If you forget these eight norms, you can land into Service Tax litigations
In
the course of providing a Taxable Service, we incur reimbursable expenditures
such as travelling and boarding expenses, postage, telephone, etc.,
and indicate these items separately on the invoice issued to the recipient
of service. Do we have a Service Tax liability on the value of such
reimbursable expenditures?
Valuation
related disputes have been on constant rise and an area of unending
disputes between the Service providers and the Department. The manner
of determination of value is a complex subject leading to confusion
and misinterpretation of the Service Tax Valuation principles. The Service
Tax Officers have been empowered to reject the value declared by a service
provider vide Service Tax Notification No. 12/2006-S.T. dated 19.04.2006,
thus giving immense powers to the Department and wherever there are
such powers, abuse of the same cannot be ruled out. However, a service
provider needs to understand these Valuation principles so that unnecessary
futile litigations can be avoided. According to the Service Tax (Determination
of Value) Rules, 2006, 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 and in all other cases,
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.
Prior
to the introduction of Service Tax (Determination of Value) Rules, 2006,
all such reimbursable expenditures were excluded from the gross taxable
value in accordance with the clarifications and Circulars issued by
the Department vide No. B11/1/2001-TRU dated 09.07.2001 and accordingly
a service provider was required to produce only documentary evidences
in support of reimbursable deduction. However all such passed clarifications
and Circulars were resended on introduction of Master Circular dated
23.08.2007
The
service provider usually excludes all the reimbursable expenditures
from the Taxable value without following the principles and guidelines
issued vide the CBEC Circular F. No. B1/4/2006-TRU dated 19.04.2006
and thus fails to avoid the pitfalls. Value for the purpose of charging
service tax is the gross amount received as consideration for provision
of service. All expenditures or costs incurred by the service provider
in the course of providing a taxable service forms integral part of
the taxable value and are includable in the value. It is not relevant
that various expenditure or costs are separately indicated in the invoice
or bill issued by the service provider to his client. However, there
are certain exceptions specially in the case of service providers acting
as pure agent.
This exclusion from the gross value
is available to a pure agent subject to fulfillment of eight specific
conditions and those who fail to follow this Eight- Fold Path will fail
to attain the Nirvana from Service Tax litigations.
Path 1-
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;
Path 2- 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;
Path 3 - the recipient of service is liable to make
payment to the third party;
Path 4 - the recipient of service
authorises the service provider to make payment on his behalf;
Path 5 - 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;
Path 6 - 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;
Path 7 - the service provider recovers from the recipient
of service only such amount as has been paid by him to the third party
and the
Path 8 - 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.
But
the irony is that even after following these Eight-Fold Path, one will
not attain Nirvana from the Service Tax Valuation litigations unless
he makes sure he falls under the criteria of an pure agent and
as such 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; 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; does not use such goods or services so
procured and receives only the actual amount incurred to procure such
goods or services. In absence of any of the above conditions, a service
provider is not entitled for exclusion of the reimbursable expenditure
from the Taxable value and thus will have to pay the Service Tax accordingly.
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