Valuation of Service for Service Tax

Service Tax (Determination of Value) Rules, 2006 has been introduced vide Notification No. 12/2006 dated April 19, 2006.

The Finance Act has substituted section 67 relating to valuation of service with effect from 18-4-2006.

The author has herein explained the various aspects of new valuation provisions as per Service Tax (Determination of Value) Rules, 2006 read with new section 67.

New section 67

As per the provisions of new section 67 of the Finance Act, 2006:—

• When service consideration is received in money then, gross consideration will be the value of the service.
   

• When the consideration is not wholly in money then, the value of service shall be such amount as with addition of tax payable, is equal to the gross amount charged.
   

• The gross amount charged shall include any amount received towards the service before, during or after provision of such service.
   

• Subject to the above provisions, the value shall be determined according to the Valuation Rules as explained below.

Service tax valuation rules

The Service Tax (Determination of Value) Rules, 2006 have been introduced vide Notification No. 12/ 2006- Service Tax, dated April 19, 2006.

Rule 1 provides title to these rules as "The Service Tax (Determination of Value) Rules, 2006".

Rule 2 defines the meaning of the words "Act", "Section" and "value" for the purpose of these rules. "Value"
shall have the meaning assigned to it in section 67.

Rule 3 relates to determination of value. The provisions of Rule 3 read with section 67 are explained below: —

• The value of service shall be the gross amount charged by the service provider for the service.
   

• In cases where the service provider charges for the service in money; i.e., the consideration received is wholly or partly consisting of money, the amount charged is the value of the service.
   

• The value of taxable service, where the consideration received is not wholly or partly consisting of money, shall determined in the following manner: —

1. The value 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.
    

2. In case the value cannot be determined as per (1) above, the value of service shall be equivalent money value of such consideration or the cost of providing the said service whichever is higher.

Rule 4 grants power to the central Excise Officer to satisfy himself as regards to the accuracy of any information or documents furnished for valuation.

Rule 5 provides inclusion in or exclusion from taxable value of certain expenditure or costs. Before 19-4-2006, in case of most of the services reimbursements were not taxable. Now as per this rule almost all reimbursements will be taxable.

As per provisions of rule 5: —

• Where any expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the value.
   

• The expenditure or costs that a service provider incurs as a pure agent of the service receiver shall be excluded from the value provided service provider fulfils the following 8 conditions:

1. The service provider acts as an agent of the recipient of service when he makes payment to the third party for the goods or services procured.
    

2. The recipient of service receives and uses the goods or services so procured by the service provider as an agent of the recipient of service.
    

3. The recipient of service is liable for making payment to the third party.
    

4. The recipient of service authorises the service provider to make the payment on his behalf.
    

5. The recipient of service knows that the goods and services paid for by the service provider will be provided by a third party.
    

6. The payment made by the service provider on behalf of the recipient of service is indicated separately in the invoice issued by the service provider to the recipient of service.
    

7. The service provider recovers only the actual amount he has paid to the third party.
    

8. The goods or services procured by the service provider from the third party are in addition to the services he provides to the recipient of service on his own account.

Explanation 1 to rule 5 explains the meaning of ‘pure agent or agent’ and Explanation 2 to the said rule clarifies that "the value of taxable services" is the total consideration consisting of all components of taxable service and it is immaterial that the details of individual components are separately indicated in the invoice.

Rule 6 provides cases in which the commission, costs, etc, will be included or excluded.

As per the provisions of Rule 7: —

• When service is provided from outside India, actual consideration charged is the value of a taxable service for the service provided or to be provided.
   

• When services as specified in clause (ii) of rule 3 of the Taxation of Service (Provided from Outside India and Received in India) Rule, are partly performed in India, the value shall be the total consideration paid by the recipient for the services including the value of service partly performed outside India.

Are circulars, notifications and rules granting abatement or exemption still valid?

Abatement or exemption to service provided is applicable after the gross value of service so provided is determined. Service tax valuation rules read with new section 67 determines the gross value of taxable service. Notifications, circulars and rules granting abatement and exemption will be valid unless they are withdrawn specifically.

For example,

1. Rule 6(7) of the Service Tax Rules, 1994 provides that air travel agent has an option to pay service tax at the rate of 0.6 per cent and 1.2 per cent of the basic fare in the case of domestic and international air bookings respectively.
    

2. Notification No.1/2006 grants abatement to several services; for instance abatement of 75% is applicable on the service of transport of goods by road.

Service provided free of cost

The valuation rules are for the purpose of valuing the service where consideration is received in wholly or partly in money. Hence, services provided free of charge are not liable to service tax. However, if a service provider provides services for nil consideration in money terms but receives services or goods from the service receiver free of charge or at a discounted value in consideration to such service provided, then the service shall be valued as per valuation rules and shall be taxed.

Conclusion

Section 4 of the Central Excise Act clearly provides when transaction value is to be used and when goods are to be valued as per valuation rules. Unfortunately this clarity is missing in section 67 of the Finance Act, 1994. In the case of service tax, transaction value is the value for the purpose of levying the tax provided the service provider charges in money. If the service provider does not charge wholly in money, then, the value is to be determined as per the valuation rules read with new section 67. Thus, pursuant to the introduction of the valuation rules it will be advisable for all service providers to re-determine the gross taxable value on which service tax is payable especially in case of reimbursements as explained in rule 5 above. The determination of taxable value has to be made on case-to-case basis by the service provider for each service provided. For the ready reference of the readers Notification No.12/2006 on Service Tax (Determination of Value) Rules, 2006 is attached below.

NOTIFICATION NO

In exercise of the powers conferred by clause (aa) of sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:—

1. Short title and commencement.—

1. These rules may be called the Service Tax (Determination of Value) Rules, 2006.
    

2. They shall come into force on the date of their publication in the Official Gazette.

2. Definitions.—In these rules, unless the context otherwise requires,–

• "Act" means the Finance Act, 1994 (32 of 1994);
   

• "section" means the section of the Act;
   

• "value" shall have the meaning assigned to it in section 67;
   

• words and expressions used in these rules and not defined but defined in the Act shall have the meaning respectively assigned to them in the Act.

3. Manner of determination of value.– Subject to the provisions of section 67, the value of taxable service, where the consideration received is not wholly or partly consisting of money, shall be determined by the service provider in the following manner:—

1. 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;
    

2. where the value cannot be determined in 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 of provision of such taxable service.

4. Rejection of value.—

1. Nothing contained in rule 3 shall be construed as restricting or calling into question the power of the Central Excise Officer to satisfy himself as to the accuracy of any information furnished or document presented for valuation.
    

2. Where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or these rules, he 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 fixed at the amount specified in the notice.
    

3. The Central Excise Officer shall, after providing reasonable opportunity of being heard, determine the value of such taxable service for the purpose of charging service tax in accordance with the provisions of the Act and these rules.

5. Inclusion in or exclusion from value of certain expenditure or costs.—

1. Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.
    

2. Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:—

• 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;
   

• 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;
   

• the recipient of service is liable to make payment to the third party;
   

• the recipient of service authorises the service provider to make payment on his behalf;
   

• 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;
   

• 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;
   

• the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
   

• 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.

Explanation 1.– For the purposes of sub- rule (2), "pure agent" means a person who–

• 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.

Explanation 2.— For the removal of doubts it is clarified that the 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.

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 for Television advertisement and paid service tax on the total consideration billed. 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

Illustration 2.– In the course of providing a taxable service, a service provider incurs costs such as travelling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. 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.

Illustration 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.

Illustration 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.

6. Cases in which the commission, costs, etc., will be included or excluded.–

1. Subject to the provisions of section 67, the value of the taxable services shall include‚–

• 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;
   

• 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;
   

• the amount of premium charged by the insurer from the policy holder;
   

• the commission received by the air travel agent from the airline;
   

• the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;
   

• 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;
   

• the commission or any amount received by the rail travel agent from the Railways or the customer;
   

• 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
   

• 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.

2. Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may be, does not include–

• initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;

• the airfare collected by air travel agent in respect of service provided by him;

• the rail fare collected by air travel agent in respect of service provided by him; and

• interest on loans.

7. Actual consideration to be the value of taxable service provided from outside India.–

1. The value of taxable service received under the provisions of section 66A, shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.
    

2. Notwithstanding anything contained in sub-rule (1), the value of taxable services specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, as are partly performed in India, shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.

F. No. B1/4/2006-TRU

(R.Sriram)