF SERVICES – TO 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;

46 VALUATION OF SERVICES – TO INCLUDE (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; and (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.Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.

47 SPECIFIC EXCLUSION FROM VALUE 1. Initial deposit made by the subscriber as the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit 2. The airfare collected by air travel agent in respect of service provided by him 3. The rail fare collected by [rail] travel agent in respect of service3 provided by him 4. Interest on loans, and 5. 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

48 OTHER RELEVANT ISSUES The existing provisions relating to positive list approach of taxing services under sections 65, 65A, 66, and 66A, of taxing services under sections 65, 65A, 66, and 66A, which inter-alia include definition of taxable service, which inter-alia include definition of taxable service, classification Reverse charge, [u/s. 66A], shall not be classification Reverse charge, [u/s. 66A], shall not be applicable from (18/ ) applicable from (18/ ) Newly inserted Section 65B (effective from ) provides definitions relating to Service Tax which provides definitions relating to Service Tax which inter-alia includes the definition of Service, Support inter-alia includes the definition of Service, Support Service, Taxable Service, Negative List etc. [notification no 19/2012 dated ]. Service, Taxable Service, Negative List etc. [notification no 19/2012 dated ].

49 Determination of value of services In accordance with Rule 3 of the valuation Rules, where the value of services is not ascertainable, the same shall be determined in the following manner: is not ascertainable, the same shall be determined in the following manner: a) The value of such taxable service shall be equivalent to the gross amount charged by the service provider for similar service to any other person in the ordinary course of business where such gross amount is the sole consideration. b) If the value could not be determined as above, cost of provision of such taxable service would be considered as equivalent money value of such services. The value of taxable services shall also include any amount realised as demurrage or by any other name whatever called for the provision of a service 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 beyond the period originally contracted or in any other manner relatable to the provision of service. provision of service.

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