Service Tax and TDS?

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Arvind (Querist)
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05 October 2007 Should Service tax be added and TDS be deducted on the following transaction?

Facts;
Instead of each company performing its own marketing activities, one company X in India is pooling their resources together to do what we call as cluster sales and marketing activities. Essentially, all the companies(including Company X) in India would contribute to a cluster fund. The fund is then used to hire sales people to promote group companies in India, and to perform different promotional activities.

Currently, all cluster activities are paid centrally by Comapny X. All cluster sales people are also hired by this X. The costs incurred are then shared by all group companies (including X). At the end of each month, Comapny X would bill the other group companies for their share of the costs.

Questions:

1. Would the above cost sharing arrangement trigger service tax? Should Comapny X add service tax when it's charging out the costs to the group companies? Note there is no profit element being added when Comapny X is charging the costs to group companies. All items are on a cost reimbursement basis.

2. Should TDS be deducted from the amount charged by Company X? If yes, under which section of the Income Tax Act?

R.V.RAO

R.V.RAO (Expert)
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06 October 2007 IRRESPECTIVE OF ANY KIND OF BILL WHERE SERVICE TAX IS CHARGED,THE TDS MUST BE DEDUCTED ON THE TOTAL OF THE BILL AMOUNT AFTER ADDING SERVICE TAX TO THE BILL AMOUNT.( REFER www.taxworry.com)
COMING TO THE service through COST SHARING AGREEMENT,PL. NOTE THAT THE WORD SERVICE IS NOT DEFINED UNDER FINANCE ACT 1994 OR SERVICE TAX ACT.(PL. REFER DR.SANJEEV AGARWAL'S ASSESSE'S GUIDE TO SERVICE TAX).
IN THE ABOVE AUTHOR'S BOOK-(UNDER SERVICE TERMINOLOGY- CHAPTER-3) IT IS SPECIFICALLY STATED SERVICE MEANS SERVICE OF ANY DESCRIPTION.. ......BUT DOES NOT INCLUDE RENDERING OF ANY SERVICE FREE OF CHARGE OR UNDER A CONTRACT OF PERSONAL SERVICE.
SO IN THE CASE REFERRED BY YOU SINCE THERE IS NO PROFIT CHARGED BY X COMPANY,THERE IS NO TAXABLE SERVICE.HENCE SERVICE TAX IS NOT APPLICABLE, SINCE SERVICE TAX IS LEVIED ON TAXABLE SERVICES AS PER SEC.65( 105)OF FINANCE ACT 1994.
AS FAR AS TDS IS CONCERNED THE SAME IS GOVERNED BY SEC 192,193,194,195 OR 196 OF THE INCOME TAX ACT.
A COST SHARING AGREEMENT DOES NOT FALL UNDER ANY OF THOSE CATEGORIES OF ABOVE SECTIONS OF IT ACT,INCLUDING ANY TECH. OR PROFESSIONAL SERVICE WHICH I DONT FIND ANY in your case.
R.V.RAO