C & AG Reports that Value of service adopted was not based on Sole Consideration
SECTION 67(2) of the Finance Act, 1994, read with rule 3(a) of the Service Tax (Determination of Value) Rules, 2006, effective from 19 April 2004, stipulates that where provision of service is for a consideration not wholly or partly consisting of money, 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.
M/s Kandla Port Trust (KPT), Vadinar , in Rajkot Commissionerate, provided port services to M/s Essar Oil Ltd ( EOL ), in connection with installation/creation of various new ports, related facilities in the KPT water limits and also in land/road area of KPT at Off-shore Oil Terminal (OOT), Vadinar . M/s EOL paid Rs. 6.68 crore between February 2007 and March 2008 to KPT as wharfage and berthing charges at 51.43 per cent of the scale of rates (SORs) of KPT for the products brought by EOL at the Vadinar Terminal. The assessee also paid service tax of Rs. 82.38 lakh on this amount.
C & AG observes that payment of service tax of 51.43 per cent of scale of rates was not correct because the assessee and EOL had entered into an agreement by virtue of which KPT had extended its facilities to be used and developed by the EOL and the developed assets were to be repatriated to KPT free of cost on a future date. In consideration thereof, the charges leviable were reduced to 51.43 per cent of the actual scale of rates of KPT.
In such cases, the service tax of Rs. 1.60 crore should have been paid on the full service charge of Rs. 12.98 crore which was chargeable by KPT in normal circumstances from any other assessee for providing similar services under rule 3 (a) of the aforesaid Rules. This resulted in short payment of service tax of Rs. 77.87 lakh .
The matter was pointed out to the department/Ministry in August 2008/October 2009 and it has not replied to the C & AG as on January 2010.
Service Tax (Determination of Value) Rules, 2006 is effective from April 19, 2006 while the C & AG states in his report to the Parliament that the said rules are effective from April 19, 2004. Secondly, Section 67(2) of the Finance Act, 1994 explains that where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. This section does not apply to the facts of the case. In fact, the facts of the case would be governed by section 67(1)(ii) of the Finance Act, 1994. Therefore, the report should have referred to Section 67(1)(ii) of the Act instead of Section 67(2) of the Finance Act, 1994.
These may be typographical errors, but can the Annual Report from C & AG submitted to the Parliament with much fanfare afford to have typographical errors?
As for the merits of the issue, we asked an expert for his opinion. This is what he told us, “even assuming that Section 67(1)(ii) read with Rule 3(a) are applicable to the facts of the case, KPT would be liable to pay service tax only on 51.43 per cent scale of rates if EOL pays KPT only that much amount i.e. 51.43 percent of contract value as is done in the instant case. This is irrespective of the fact that KPT raises an invoice for the entire amount of Rs. 12.98 crores . This is also supported by the provisions of Rule 6 of Service Tax Rules, 1994, which stipulates that a service provider is liable to pay service tax only on the value of taxable services received from the client. Therefore, even if KPT raises an invoice treating Rs. 12.98 crores as gross amount charged as contended by C & AG, there is no requirement under law that KPT should pay service tax on that entire amount unless it receives the entire sum of Rs. 12.98 crores from their client viz., EOL .”