Valuation under

1

• Valuation under
• Service Tax Regulation
• Mrityunjay Acharjee

2
AGENDA

• Statutory provisions relating to Valuation of
  Taxable Services.
• Service Tax (Determination of Value) Rules
• Latest amendments in Valuation Rules with the
  introduction of Negative List
• Determination of value of service portion in the
  execution of a works contract.

3
VALUATION OF SERVICES

• Value of Taxable Service shall be the Gross
  amount charged by the service provider for such
  services provided or to be provided rendered by
  him.
• Tax is payable as soon as advances, if any, is
  received

4
VALUATION OF TAXABLE SERVICES U/s. 67

• Where consideration for providing services is
  entirely in money, gross amount charged by
  service provider/ to be provided shall be the
  value of Service.
• Where consideration is not wholly or partly in
  terms of money, be such amount in money as, with
  the addition of service tax charged, is
  equivalent to the consideration

5
VALUATION OF TAXABLE SERVICES U/s. 67

• Where provision of services is for a
  consideration which is not ascertainable, the
  value would be determined in the prescribed
  manner and as per the Valuation Rules.

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VALUATION OF TAXABLE

• Where consideration is not wholly or partly in
• terms of money ( or value not ascertainable)
• Service Tax is payable
• Value of taxable services shall be equivalent to
  the Gross amount charged by the Service Provider
  to provide similar services to other persons in
  ordinary course of trade , where Gross amount
  charged is Sole Consideration
• In other cases, (not above), Value shall not be
  less than the Cost of Provision of such Services

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Non-Monetary Consideration

• Supply of goods and service in return for
  provision of service
• Refraining or forbearing to do an Act in return
  for provision of service
• Tolerating an Act or a situation in return for
  provision of a service
• Doing or agreeing to do an Act in return for
  provision of service
• Service Tax is payable on the fair value of non-
• monetary consideration, which is equivalent money
• value as determined as per Rules.

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PROVISION OF VALUATION U/s. 67

• .
• Where Service Tax is inclusive and not charged
• separately - value shall be determined on back
• calculation basis
• Gross amount charged shall include any amount
• received before / during / after such services

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DETERMINATION OF VALUE - RULES

• Thee Central Excise / Service Tax Officer can
  reject the value determined by the service
  provider and determined value separately.
• In case of service provided/ to be provided
  from outside India, actual consideration received
  shall be relevant for valuation
• Rule 7

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PRINCIPLES OF COST ANALYSIS

• Determination of Cost of Taxable Services
• Cost would be worked out on the basis of usual
  Cost Accounting principles
• Certification of Cost / Chartered Accountants for
  determination of Cost of Services
• Specific Guidelines from ICAI for the purpose of
  determination of Cost of Services is needed

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PRINCIPLES OF COST ANALYSIS

1. Value based on Cost of Provision of Services
   where reasonable profit (industry average or 10)
   shall be added on total cost of services
2. For captive consumption of services principles
   laid down in CAS-4 issued by ICAI and CBEC
   Circular No. 692/8/2003 may be followed
3. All expenditure and cost relating to provision of
   service incurred by service provider is
   includable in the value Rule 5(1) and shall
   be treated as consideration for the taxable
   services

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INCLUSION/EXCLUSION FROM VALUE

• Where any expenditure/cost has been incurred by
  the service provider in the course of providing
  taxable service all such exp. / costs shall be
  treated as consideration for taxable service
  provided / to be provided and shall be included
  in the value for the purpose of charging Service
  Tax.
• Where any expenditure or cost incurred by service
  provider as Pure Agent of the recipient of
  service such amount shall be excluded, subject
  to fulfillment of all eight conditions

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VALUE OF TAXABLE SERVICES

• 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.
• In other words, Gross consideration is taxable
• (Explanation to Rule 5).

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Non-Monetary Consideration

• Supply of goods and service in return for
  provision of service
• Refraining or forbearing to do an Act in return
  for provision of service
• Tolerating an Act or a situation in return for
  provision of a service
• Doing or agreeing to do an Act in return for
  provision of service
• Service Tax is payable on the fair value of non-
• monetary consideration, which is equivalent money
• value as determined as per Rules.

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PRINCIPLES FOR VALUE DETERMINATION

1. Circular no. B1/4/2006 TRU dated 19.04.2006 -
   Value for the purposes of charging Service Tax
   is the gross amount received as consideration for
   provision of service. All expenditure or cost
   incurred by the service provider in the course of
   providing taxable services forms integral part of
   the taxable value and includable. It is not
   relevant that various expenditure or cost has
   separately indicated in the invoice or bill
   issued by the service provider to his client.
2. All earlier circulars stands withdrawn

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VALUE OF TAXABLE SERVICES

• Re-imbursement of expenses incurred on behalf of
• client is not includible Rule 5(2) -
• Glaxo Smithkline Pharma Ltd. Vs. CCE
• Deduction available, if conditions for Pure
  Agent
• are fulfilled

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LIABILITY OF SERVICE RECEIVER NOT INCLUDIBLE

• Re-imbursement of expenses claimed by the
  service provider as per agreement, which is a
  liability of the service receiver the same
  should not be included in the value
• Scott Wilson Kirkpatrick India Ltd. Vs.
  CCE

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MEANING OF PURE AGENT

• Means a person who
• (a) 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
• (b) 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
• (c) does not use such goods or services so
  procured
• (d) receives only the actual amount incurred to
  procure such goods or services

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CONDITIONS FOR EXEMPTION AS PURE AGENT

1. SP acts as a pure agent while making payment of
   third party for goods/services procured.
2. The SR received and uses the goods so procured by
   the SP in his capacity as pure agent of SR
3. The SR is liable to make payment to the third
   party
4. The SR authorises the SP to make payment on his
   behalf
5. The SR is aware that the goods and services for
   which payment has been made by SP shall be
   provided by a third party

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CONDITIONS FOR EXEMPTION AS PURE AGENT

• 6. Payment made by SP on behalf of the SR has
  been separately indicated in the invoice issued
  by the SP
• 7. The SP recovers from the SR only such amount
  as has been paid by him to the third party
• 8. The goods and services procured by the SP from
  third party as pure agent are in addition to the
  services provided by him on his own capacity.

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VALUATION OF SERVICES EXAMPLE 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. What would value
  of Taxable Services.
• 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

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VALUATION OF SERVICES EXAMPLE 2

• In the course of providing a taxable service, a
  service provider incurs costs such as traveling
  expenses, postage, telephone, etc., and may
  indicate these items separately on the invoice
  issued to the recipient of service. What would
  be the value of taxable services.
• 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.

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VALUATION OF SERVICES EXAMPLE 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. .

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VALUATION OF SERVICES EXAMPLE 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.

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NO SERVICE TAX ON FREE SERVICE

• If service is provided free of charges No
  Service Tax is payable Bharti Cellular Ltd.
  Vs. CCE
• Free Service provided by authorised vehicle
  service stations (at the time of sale) for which
  no payment is received from anyone and price is
  included in sale price of such vehicle, the same
  could not be subjected to Service Tax - Indus
  Motor Company vs. CCE(2008)

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LEVY OF SERVICE TAX AND EXCISE DUTY

• LEVY OF
• SERVICE TAX
• ON
• INDIVISIBLE CONTRACTS

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LEVY OF SERVICE TAX AND EXCISE DUTY

• Though, Service Tax and Excise Duty, both
  independent taxes, in certain situation ST is
  payable even ED has been paid on the same amount.
• Lincoln Helios India Ltd. Vs CCE,
• it was held that Service Tax is payable in
  erecting and commissioning charges even if excise
  Duty has been paid on entire value of contract
  including erection and commissioning

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VALUATION INDIVISIBLE CONTRACTS

• If such service is covered under Works Contract
  Service valuation shall as per Rule 2A of
  Valuation Rules Amended through Notification No
  24 of 2012 dated 6th June 2012
• 2. In other cases value of the goods cant be
  included in the value of services
• - Bharat Sanchar Nigam ltd. Vs. UOI
• - Imagic Creative Pvt. Ltd Vs. CCT

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VALUATION OF SERVICES

• LEVY OF
• SERVICE TAX
• ON
• WORKS CONTRACT
• Notification No 24 of 2012 dt 6 June 2012

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Determination of Value in Works Contractas
notified by Notification No 24 of 2012 dt 6 June
2012

• Works contract has been defined in section
  65B(54) to mean a contract
• wherein transfer of property in goods involved
  in the execution of such
• contract is levyable to tax as sale of goods and
  such contract is for the
• purpose of carrying out construction, erection,
  commissioning,
• installation, completion, fitting out,
  improvement, repair, renovation,
• alteration of any building or structure on land
  or for carrying out any
• other similar activity or part thereof in
  relation to any building or
• structure.
• Value of taxable service is also determined in
  accordance with Service
• Tax (Determination of value) Rules, 2012 as
  amended from time to time.
• The amended Service tax (Determination of
  value) Rules, 2012 shall
• be effective from 01.07.2012 vide notification
  no 24/2012 dated 06.06.12.

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VALUATION OF SERVICES WORKS CONTRACT

• Where Value Added Tax, has been paid on the
  actual value of transfer of property in goods
  involved in the execution of the works contract,
  such value adopted for the purposes of payment of
  VAT, as the case may be, shall be taken as the
  value of transfer of property in goods involved
  in the execution of the said works contract for
  determining the value of works contract service.

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Determination of Value in Works Contract

• Value of works contract as per amended Rule for
  valuation of taxable
• Services in the execution of a works contract
  (from 01.07.2012) includes
• the followings
• (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

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Determination of Value in Works Contract

• Value of service portion in the execution of a
  works contract
• section 66E(h) shall be equivalent to the
  gross amount
• charged for the works contract less the value of
  property in
• goods transferred in the execution of the said
  works contract.
• Where VAT/Sales Tax has been paid or payable
  on the actual value of property in goods
  transferred in the execution of the works
  contract, such value adopted for the purposes of
  payment of VAT/Sales Tax, shall be taken as the
  value of property in goods transferred in the
  execution of the said works contract for
  determination of the value of service portion
  in the execution of works contract.

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Determination of Value of Works Contract in
other cases

• Where the value could not been determined as
  above, the amount of service tax payable shall be
  

Works Contract relating to .. Taxable portion as a of  the total amount
For execution of original works. original works means and includes - all new constructions, all types of additions and alterations to abandoned or damaged structures to make them workable, erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise 40 of total amount charged for the Works Contract. ( i.e, 12.36 on 40)
For maintenance or repair or reconditioning or restoration or servicing of any goods, 70 of total amount charged for the Works Contract
For any other contract (other than above) including maintenance, repair, finishing services like glazing etc., installation of electrical fittings etc 60 of total amount charged for the Works Contract
35
Determination of Value of Works Contract in
other cases

• Total Amount for the contracts shall be the
  sum total of
• gross amount charged plus the fair market
  value of all goods
• and services supplied in or in relation to
  the execution of the
• same contract, or any other contract, after
  deducting the amount charged for such goods or
  services and the VAT/Sales Tax levied thereon.
• Fair Market value of goods and services
  shall be determined in accordance with generally
  accepted accounting principles.

36
CENVAT Credit - Works Contract Services

• The Provider of taxable service could not
  take CENVAT credit of duties/cess paid on any
  inputs used in or in relation to the said works
  contract. However, credit in respect of taxes
  paid on capital goods and input services shall be
  available.
• Credit in respect of taxes paid on capital goods
  and input services shall also be available in
  those cases where taxable value is determined on
  Specified percentage basis.

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Value of Works Contract

• Question
• Would labour contract in relation to building or
  structure is treated as works contract?
• No. Labour contract do not fall in the
  definition of works contract. There should be a
  transfer of property in goods involved in the
  execution of works scontract which is leviable to
  VAT.
• Pure labour contract is not a works contract and
  would be leviable to Service Tax like any other
  service on its full value of consideration.

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Value of Works Contract

• Question
• Would contracts for tailoring of clothes or
  development of
• photographs also be treated as works contracts
  as these are
• also for carrying out a particular work?
• No. The phrase used is works contract and not
  work contract.
• Works has a defined and accepted legal
  meaning. As per
• Blacks Law dictionary works means buildings
  or structures
• on land. Moreover works contract has been
  defined in the Act as
• contract for carrying out specified activity,
  like construction,
• erection, commissioning, installation,
  completion, fitting out,
• improvement, repair, renovation, alteration
  etc., or a part thereof
• in relation to any building or structure on
  land. Therefore
• contracts which do not pertain to building or
  structures on land
• would be out of the ambit of works contracts .

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Value of Works Contract

• Question
• Would contracts for construction of a pipe-line
  or
• conduit be covered under works contract?
• Yes. As pipeline or conduits are structures on
  land
• contracts for construction of such structure
  would be
• covered under works contract

40
Value of Works Contract

• Question
• Would contracts for erection commissioning or
• installation of plant, machinery, equipment or
• structures, whether prefabricated or otherwise be
  
• treated as a works contract?
• Such contracts would be treated as works
  contracts if
• ? Transfer of property in goods is involved in
  such a contract and
• ? The machinery equipment structures are attached
  or embedded to earth after erection commissioning
  or installation.

41
Value of Works Contract

• What is the scope of building or structure on
  land?
• Buildings and structures on land means not only
• buildings or structures attached to earth but
  also things
• permanently fastened to a building or structure
  attached
• to earth. Hence covered under Works Contract
• Would contracts for painting of a building,
  repair of
• a building, renovation of a building, wall
  tiling,
• flooring be covered under works contract?
• Yes, if such contracts involve provision of
  materials as
• well.

42
Determination of value of service involved in
supply of food or any article of human
consumption

• Determination of value of taxable service
  involved in supply of food and drinks in any
  restaurant or as outdoor catering.
• Total amount means the sum total of the
  gross amount charged and the fair market value of
  all goods and services supplied in or in relation
  to the supply of food/drinks whether or not
  supplied under the same contract or any other
  contract, after deducting therefrom, the amount
  charged for such goods or services, if any and
  the amount VAT/Sales Tax levied thereon

Description Taxable portion as a of  the total amount
Service portion in the supply of food or any other article of human consumption or any drink (whether or not intoxicating),  at a restaurant 40
Service portion in outdoor catering supply of food or any other article of human consumption or any drink (whether or not intoxicating),   60
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VALUATION INDIVISIBLE CONTRACTS

1. Service Tax is payable on value of services and
   not on the value of the material/input used while
   providing service
2. Notification no. 12/2003-ST- if amount charged
   includes value of goods and material sold,
   Service Tax will not be payable on value of such
   goods and material
3. In case of AMC, if Sales Tax has been paid on
   components and parts, Service Tax would not be
   payable on that value. Kone Elevators Ltd. Vs.
   CST

44
VALUATION OF SERVICES

• Elements to be
• Included for
• Determining
• Taxable Value

45
VALUATION OF SERVICES TO INCLUDE

• (i) 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
• (ii)  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
• (iii)  The amount of premium charged by the
  insurer from the policy holder
• (iv)   The commission received by the air travel
  agent from the airline
• (v)    The commission, fee or any other sum
  received by an actuary, or intermediary or
  insurance intermediary or insurance agent from
  the insurer
• (vi)  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
• (vii) The commission or any amount received by
  the rail travel agent from the Railways or the
  customer

46
VALUATION OF SERVICES TO INCLUDE

• (viii)  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
• (ix)   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.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.

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SPECIFIC EXCLUSION FROM VALUE

1. Initial deposit made by the subscriber as the
   time of application for telephone connection or
   pager or facsimile (FAX) or telegraph or telex or
   for leased circuit
2. The airfare collected by air travel agent in
   respect of service provided by him
3. The rail fare collected by rail travel agent in
   respect of service3 provided by him
4. Interest on loans, and
5. The taxes levied by any Government on any
   passenger travelling by air, if shown separately
   on the ticket, or the invoice for such ticket,
   issued to the passenger

48
OTHER RELEVANT ISSUES

• The existing provisions relating to positive list
  approach
• of taxing services under sections 65, 65A, 66,
  and 66A,
• which inter-alia include definition of taxable
  service,
• classification Reverse charge, u/s. 66A, shall
  not be
• applicable from 01.07.2012. (18/2012-
  01.06.2012)
• Newly inserted Section 65B (effective from
  01.07.2012)
• provides definitions relating to Service Tax
  which
• inter-alia includes the definition of Service,
  Support
• Service, Taxable Service, Negative List
  etc. notification no 19/2012 dated 05.06.2012.

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Determination of value of services

• In accordance with Rule 3 of the valuation Rules,
  where the value of services
• is not ascertainable, the same shall be
  determined in the following manner
• a) The value of such taxable service shall be
  equivalent to the gross amount charged by the
  service provider for similar service to any other
  person in the ordinary course of business where
  such gross amount is the sole consideration.
• b) If the value could not be determined as above,
  cost of provision of such taxable service would
  be considered as equivalent money value of such
  services.
• The value of taxable services shall also include
  any amount realised as
• demurrage or by any other name whatever called
  for the provision of a service
• beyond the period originally contracted or in
  any other manner relatable to the
• provision of service.

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Questions ?????
51
THANK YOU
11/27/2013