Valuation of Commission paid to foreign service providers – Whether under Section 67(1)(i) or Section 67(2) of Finance Act, 1994
DDT received a mail from a concerned netizen, the excerpts of which are as follows:
"We are engaged in the export business and giving sales commission to foreign agents in foreign currency. We are remitting amount in foreign currency based on the % of FOB/C&F/CIF value of the goods, as the case may be.
We are paying service tax on commission paid to foreign agents in foreign currency under the head of " Business Auxiliary Services" over and above of amount paid to foreign agents. We are calculating service tax considering payment of commission as Gross Amount including Service Tax as per section 67 (2) of Finance Act and depositing the same with the department as detailed in the example below:
Example: Commission amount paid: Rs. 1,00,000 Service Tax Paid: Rs.100000 X 12.36 / 112.36 = Rs. 11,000
We have taken this view since no service tax is collected from the provider of service hence gross amount can be treated as inclusive of service tax.
Is our assumption is correct?"
Considering that this issue could be gnawing the minds of many recipients of services from abroad, we decided to put this issue in the public domain and also put across our viewpoint on this issue as follows:
With regard to levy of service tax on services received in India from service providers located outside India, section 66A of the Finance Act, 1994 provides that the recipient located in India shall be deemed as the provider of taxable service and accordingly the said recipient shall be liable to pay service tax.
As regards valuation of taxable services, provisions of section 67 ibid apply. According to section 67(1)(i), the taxable value shall be the gross amount charged by the service provider and service tax shall be paid thereon by the service provider. Section 67(2) stipulates that in cases where gross amount charged is inclusive of service tax then the taxable value shall be calculated accordingly i.e. the gross amount charged in such instances will be cum tax value.
This can also be illustrated with a simple example:
Case 1: Amount billed by the service provider = Rs 1,00,000/-
ST payable by treating this amount as taxable value = Rs.100000 X 12.36% = Rs. 12,360/-
Amount paid to the service provider = 1,00,000/-
ST paid to the department = Rs 12,360/-
In this case, the ST liability is correctly shown as Rs 12,360/-
Case 2: Amount billed by the service provider = Rs 1,00,000/-
ST payable by treating this amount as cum tax value = Rs.100000 X 12.36 / 112.36 = Rs. 11,000
Amount paid to the service provider = 1,00,000 - 11,000 = 89,000/-
ST paid to the department = Rs 11,000/-
In this case, cum-tax benefit is admissible.
Case 3: Amount billed by the service provider = Rs 1,00,000/-
ST paid by treating this amount as cum tax value = Rs.100000 X 12.36 /112.36 = Rs. 11,000
Amount paid to the service provider = Rs. 1,00,000/-
ST paid to the department = Rs 11,000/-
This is not correct method of paying tax as the amount paid to the service provider is Rs 1,00,000, but not Rs 89,000/- . Hence cum-tax benefit is not available.
So, for a service provider to determine the taxable value in terms of provisions of section 67(1)(i) or provisions of section 67(2), it depends on the contractual arrangement/ agreement between the service provider and the service recipient with regard to the treatment to be given to the contract value i.e. whether the contract value has to be treated as an amount inclusive of all taxes (including service tax) or a value excluding all taxes (including service tax). This is irrespective of the fact that a recipient of service is liable to pay service tax in terms of section 66A.
Therefore, it may be wrong to assume that merely because the actual service provider residing outside India is not paying the service tax and such service tax liability is shifted to the service recipient by virtue of the deeming fiction created by section 66A, the gross amount charged by the service recipient will be inclusive of service tax and therefore should be treated as cum tax value in all the cases.
Therefore, in the fitness of things, it would be proper to discharge tax liability by examining each case instead of claiming cum-tax benefit in all the cases.
In any case, if the taxable service received is input service as defined in Rule 2(l) of CENVAT Credit Rules, 2004 then whatever service tax is paid as a recipient of taxable services, such service tax would be available as input credit.