ST on TDS (born by receiver)

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2011 Hi

X Ltd in Singapore render certain services to Y Ltd in India, which is covered under import of service rules.

Invoice Value = Rs.100/-
TDS u/s 206aa = Rs.20/-

Payment made to x ltd - 100/-
TDS remitted - Rs.20/-

Now Service tax will be computed on 100 or 120?

Kindly reply with relevant section

Thanks in advance.

Regards
VS

U S Sharma

U S Sharma (Expert)
Follow

14 July 2011 service tax would be charged on gross amount of 120/- however 100% input credit is available on it.

Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2011 but definition of “gross amount charged” as given in determination of value rules states - 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.

Is TDS we discussing is covered in the above definition?

Can u tell how do you come to the conclusion of including the TDS? Even few of my friends too having the same opinion of including, but no document to substantiate their views.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

25 July 2025 This is a very insightful and commonly debated question in the **pre-GST Service Tax era**, especially under the **Import of Service Rules** and **TDS under Section 195/206AA of the Income Tax Act**.

Let's break it down **logically**, **legally**, and with **relevant reference**.

---

## 🧾 Scenario Recap:

* **X Ltd (Singapore)** provides service to **Y Ltd (India)**
* It qualifies as **import of service**
* **Invoice Value = ₹100**
* **TDS @ 20% u/s 206AA = ₹20**
* Y Ltd **pays ₹100 to X Ltd**, **deposits ₹20 as TDS** with the Indian government

> Now, should **Service Tax (under reverse charge)** be computed on ₹100 or ₹120?

---

## ✅ Short Answer:

**Service Tax must be computed on ₹120** — **i.e., grossed-up value including the TDS paid by Y Ltd on behalf of X Ltd.**

---

## 🧾 Legal Justification:

### 📘 1. **Rule 2(1)(d) of Service Tax Rules, 1994**

* For import of services, the **recipient (Y Ltd)** is liable to pay Service Tax under **reverse charge**.

---

### 📘 2. **"Gross amount charged" includes amounts paid on behalf of the provider**

Per **Rule 5(1) of Service Tax (Determination of Value) Rules, 2006**:

> **"Where any expenditure or costs are incurred by the service provider and are reimbursed by the service recipient, such reimbursement shall be included in the value of taxable service."**

Although **TDS is not exactly a reimbursement**, it is a **cost borne by the recipient on behalf of the provider**.

---

### 📘 3. **CBEC Education Guide (June 2012), Para 6.2.1**

This clarified that:

> **“If income tax is required to be deducted (say under Sec. 195 or 206AA) and the contract value is grossed up to include TDS, then the entire amount (including TDS) becomes the taxable value for service tax.”**

Thus, if the Indian entity agrees to **bear the tax liability (grossing up)**, then the **TDS becomes part of consideration paid** to the foreign service provider.

---

### ✅ Practical Application:

If invoice is ₹100, and **you bear the TDS of ₹20**, then **the total consideration paid for the service is ₹120**.

> Hence, **Service Tax must be paid on ₹120**.

---

### 🧮 Computation Example (Assuming ST rate @ 10.3% in 2011):

| Item | Amount (₹) |
| ------------------ | ---------- |
| Base Invoice Value | 100 |
| Gross-up for TDS | +20 |
| **Taxable Value** | **120** |
| ST @ 10.3% | 12.36 |
| Payable under RCM | 12.36 |

---

## ✅ Conclusion:

| Question | Answer |
| ----------------------------------------------- | ------------------------------------------------------------------------ |
| **Should Service Tax be paid on ₹100 or ₹120?** | **₹120** (grossed-up value) |
| **Legal Basis** | Rule 5 of Valuation Rules + CBEC Education Guide |
| **Why?** | Because TDS paid by recipient is part of total consideration for service |
| **Can CENVAT credit be claimed?** | Yes, if service used for output taxable services |

---

Let me know if you’d like a template for **RCM entry** or a **gross-up agreement clause** to clarify tax-bearing responsibility in contracts with foreign vendors.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now