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VALUATION OF TAXABLE SERVICE UNDER THE SERVICE

TAX LAW AN ANALYSIS

BY : CA. P.K. SAHA. F.C.A., A.I.C.W.A., DISA.

Valuation of taxable services is governed by Section 67 of the Finance Act, 1994 (asamended). The section has undergone changes by virtue of amendments over the years2001, 2003, 2004, 2005 and more particularly in 2006 w.e.f. 19.04.2006. Amendmentwas also made in Explanation (c) to section 67 by the Finance Act, 2008 providing forinclusion and exclusion of some specific payments and costs with far reaching effect.

Section 67 provides for valuation of taxable services provided by different service

providers for charging of the service tax. Determination of value of services for all type

of services should be made as per the provisions of this section and is basically guidedby the principles followed so far for the valuation of excisable goods under Section 4 ofthe Central Excise Act, 1944.

Section 130 (c) of the Finance Act, 2001 prescribed that the value of taxable servicesshall be the gross amount charged by the service provider for such service (taxableservice) provided or to be provided by him. Section 67 of the Finance Act, 1994 was

amended by the Finance Act, 2001 and the Finance Act, 2003 to provide for acomprehensive definition of value of taxable services instead of separate definitions for

each of the services. However, there was no material change in the basic definitionsrelating to existing taxable services.

The Finance Act, 2006 has totally substituted section 67 with effect from 18-4-2006 andService Tax (Determination of Value) Rules, 2006 was issued w.e.f. 19.04.2006. Theearlier position confined itself only to the gross amount charged by the service providerwhich in effect meant that only the consideration received in money was the sole basisfor determining the value of taxable service. In cases where the service provider

received any part of the consideration not in terms of money but in kind or by way ofreimbursement, such items naturally would not figure in the bill or invoice raised by the

service provider thereby depressing the real value of taxable service. Further, therewere many instances where the consideration received did not reflect actual value of

service

In order to overcome the difficulties and lacunae, section 67 has been recast in order to

cater to situations where any part of the consideration or the full consideration itself forservice provided or to be provided is not received in money.

Further w.e.f. 18.04.2006, all circulars issued relating to value of taxable services hadbeen withdrawn in view of the comprehensive new provisions on value of taxable

services.

In this article, the author discusses the provisions of valuation under section 67 ofFinance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006.Applicability of these provisions under various circumstances has been explained.

Highlights of section 67 of the Finance Act, 1994

Highlights of the new section 67 in its present form are as follows :

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Where the consideration for provision of any service is

entirely in money, then the gross amount charged by the service provider forsuch service provided or to be provided by him would be relevant for valuation.

[Section 67(1)(i)]


not wholly or partly consisting of money, then service tax would be payable onsuch amount in money which with the addition of service tax charged, isequivalent to the consideration. [Section 67(1)(ii)]


not ascertainable, the value of such service would be determined in terms of theValuation Rules. [Section 67(1)(iii)]

Where the gross amount charged for service provided

or to be provided is inclusive of service tax payable, the value of such taxable

service would be such amount which with the addition of tax payable, is equal tothe gross amount charged. [Section 67(2)]

Gross amount charged for the taxable service shall

include any amount received towards the taxable service before, during or afterprovision of such service. [Section 67(3)]

Value of taxable service will be determined in terms of

the Valuation Rules subject to the provisions of sub-sections (1), (2) and (3) ofsection 67 of the Act. [Section 67(4)]

For the purpose of this section, consideration

includes any amount that is payable for the taxable services provided or to beprovided.

For the purpose of this section, money includes anycurrency, cheque, promissory note, letter of credit, draft, pay order, travellerscheque, money order, postal remittance and other similar instruments but doesnot include currency that is held for its numismatic value.

For the purpose of this section, gross amount

charged includes payment by cheque, credit card, deduction from account andany 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 accountof a person liable to pay service tax, where the transaction of taxable service iswith any associated enterprise.

Highlights of Service Tax Valuation Rules

In exercise of the powers under section 67, Service tax (Determination of Value)Rules, 2006 have been issued w.e.f. 19-4-2006. The said rules provide as follows :

Where the consideration received is not wholly orpartly consisting of money, the value of taxable service, shall be determined interms of rule 3 of the Service Tax (Determination of Value) Rules, 2006.

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As per rule 3(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 grossamount charged is the sole consideration.

As per rule 3(b) where the value cannot be determinedin 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 ofprovision of such taxable service.

The Central Excise Officer may reject the value sodetermined in terms of the rule 3 by the service provider. [Rule 4(1)]

If the Central Excise Officer is satisfied that the value

so determined by the service provider is not in accordance with the provisions ofthe Act or these rules, While rejecting the value so determined, the Central ExciseOfficer shall issue a notice to such service provider to show cause why the value

of such taxable service for the purpose of charging service tax should not be fixedat the amount specified in the notice. [Rule 4(2)]

The Central Excise Officer shall, after providing

reasonable opportunity of being heard, determine the value of such taxableservice for the purpose of charging service tax in accordance with the provisions

of the Act and these rules. [Rule 4(3)]

Rule 5 deals with certain inclusion in or exclusion of

certain expenditure or costs from the value.

Rule 6 deals with cases in which the commission,

costs, etc. will be included or excluded from the value.

In case of services provided from outside India, the

value of taxable service received shall be such amount as is equal to the actual

consideration charged for the services provided or to be provided. [Rule 7(1)]

Conflict between Service Tax Rules and Valuation provisions

It can be observed that section 67 makes provisions of valuation of a taxable servicewhen consideration is not received in cash, whereas, the rule 6(1) of the Service TaxRules, 1994 provides that service tax is payable only when payment is received.

Payment as normally understood must be cash payment. Thus, one can argue thateven if valuation is done as per section 67, service tax is not payable as no payment

is received.

Counter-argument from the department in this regard may be that, rules cannotoverride provisions of a section. When consideration is received other than in cash, itmeans that payment has been received.

All earlier circulars by CBE&C on valuation withdrawnw.e.f. 19.04.2006

Para 4.1-13 of Ministry of Finance circular F. No. B1/4/2006-TRU, dated 19-4-2006

reads as follows

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In view of the comprehensive provisions on value of taxable services, all thecirculars issued relating to value of taxable services are withdrawn.

Thus, all previous circulars on valuation e.g. those relating to reimbursement of

expenses, out of pocket expenses, etc. will have no application after 19.04.2006.

Service provided for a consideration in money

Under clause(i) of sub-section (1) of section 67, where the provision of service is for

a consideration in money, the value shall be the gross amount charged by the serviceprovider for such service provided or to be provided by him. This applies to majority

of services where consideration other than in terms of money may not be involved.

The gross amount charged will normally be reflected in the bill raised by the service

provider. As per the provisions contained in rule 6(1) of the Service Tax Rules,service tax is payable on receipt of the amount from service receiver. In such cases,the amount received from the service receiver will be considered as the gross

amount charged and service tax would be payable on such value.

Meaning of gross amount charged -

Explanation (c) to section 67, provides that the expression gross amount chargedincludes payment by cheque, credit card, deduction from account and any form ofpayment by issue of credit notes or debit notes and book adjustment. Thus,assuming that A has provided service to B for consideration of Rs. 50 Lakhs and B

has given loan of Rs. 25 lakhs earlier to A and B makes balance payment of Rs. 25lakhs to A after adjusting the amount of loan given earlier. As per Explanation (c),it will be deemed that A has received the entire consideration of Rs. 50 lakhs and

service tax will be payable by him on Rs. 50 lakhs.

Third proviso to rule 6(1) also provides, with effect from 10-5-2008, that where thetransaction of taxable service is with any associated enterprise, any paymentreceived towards the value of taxable service, in such case shall include any amountcredited or debited, as the case may be, to any account, whether called Suspenseaccount or by any other name, in the books of account of a person liable to payservice tax.

Gross amount to be inclusive of service tax -

Section 67(2) provides that where gross amount charged by a service provider is

inclusive of service tax payable, the value of taxable service will be such amount as,with addition of service tax payable, is equal to the gross amount charged.

The service provider is required to show service tax separately in his invoice/bill,since provisions of section 12A of Central Excise Act, 1944 have been madeapplicable to service tax. This is also required as per Rule 5(1) of Service Tax Credit

Rules to enable the service recipient to claim credit of service tax paid by the serviceprovider.

When Invoice does not indicate service tax

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Though service provider is legally required to indicate service tax in his invoice,nature of taxable services may be such that, showing service tax separately is notpossible. In some cases, the assessee may not also charge service tax in his invoicedespite the aforesaid legal position.

In case of services provided by a person resident outside India, his invoice naturallywill not show service tax.

It is also possible that the service provider may not be even aware that his services

are taxable, and hence may not have collected service tax in his invoice.

In such cases, the question that is likely to arise is whether the gross amountcharged is to be taken as inclusive of service tax or is to be taken as net amount i.e.

value on which service tax is payable at appropriate rates.

Section 67(2) reads, where gross amount charged by a service provider is inclusiveof service tax payable. The section does not state that gross amount charged should

be deemed to be inclusive of service tax.

In similar issue under central excise, it was held that price should be taken as cumduty price and tax payable should be calculated by back calculations.

In CCE v. Maruti Udyog Ltd. 2002 141 ELT 3 (SC 3 member bench), it has beenheld that the price should be considered as cum-duty price and excise duty should becalculated by making backward calculations - review petitions and civil appealdismissed by the 3 member bench of the SC on 9-12-2004 (179 ELT A102).

Service provided for a consideration not wholly orpartly consisting of money

In this situation, clause (ii) of sub-section (1) of section 67 provided that the value

shall be such amount in money as, with the addition of service tax charged, isequivalent to the consideration.

Rule 3(a) of The Service Tax (Determination of Value) Rules, 2006 states that

subject to the provisions of section 67, the value of such taxable service, where theconsideration received is not wholly or partly consisting of money, shall be equivalent

to the gross amount charged by the service provider to provide similar service to anyother person in the ordinary course of trade and the gross amount charged is the

sole consideration.

The Supreme Court in Nat Steel Equipment Pvt. Ltd. V. Collector of CentralExcise 1988 (34) ELT 8, while considering the meaning of the word similar in tariffitem, has stated as follows:-

The expression similar is a significant expression. It does not mean identical butit means corresponding to or resembling to in many respects; somewhat like; or

having a general likeness. The statute does not contemplate that goods classedunder the words of similar description shall be in all respects the same. If it did

these words would be unnecessary.These were intended to embrace goods but notidentical with those goods

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It will thus be evident that the word similar does not mean identical but thereshould be resemblance between two services in order to constitute the services assimilar services. However, it may be difficult to arrive at any commonly acceptabledecision in this regard as the facts of each case should be considered to settle theissue or without the judicial pronouncements or intervention of any superior court.

Valuation on the basis of equivalent money value

of consideration where value of similar services cannot be ascertained -

Rule 3(b) of the Valuation Rules provides that where the value cannot be determined

in accordance with caluse (a) of rule 3, the service provider shall determine theequivalent money value of such consideration which shall, in no case be less than the

cost of provision of such taxable service.

Thus, if value of similar services cannot be ascertained, the value will be equivalentvalue of consideration. Such equivalent value, to be determined by serviceprovider himself, which shall not be less than the cost of provision of such services.

The valuation rule does not provide for the method of calculation of cost of thetaxable services. So far there is no specific guideline in this regard issued by theInstitute of Cost and Works Accountant of India (ICWAI) for the purpose ofcomputing the cost of provision of services. Hence, such cost should be determined

following the basic principles of costing methods.

In this regard reference may be made to The Cost Accounting Standard 4 (CAS-4)which lays down the principle for determination of cost of manufacture of goods forcaptive consumption. This standard has been adopted for the purpose of valuationunder the Central Excise Rules. The guidelines given in the said CAS -4 may behelpful in determining the cost of provision of services.

Distinction between cost and value

It is to be noted that the word used is cost and not value.

As per Websters Concise Dictionary, cost means to have or require as a price, tocause to pay, the price paid for anything. As per Concise Oxford Dictionary, costmeans require the payment of (a specified sum) in order to be bought or obtained.As per Websters Concise Dictionary, value means desirability or worth of a thing,

worth in money, market price. As per Concise Oxford Dictionary, value means amaterial or monetary worth, the regard that something is held to deserve;

importance or worth,

Cost will not include profit element.

Thus, the value as determined under rule 3(b) should not be less than the cost ofsuch services. It will not include the profit element.

Rejection of value and determination of value by Central Excise Officer -

The basic responsibility to determine the value of taxable service lies with theservice provider, as is made clear in rule 3 of Valuation Rules.

However, rule 4(1) states that rule 3 does not restrict or question the power of

Central Excise Officer to satisfy himself as to the accuracy of any informationfurnished or documents presented for valuation. Really, no documents are to be

presented for valuation. What the rule means is that the Central Excise Officer can

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call for information and documents to satisfy himself that the value as determined byservice provider is correct as per provisions of Act and Rules.

Rule 4 (2) empowers Central Excise Officer to issue show-cause notice to serviceprovider to show cause why the value of taxable service should not be fixed at theamount fixed in the show-cause notice. Thus, rule 4(2) makes it clear that the show-

cause notice must clearly state with reasons, the exact quantum which the CentralExcise Officer proposes to determine as value.

Rule 4(3) provides that after giving opportunity of personal hearing, the value for

purpose of service tax shall be determined by Central Excise Officer.

Reimbursement of expenses incurred on behalf ofservice receiver not includible

Often, a service provider incurs some expenditure on behalf of service receiver and

then recovers the amount from him. Such expenditure is not part of service provided

by him to service receiver, provided such expenditure is incurred by him as perbusiness practice or convenience. Following illustrations may clarify the provisions

Octroi / entry tax amount paid by Clearing & Forwarding Agent, CHA or

Transporter on behalf of owner of goods/ Principal.

Customs duty, dock dues, demurrage, transport charges etc. paid by Customs

House Agent on behalf of client.

Advertisement charges paid by Advertising Agency to newspaper on behalf of

clients.

Ticket charges paid by Travel Agent and recovered from his customer.

Reimbursement of godown rent, salary and loading/unloading expenses by

Principal to his C&F Agent.

These are not part of service provided and hence are not includible. Rule 5(2)provides that the expenditure or costs that a service provider incurs, as a pure agent

of the client, shall be excluded from the value if such service provider fulfilsprescribed conditions.

Expenditure incurred by service provider as pure agent not includible

Sub-rule (2) of rule 5 carves out an exception to the general rule contained in sub-rule (1), and it provides that the expenditure of costs that a service provider incurs,as a pure agent of the client, shall be excluded from the value if such service

provider fulfils the following conditions mentioned in with respect to such expenditureor costs.

The following conditions are prescribed :

(i)the service provider acts as a pure agent of the recipient of service whenhe makes payment to third party for the goods or services procured;(ii) the recipient of service receives and uses the goods or services soprocured 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 thirdparty;

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(iv) the recipient of service authorizes the service provider to makepayment on his behalf;(v) the recipient of service knows that the goods and services for whichpayment has been made by the service provider shall be provided by thethird 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 theservice provider to the recipient of service;

(vii) the service provider recovers from the recipient of service onlysuch amount as has been paid by him to the third party; and

(viii) the goods or services procured by the service provider from thethird party as a pure agent of the recipient of service are in addition to theservices he provides on his own account.

Meaning of the term Pure Agent or an Agent

Explanation 1 to rule 5 provides that for the purpose of sub-rule (2), pure agent or

an agent is a person who

(a) enters into a contractual agreement with the recipient of service to act as hispure agent to incur expenditure or costs in the course of providing taxableservice;

(b) neither intends to hold nor holds any title to the goods or services so procured orprovided 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. Itmay be noted that contractual agreement need not be in writing, as Contract

Act does not require that any agreement must be in writing, unless it is requiredto be in writing under some other law.

In computing the cost of provision of the services the expenditure incurred as pureagent will not be included. For example, custom house agent provides the servicesof clearance of imported cargo. He incurs various expenditure like payment for cranehire charges, gang charges, weighment charges. These expenses are normallyincurred by him as an agent. Therefore, in the bill, in addition to the agency

charges, these expenditures are shown as out of pocket expenses. In computing thecost of services provided by the custom house agent, such expenditure must be

excluded from the cost. However, the criteria listed above must be satisfied.

Illustration1 as given in rule 5 below the rule reads as follows:

Illustration 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 fortelevision advertisement and paid service tax on the total consideration billed. Insuch a case, consideration for the service provided is what X pays to Y. Y does not

act as an agent on behalf of X when obtaining the television advertisement even ifthe 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 orfacilitate him to perform his services as an estate agent.

This illustration clearly shows distinction between payments made as agent andpayment made as principal.

Inclusions and exclusions for determining value oftaxable services [Rule 6(1) of the Valuation Rules read with section 67 of theFinance Act :

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Specific Inclusions :

Sl.

No.

Taxable Services Amount to be included

1 Air Travel Agents Commission received by the air travel agentfrom the airline

2 Authorised ServiceStation

Reimbursement received by the authorizedservice station from manufacturer for

carrying out any service/repair of any eligiblevehicle manufactured by such manufacturer

3 Insurance Services Amount of premium charged by the insurer

from the policy holder

4 Insurance AuxiliaryServices

Commission, fee or any other sum receivedby an actuary or intermediary or insurance

intermediary or insurance agent from theinsurer

5 Rail Travel AgentsServices

The commission or any amount received byrail travel agent from the railways or the

customer

6 Security Agency Services Gross amount charged viz salary, PF, ESI,

income tax deducted at source, professionaltax, labour welfare fund and other expenses

such as towards bonus, leave encashment,uniform etc.

7 Stock Broking Services Aggregate of commission or brokerage

charged on the sale or purchase of securities

including the commission or brokerage paidby the stock broker to any sub-broker

8 Telephone/Pager/Facsmile/Telegraph/Leased Circuit

Services

Adjustment made from any deposits made bythe subscriber at the time of application for

telephones connections or pager or facsimileor telegraph or telex or for leased circuit

9 Tour Operator Services Charges for accommodation, food and otherfacilities provided in relation to such tour

10 All Services Cost of all consumables consumed whilerendering the service but which have not

been sold along with the service

11 Clearing & ForwardingAgent

Remuneration or commission paid to agentby client for services provided in relation to

clearing and forwarding

12 Insurance AuxiliaryServices

Commissions, fee or other sum paid to agentby insurer for services provided by insurance

agent

Specific Exclusions :

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Sl.No.

Taxable Services Amount to be excluded

1 Air Travel Agents Actual amount of air fare collected

2 Advertising Services Cost of space/time slot booked

3 Authorised ServiceStation Services

Cost of parts or accessories or consumablessuch as lubricants and coolants, if any, soldto the customer during the course of serviceor repair of vehicles

4 Banking & FinancialServices

Interest on Loans, cash credit and overdraft;discount on bill discounting

5 Beauty parlour Services Amount charged in relation to hair dying

6 Cable Operator Services Entertainment tax and cost of the cableprovided

7 Commercial CoachingCentre

Cost of standard text books sold to studentsat printed price

8 Commission orInstallation Services

Cost of parts or other materials sold to thecustomer during the course of providing such

services

9 General/Life Insurance Re-insurance premium, investmentcomponent of premium

10 Intellectual PropertyServices

Amount of cess paid towards the import oftechnology under Section 3 of the Researchand Development Cess Act, 1986

11 Management,

Maintenance or Repair

Services

Cost of parts or any other materials, if any

sold to the customer during the course of

providing such services

12 Photography/Videography

Services

Cost of unexposed photography film/video

tape or other storage device

13 Rail Travel Agentsservices

Amount of rail fare collected

14 Sound Recording Services Cost of unrecorded magnetic tape or otherdevices of storage

15 Telephone/Pager/Facsmile/Telegraph/Leased CircuitServices

Surcharge for delayed payment of bill andinitial deposits made by the subscriber at thetime of application

Determination of value of services involved in theexecution of a works contract

Rule 2A embodies a special provision for determination of value of service involved inthe execution of works contracts. It provides that the value of taxable service in

relation to services involved in the execution of a works contract shall be determinedby the service provider in the following manner:-

1. Value of works contract service determined shall be equivalent to the grossamount charged for the works contract less the value of transfer of property ingoods involved in the execution of the said works contract.

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It may be noted that

(a) gross amount charged for the works contract shall not include Value AddedTax (VAT) or sales tax, as the case may be, paid, if any, on transfer ofproperty 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 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.

2. Where Value Added Tax or sales tax, as the case may be, has been paid on theactual value of transfer of property in goods involved in the execution of the

works contract, then such value adopted for the purposes of payment of Value

Added Tax or sales tax, as the case may be, shall be taken as the value oftransfer of property in goods involved in the execution of the said works contractfor determining the value of works contract service under 1 above.

Conclusion :

Even after the thorough amendment of section 67 of the Finance Act, 1994 and therelated valuation rules in 2006, it cannot be said that all major issues especially thecontroversial issues concerning the valuation of service have been suitablyaddressed. Admittedly, provisions have been made for valuation in cases whereconsideration is partly in money and for cases where consideration is not readilyascertainable. The new valuation rule has also roped in reimbursement of expenses

within the fur flung tax net. In specific cases even the cost of service can beadopted for the purpose of valuation. However, given the Indian legal tradition, in

the years to come the valuation of taxable service alone may assume the characterof a labyrinth of legal complexities intelligible only to a select few.

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