© DG Education (P) Ltd
[Service Tax : Valuation of Services]
VALUATION OF SERVICES:
[Sec 67- Explanation has been inserted by FA, 2015]
SEC 67(1)(i): MONETARY CONSIDERATION
1.
M/s. AB Coaching Ltd. Provides coaching in the field of commerce. The normal fees is Rs. 1,00,000 per student (all inclusive),
however as per policy of company, during the year, certain concessions were granted to poor students whereby only Rs. 10,000 (all
inclusive) were charged from them.
Compute the value of taxable service in both situations.
Valuation of services
Service to general students
Service to poor students

2.
Gross amount charged
1,00,000
10,000
Valuation provision
Sec 67(1)(i)
Sec 67(1)(i)
Value of Service (excluding ST)
Rs 87,720
Rs 8,772
State with reason In brief whether the following statement is true or false:
“Mr. Salim, an architect has received an Advance Amount of 4,48,500, after deduction of Income Tax of 51,500. The Service Tax is
payable on 4,48,500.”
TDS is part of Taxable Value : Service Tax is to be paid on the value of taxable service determined as per Sec 67. Sec 67(1)(i) provides
that value of service shall be ‘gross amount charged’ for the service. Income Tax Deducted at Source is included in the charged
amount. Service Tax is, therefore, payable on the total amount inclusive of the Income Tax deducted at source.
Conclusion : Hence, the given statement is false. Service Tax is payable on 4,48,500 + 51,500 = 5,00,000

3.
Raj Associates is a consultancy firm. During the FY 2015-16, it received Rs 18 lakhs as professional fees on which tax ha been
deducted under source u/Sec 194-J. You are required to compute the value of taxable service and ST liability in hands of Raj
Associates assuming that the receipt is inclusive of ST @14%.
[IPCC May 2014- 4 marks]
Service Provider: Raj Associates
Description of service: Consultancy Services
Invoicing of Service: [Gross Amount Charged + ST@14%]
TDS u/Sec 194-J of Income Tax Act@10% = [Gross Amount Charged *10%]
• CBDT has recently clarified that TDS is to be made on amount exclusive of ST, if ST is indicated separately under terms of the
agreement / contract.
• It has been presumed that Raj Associates has charged ST separately.
Payment Receipt (net of TDS): [ (Gross Amount Charged – 10%) + ST@14%]] = [90% of Gross Amount Charged + ST@14%]
Gross Amount Charged
ST@14%
Total Invoice Value
TDS u/Sec 194-J [@10% of X]
Net payment received
X (say)
0.14X
1.14X
0.10 X
1.04X
= 18,00,000
Thus, X = 18,00,000 / 1.04 = 17,30,769
Thus, Value of Taxable Service = 17,30,769
& ST thereon ST@14% = 2,42,308 (rounded off to the nearest rupee)

4.
A Ltd has received services from a foreign company. Under the agreement, they are liable to pay know-how charges tax free.
TDS@40% is laible to be made under Income-tax law. The sum paid tax-free: Rs 588; Rate of TDS= 41.2% and ST @14%. Compute
the amount of ST payable.
Service Provider: A Ltd
Description of service: IPR Service (POPS as per Rule 3 = Location of SR = Location of A Ltd = Taxable territory)
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
Taxability of service: Taxable on full reverse charge basis (as SP is foreign company, i.e., located in non-taxable territory)
Value of service: (Net payment to SP + TDS paid to CG) – ST is payable on this value (ST shall be paid directly to CG)
Net payment to SP
TDS paid to CG
588
@41.2%
(exclusive of TDS)
The consideration/sum paid for the service shall be calculated by way of statutory grossing up as specified in Sec 195-A of the Income
Tax Act, 1961 (which we popularly referred as – GROSSING UP for purposes of TDS) is as follows:
(a) Grossed Sum-Up = sum paid (net of tax) / (100- TDS rate)
(b) Here, grossed up sum = 588 / (100- 41.2) = Rs 1,000
thus, value of service shall be Rs 1,000.
Upon this value, ST @14% (= Rs 140) shall be payable by A Ltd to CG.
5.
For providing beauty treatment services, a parlour uses materials such as cosmetics and toilet preparations. Whether the cost of
such materials will be included in the value of taxable service?
(May 2006- 3 Marks)
In terms of Sec 67 of the Finance Act, 1994 “taxable value” of any service shall be the gross amount charged by the service provider
for such service. So far materials used in providing beauty services (e.g., cosmetics and toilet preparations) are concerned, these are
essentials for providing the services and they are not sold as such but are used for providing the services. Hence, service tax shall be
charged on gross amount.
6.
Define the term 'Gross amount charged' as per Explanation to Section 67 of Finance Act, 1994, as amended, with reference to
ASSOCIATED ENTERPRISES.
(May 2009- 3 Marks)
[Chapter of ‘TP, i.e., transfer-pricing’].
‘Associated Enterprises’ have been defined to have the same meaning as given to it under Income Tax Act
It
involves one foreign entity and its Indian counterpart. Transaction between Associated Enterprise will also be subject to ST liability if
service is provided in India and Indian counterpart (service receiver in India) shall be liable to pay ST. In general, POT of service
receiver is ‘date of payment of service’. But considering the possibility of deferment of ST by deliberating delaying the payment for
service by Indian service receiver to foreign counterpart, POT in respect of transaction between Associated Enterprise has been
specified as date on which debit entry is made in books by the person liable to pay ST. In harmony with that, explanation has been
added to Sec 67 (which deals with determination of value of taxable service) providing that ‘Gross Amount Charged’ shall include any
amount debited or credited to the books of accounts to any account shall be deemed to be “gross amount charged” and thus, will be
chargeable to service tax, when transaction is between associated enterprises.
SEC 67(1)(ii): NON-MONETARY CONSIDERATION
7.
Mr. X, a Cost Accountant rendered taxable service to Vishwa Cements Ltd. In this regard the company sent 200 cement bags free of
cost (worth Rs 20,000), for the house construction of Mr. X. Explain how the value of the taxable service will be determined in this
case. Will your answer be different if the service had been rendered free of charge?
[CS Final, Dec 2008]
Services provided for non-monetary consideration (200 Cement Bags)
Value of service shall be determined in terms of Sec 67(1)(ii) of FA, 1994 as money value of such consideration is ascertainable. Sec
67(1)(ii) provides that in such case, value shall be such amount in money as with the addition of ST is equivalent to consideration.
Putting it simply,
Value of Service = [X (amount in money) + ST]= Consideration
= [X + 14%] = 20,000 (Value of 200 Cement Bags)
Thus, Value of Service = 20,000/ 1.14= 17,544 (rounded off)
Services provided for free, i.e., without any consideration at all
‘Service’ has been defined u/s 65-B to mean an activity carried out by a person for another for consideration. Thus, unless
consideration is there, activity cannot be considered as service and thus, cannot be chargeable to ST.
SEC 67(1)(iii): VALUE OF SERVICE NOT ASCERTAINABLE
STVR, 2006 -- RULE 2-A, 2-B, 2-C & RULE 3
RULE 2-A: Valuation of Works Contract Service
© DG Education (P) Ltd
8.
[Service Tax : Valuation of Services]
Hemant Ltd. carried out following works, all of which are liable to VAT as transfer of property is involved in the execution of works
contract (the amount charged given below are exclusive of all taxes) :
i. New constructions: Rs. 60 Lakh;
ii. Additions and alterations to damaged structures on land to make them workable : Rs. 40 Lakh;
iii. Maintenance and servicing of goods : Rs. 20 Lakh;
iv. Maintenance and repairs of immovable property : Rs. 25 Lakh;
v. Glazing and plastering of an immovable property : Rs. 30 Lakh.
Compute the taxable value of services involved in the execution of works-contract.
(Nov 2014 - 5 Marks)
All the aforesaid contracts are "works contract". Service portion in execution of these works contract is liable to service tax u/Sec 66E(h) read with Rule 2A of the Service Tax (Determination of Value) Rules, 2006.
Since data regarding valuation under Rule 2A(i) is not given, value is computed as per Rule 2A(ii) at specified percentage of gross
amount charged. The value would be :
Particulars
Amount charged
(Rs. lakh)
Taxable Value (as per amended provisions)
Deemed %
New Constructions (it is "original works")
60
40.00%
24
Addition and alteration of damaged structure on land to
make them workable (It is "original works")
40
40.00%
16
Maintenance and servicing of goods
20
70.00%
14
Maintenance and repair of immovable property
25
70.0%
21
Glazing and Plastering of an immovable property
30
70.00%
21
Total Value
9.
Value (Rs. lakh)
92.5
Indian Oil Corporation [IOC] has awarded a contract in July, 2015 for Rs 140 lakh to M/s Jagjit Construction Ltd. in respect of
alterations to one of its buildings. The said building was abandoned by IOC five years ago. The materials required for carrying out
the alterations will be supplied by Jagjit Construction Ltd. itself. The purpose of awarding the foregoing contract is to make the said
building workable. Whether the aforestated services of Jagjit construction Ltd. are subject to Service Tax and if so, determine the
amount of service tax payable?
[ICAI Study Material (latest)]
The contract of awarded to Jagjit Ltd seems to be one with labour-cum-material. Such contracts are known as ‘Works Contract’ and
are chargeable to ST to the extent of value of service involved in execution of such contracts. Value of service being not ascertainable
as such, the valuation of such contract is done under section 67(1)(iii) read with Rule 2-A of Service Tax Valuation Rules, 2006.
Jagjit Ltd can use any one of following 2 methods for determination of such service portion:
Method-1: TV= [Gross Amount Charged for Contract- Value of goods whose property transferred in contract]
Method-2: TV = 40% of Total Amount Charged for Works Contract [this being contract for ‘Original Works’]
Presuming that Jagjit Ltd. Opted for second method and further presuming that ST is chargeable additionally, the value of taxable
service in given situation is Rs 56,00,000 (40% of 140,00,000). Accordingly, ST liability shall be 7,84,000/- (14% of 56,00,000).
Tutorial Note:
1. SP being a company (business entity registered as Body corporate), partial reverse charge is not applicable on the service transaction.
2. Entire ST liability shall be discharged by Jagjit Construction Ltd.
10. Airports Authority of India (AAI) awarded a contract for construction of AN AIRPORT in Nicobar Islands to Ananyana Construction
Ltd. for Rs 2000 lakh in July, 2015. Whether the aforestated services of Ananyana construction Ltd. are subject to ST and if so,
determine the amount of ST payable?
[ICAI Study Material (latest)]
The contract of awarded to Ananyana Construction Ltd seems to be one with labour-cum-material. Such contracts are known as
‘Works Contract’ and are chargeable to ST to the extent of value of service involved in execution of such contracts. Value of service
being not ascertainable as such, the valuation of such contract is done under section 67(1)(iii) read with Rule 2-A of Service Tax
Valuation Rules, 2006.
Ananyana Construction Ltd can use any one of following 2 methods for determination of such service portion:
Method-1: TV= [Gross Amount Charged for Contract- Value of goods whose property transferred in contract]
Method-2: TV = 40% of Total Amount Charged for Works Contract [this being contract for ‘Original Works’]
Further, w.e.f., exemption given to service by way of construction of airport has been withdrawn [E/N 25/2012 (Entry No 15)
amended w.e.f. 1st April, 2015] Therefore, ST is payable by Ananyana construction Ltd..
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
Service provider, Ananyana Construction Ltd., being a body corporate, the partial reverse charge is not applicable to works contract
services. Thus, full ST is payable by Ananyana Construction Ltd.
Presuming that Ananyana Construction ltd has opted for valuation of services on notional basis in terms of Rue 2-A(ii) of STVR, 2006,
the ST payable shall be Rs 112 Lakhs [(40% of 2,000 Lakhs) * 14%]
Tutorial Note:
•
SR = Airport Authority of India = Body Corporate [Sec 3(2) of The Airport Authority of India Act, 1994].
• But since SP is body corporate (company), partial reverse charge is not applicable to the situation.
 (Expected)
11. Whether the value of material supplied by the contractee to the contractor for use in the execution of the works contract shall be
included in the value of works contract for payment of Service tax on ‘notional % basis’? What are the prescribed %? Can the
service provider avail cenvat credit also?
(May 2010- 4 Marks)
Inclusion of value material supplied by contractee:
While determining the value of service under ‘Notional % Valuation Scheme’ as prescribed by Rule 2-A (ii) of STVR, 2006, the %
specified shall be applied to ‘Total Amount Charged for the Works Contract’. It has been unambiguously made clear in Rule 2-A (ii)
that ‘total amount charged’ for the works contract shall be computed in following fashion:
Gross Amount Charged for the works contract
XXX
XXX
FMV of all goods & services supplied by service receiver in or in relation to execution of works contract,
whether or not supplied under the same contract or any other contract
(XX)
Less: Amount charged for such goods or services by service receiver
TOTAL AMOUNT CHARGED
Thus, The ‘total amount charged’ shall be computed by aggregating gross amount charged and the value of material supplied by the
contractee to the contractor **(REFER NOTE BELOW).
Prescribed % of Abatement:
In case of(A)
Works contracts entered into for execution of ORIGINAL WORKS,
(B)
ST shall be payable on
40% of the total amount charged
OTHER works contracts, not covered under sub-clause (A)
70% of the total amount charged
Availability of credit: Cenvat credit of inputs used in or in relation to works contract is not available. However, cenvat credit of input
service and capital goods is available.
**Author Note:
Treatment of goods/ services made available by SR to SP on ‘FOC (free of cost) basis’ for use in provisioning of service to SR
1. As a matter of general principle, value of such goods shall not be includible in TV (Gross Amount Charged) in hands of SP.
M/S BHAYANA BUILDERS (P) LTD.- 2013- Larger bench of CESTAT
‘For computation of ‘GROSS AMOUNT CHARGED’ as used in Sec 67 of FA, 1994, the value of goods and materials
supplied free of cost (FOC) by the service recipient to the service provider, being neither monetary or non-monetary
consideration paid by or flowing from service recipient, accruing to the service provider, would not be included, i.e., it
shall be outside the taxable value’
NARESH KUMAR & CO PVT LTD – 2014 – CALCUTTA HC
[ICAI RTP, MAY 2015]
Assessee was awarded a contract for carrying out loading, shifting and feeding of coal and gypsum by roads, for which High
Speed Diesel (HSD) would be provided free of cost by service recipient. The assessee paid ST on the amount charged
from the SR for the services provided which did not include the cost of the HSD supplied by the SR.
Held that ‘value of diesel supplied free of cost by SR shall not form part of TV.
2.
However, where legislature intends these to form part of taxable value, then it can do so but the legislative intention shall be made clear by
express wording. It has been so done in following cases:
1)
Valuation in case of Works Contract
Rule 2-A of STVR, 2006
40% / 70% shall be applied upon ‘TAC’
[TAC = GAC + FMV of all goods/materials even if supplied on FOC basis]
2)
Construction intended for sale
E/N 26/2012
3)
Valuation in case of ‘Restaurant and
Outdoor Catering services’
Valuation in case of ‘catering services’
along with renting service
Rule 2-C of STVR, 2006
25% / 30% shall be applied upon ‘TAC’
[TAC = GAC + FMV of all goods/materials even if supplied on FOC basis]
4)
.
40% / 60% shall be applied upon ‘TAC’
[TAC = GAC + FMV of all goods/materials even if supplied on FOC basis]
E/N 26/2012
70% shall be applied upon ‘TAC’
[TAC = GAC + FMV of all goods/materials even if supplied on FOC basis]
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
12. Calculate the NET SERVICE TAX PAYABLE under the provision of Rule 2-A of the Service tax (Determination of Value) Rules, 2006
relating to determination of value of services in the execution of a works contract from the following particulars:
(i) Gross amount for the works contract (excluding VAT) Rs 1,00,000
(ii) Value of goods and materials sold in the execution of works contract Rs. 70,000
(iii) Cenvat credit on (ii) above - Rs. 1,000
(iv) Service tax paid on input services - Rs. 1,000
(v) Cenvat credit on capital goods issued in the provision of works contract service- Rs. 1,000
(vi) Service tax rate = 14%
Make suitable assumptions and provide explanations where required.
(Nov 2008 5 Marks)
Assumptions:
1. It has been assumed that assessee is paying VAT on “SALE ELEMENT determined on ACTUAL BASIS”.
2. In absence of any information as to SP and SR, it has been presumed that SR in not a business entity registered as body corporate and
hence, partial reverse charge is not applicable. (in other words, SP is liable to make full payment of ST).
.
STATEMENT SHOWING COMPUTATION OF ST LIABILITY
A)
B)
C)
D)
E)
F)
Particulars
Gross Amount Charged for Work Contract (excluding VAT)
Less: Value of goods and materials (subjected to VAT)
Value of Service involved in execution of Works Contract
ST Liability @ 14%
Less: Cenvat credit Available to assessee
A) CCr on Inputs
Not Admissible (WN-1)
B) CCr on Input Service
1,000
C) CCr on Capital Goods
500 (50% 0f Duty Paid) (WN-2)
ST payable by Challan
Amount (Rs)
1,00,000
(70,000)
30,000
4,200
(1,500)
2,700/-
Explanations
W.N-1: Cenvat credit of Rs.1,000 on value of goods and materials sold in the execution of works contract shall not be available to the assessee
[Explanation to Rule 2-A] - (These goods/materials are deemed to be sold and trading is ‘negative list service’ and hence, these exclusive
inputs of trading business are not eligible for cenvat credit to the service provider)
W.N-2: Cenvat credit in respect of capital goods shall be taken only for an amount not exceeding 50% of the duty paid on such capital goods in
the same financial year and balance 50% shall be available in the subsequent financial year [Rule 4 of CCR, 2004].
13. Shambhu Pvt. Ltd. was awarded a contract in July, 2015 for providing flooring and wall tiling services in respect of a building
located in Delhi by Nath Ltd. As per the terms of contract, Shambhu Pvt. Ltd. was to provide all the required material for
execution of the contract. However, a portion of the material was also provided by Nath Ltd.
Whether the services provided by Shambhu Pvt. Ltd. are subject to service tax?
If yes, determine the service tax liability of Shambhu Pvt. Ltd. from the following particularsParticulars
Gross amount (excluding all taxes) charged by the Shambhu Pvt. Ltd. for the contract
Fair market value of the material supplied by Nath Ltd.
Amount charged by Nath Ltd. for the material (inclusive of VAT)
Excise duty paid on inputs
Service tax paid on input services
Excise duty paid on capital goods, purchased during the year, used in the contract
Rs.
6,00,000
1,00,000
60,000
12,750
6,000
4,000
[ICAI RTP – NOV 2014]
Chargeability to service tax:
The contract entered into by Shambhu Pvt. Ltd. requires the provision of both services and material and is for the purpose of
carrying out completion of an immovable property. Therefore, it falls within the scope of term ‘works contract’. As per
section 66E(h) of Finance Act, 1994, service portion in the execution of a works contract is a declared service and thus,
service provided by Shambhu Pvt. Ltd. would be liable to service tax.
Determination of ‘value of service’:
• Value of service portion in execution of works contract shall be determined as per Sec 67(1)(iii) read with Rule 2-A of STVR,
2006.
• Since, in the given case, the value of the service portion in the execution of the works contract cannot be determined as
per the segregation method under rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, the value will have to be
determined as per rule 2A(ii).
• In terms of Rule 2A(ii), in case of works contracts involving completion and finishing services such as floor and wall tiling of an
immovable property, service tax shall be payable on 70% of the total amount charged for the works contract.
© DG Education (P) Ltd
•
[Service Tax : Valuation of Services]
The total amount charged shall be determined in the following manner:
Gross Amount Charged by Contractor to the service receiver
Add: FMV of material being provided by service receiver for use in works contract
Less: Amount charged for the material so provided
TOTAL AMOUNT CHARGED
Computation of ST Liability.
Particulars
Gross ST liability [Value (70% of 6,40,000) @ 14%]
Less: Cenvat credit on inputs (Note-1)
Cenvat credit on input services
Cenvat credit on capital goods (50%) (Note-2)
Net ST payable
6,00,000
1,00,000
(60,000)
6,40,000
Rs.
62,720
—
6,000
2,000
54,720
Notes:
1. Cenvat credit of duties or cess paid on any inputs, used in or in relation to a works contract, is not available [Explanation 2 to Rule 2A of
the Valuation Rules] - - (These goods/materials are deemed to be sold and trading is ‘negative list service’ and hence, these exclusive inputs
of trading business are not eligible for cenvat credit to the service provider)
2. Only 50% of the duty paid on the capital goods is available as cenvat credit, in the current year [Rule 4(2)(a) of the CCR, 2004].
14. M/s. P Enterprises (sole proprietorship firm) entered into a contract with Skyline Builders (a partnership firm*) for construction of a
building at a consideration of Rs. 95,00,000 (excluding all taxes). M/s. P Enterprises supplied steel and cement to Skyline
Builders at Rs. 5,00,000 (excluding taxes). The fair market value of such steel and cement was Rs. 10,00,000 (excluding taxes).
Determine the service tax liability of Skyline Builders.
Will your answer be different, if Skyline Builders has provided the said services to P Ltd. instead of M/s. P Enterprises
assuming all other particulars remain the same?
Note:
1. Skyline Builders is not eligible for small service providers’ exemption under Notification No. 33/2012.
2. Ignore Swachh Bharat Cess.
[ICAI RTP, Nov 2015]
Author: Partnership Firm, unless otherwise specified, shall be taken to mean normal Partnership only. [Skyline Builder is not LLP which is body
corporate]
The service being provided is ‘works contract service’. Assuming that contractor M/s P enterprises has opted for valuation of his service
on notional % basis, TV of services in his case shall come to be 40% of ‘the total amount charged’ for the service.
Computation of TOTAL AMOUNT CHARGED
Total amount means the sum total of the gross amount charged for the works contract and the fair market value of all goods
and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any
other contract, after deducting (i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon .
Particulars
(Rs.)
Gross amount received excluding taxes (A)
95,00,000
Add: Fair market value of steel and cement supplied by M/s. P Enterprises (excluding taxes) (B)
10,00,000
Less: Amount charged by M/s. P Enterprises for steel and cement (excluding taxes) (C)
Total amount charged [(A) + (B) - (C)]
5,00,000
1,00,00,000
Thus, ST liability of Skyline Builders would be [(1,00,00,000 * 40%) * 14%] = 5,60,000
Works Contract service provided to P Ltd, business entity registered as body corporate
However, in case of services provided in execution of works contract, when the service is provided by any individual/ HUF/
partnership firm (whether registered or not) including association of persons to a business entity registered as body corporate, 50% of
the service tax is payable by the service provider and balance 50% by the service receiver under partial reverse charge. Therefore, in
the given case, when Skyline Builders provide services to P Ltd. (a company) 50% of the service tax will be payable by the service
provider (Skyline Builders) and balance 50% by the service receiver (P Ltd.). In that case, service tax liability of Skyline Builders would
be 50% of the total service tax liability as computed above i.e. Rs. 2,80,000 [50% of Rs. 5,60,000].
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
15. Kirti Ltd. was awarded a contract in July, 2015 for providing plastering services in respect of an immovable property for Rs
2,00,000/-. The material required for plastering is also required to be supplied by Kirti Ltd. Whether the foregoing plastering
services are subject to Service Tax and if so, how the service tax liability will be computed?
[ICAI Study Material (latest)]
The contract of plastering awarded to Kirti Ltd is a composite indivisible contract which involves labour as well as material. Such
contracts are known as ‘Works Contract’ and are chargeable to ST to the extent of value of service involved in execution of such
contracts. Value of service being not ascertainable as such, the valuation of such contract is done under section 67(1)(iii) read with
Rule 2-A of Service Tax Valuation Rules, 2006.
Kirti Ltd can use any one of following 2 methods for determination of such service portion:
Method-1:
TV= [Gross Amount Charged for Contract- Value of goods whose property gets transferred in course of execution of
such works contract]
Method-2:
TV = 70% of Total Amount Charged for Works Contract
Presuming that Kirti Ltd. Opted for second method and further presuming that ST is chargeable additionally, the value of taxable
service in given situation is Rs 1,40,000 (70% of 2,00,000). Accordingly, ST liability shall be 19,600/- (14% of 1,40,000).
Tutorial Note:
1. SP being a company (business entity registered as Body corporate), partial reverse charge is not applicable on the service transaction.
2. Entire ST liability shall be discharged by Kirti Ltd.
RULE 2-B: Valuation of service of MONEY CHANGING
16. Siddhi Ltd. exported some goods to Samson Inc. of USA. It received US $ 9,000 as consideration for the same and sold the foreign
currency @Rs. 61 per US dollar. Compute the value of taxable service under rule 2B of the Service Tax (Determination of Value)
Rules, 2006 if RBI reference rate for US dollar at that time is Rs. 62 per US dollar.
What would be the value of taxable service if US $9,000 are converted into UK £4,500. RBI reference rate at that time for US $
is Rs. 63 per US dollar and for UK £ is Rs. 101 per UK Pound.
For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the
selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time, multiplied by the total
units of currency.
Hence, in the given case, value of taxable service shall be
= Rs. (62-61) × 9,000 = Rs. 9,000
In case neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the
person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the
reference rate provided by RBI.
Hence, in the given case, value of taxable service would be 1% of the lower of the following :
a) US dollar converted into Indian rupees = $9,000 × Rs. 63 = Rs. 5,46,000
b) UK pound converted into Indian rupees = £ 4,500 × Rs. 101 = Rs. 4,54,500
Value of taxable service = 1% of Rs. 4,54,500 = Rs. 4,545
17. Mr. Ranjeet who has entered into a rollover contract approached NDBC Bank for selling US$ 35,000 at the rate of Rs. 49 per $. RBI
reference rate for US$ is Rs. 49.50 at the time. However, rate of exchange declared by CBEC for the day is Rs. 50.50 per US$.
Calculate the value of taxable service?
As per Rule 2-B of STVR, 2006, the value of taxable service shall be the difference between [Buying Rate Or Selling Rate, as the case
may be, and the RBI Reference Rate] for that currency at that time, multiplied by units of currency exchanged.
Thus, Value of taxable service = (49.50 - 49) × 35,000 = Rs. 17,500
Note : CBEC rate has no relevance under Rule 2B of the Service Tax (Determination of Value) Rules, 2006.
Rollover Contract:
• Rollover is a process in which investors carry forward their positions in a derivatives contract from one expiry date to another. Traders can
either let a position expire or carry forward their bets - that is, enter into a similar contract expiring at a future date.
• In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a
trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position - simultaneously
closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day - the trader artificially extends
the settlement period.
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
18. Mr A, Delhi is an authorized money changer registered under FEMA, 1999. It has entered the following transaction of money
changing during Quarter (July-Aug-Sep), 2015 :
1) 600 transactions of conversion of Dollar into Indian Rupees of Rs. 20,000 per transaction;
2) 500 transactions of conversion of Dollar into Indian Rupees of Rs. 1 lakh (per transaction);
3) 200 transactions of conversion of Indian Rupee in Dollar of Rs. 5 lakhs per transaction;
4) 100 transactions of conversion of Euro into Indian Rupee of Rs. 500 lakhs per transactions;
5) 300 transactions of conversion of Dollar into Euro of Rs. 100 lakhs per transaction;
Compute the service tax payable thereon as per Rule 6(7B) of Service Tax Rule, 1994.
TRANSACTION
1) Conversion of Dollar into INR of Rs. 20,000 per
transaction
ST / Transaction
(Rs. 20,000 × 0.14%)= Rs 28
(subject to minimum of Rs. 35)
600
21,000
2)
Conversion of Dollar into INR of 1 lakh each
(Rs. 1 lakh × 0.14%)= Rs 140
500
70,000
3)
Conversion of INR into Dollar of 5 lakh per
transaction
(Rs. 140 + Rs. 4,00,000 × 0.07%) = Rs
420
200
84,000
4)
100 transactions of conversion of Euro into INR of
Rs. 500 lakhs per transaction
(Rs. 770 + Rs. 490 lakhs × 0.014%)=
7,630
(Subject to maximum of Rs. 7,000)
100
7,00,000
5)
300 transactions of conversion of Dollar into Euro
(Rs. 770 + Rs. 90 lakh × 0.014%) %)=
2,030
(Subject to maximum of Rs. 7,000)
300
6,09,000
Transactions
Service Tax
Total ST
14,84,000
*Author:
For Nov, 2016 Attempt Students: Computation of SBC (Swachh Bharat Cess) in case ST is paid under Composition Scheme:
.
ST Liability
• ST leviable u/Sec 66-B
of FA, 1994
Person not opting for composition Scheme
Value as per Sec 67 (read with Rule 2-B of
STVR, 2006) * 14%
Person opting for composition Scheme
ST as computed as per Rule 6 (7-B) of STR, 1994
• SBC leviable u/Sec 119
of FA, 2015
Value as per Sec 67 (read with Rule 2-B of
STVR, 2006) * 0.5%
[Manner of computation as specified u/Sec 119
of FA, 2015]
.
ST as computed as per Rule 6 (7-B) of STR, 1994 * 0.5 / 14%
[Rule 6 (7-D) of STR, 1994 inserted specifying this manner of
computation]
Like in our above example, SBC = (14,84,000 * 0.5/ 14)
RULE 2-C: Valuation of service portion in activity of SUPPLY OF FOOD/DRINK
19. Hotel Saravana Bhawan, a AC restaurant in Chennai has raised bills worth Rs. 15,00,000 for the month of July 2015 and it has
received certain inputs falling under chapter 1-22 and other inputs and capital goods used for providing the above taxable services.
It has also received input services for providing the above taxable services. The details of excise duty / service tax paid are as
follows :
Excise duty paid on inputs falling under chapter 1-22
Rs. 12,000
Excide duty paid on inputs falling under other chapters
Rs. 15,000
Excise duty paid on capital goods
Rs. 30,000
Service tax paid on input services
Compute the net service tax payable by Hotel Saravana Bhawan?
Rs. 11,500
Activity of supply of food/drinks is declared service as per Sec 66-E. the service portion in such activity constitutes ‘declared service’.
When such supply is done at restaurant, then value of such service portion is taken as 40% of ‘Total Amount Charged’ as per Rule 2C of STVR, 2006.
Cenvat credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 used for providing the taxable
service, has not been taken under the provisions of the Cenvat Credit Rules, 2004. But Cenvat Credit available w.r.to other inputs,
input services and capital goods.
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
STATEMENT SHOWING COMPUTATION OF NET ST PAYABLE
Gross Service tax payable
• Value of Service= [40% of ‘Total Amount Charged’ – Rule 2-C of STVR, 2006] = 4,00,000
• Rate = 14%
Rs. 84,000
Less: Admissible / Eligible Cenvat Credit
(-) Excise duty paid on inputs falling under chapter 1-22
N.A.
(-) Excise duty paid on inputs falling under other chapters
(Rs. 15,000)
(-) Service tax paid on input service
(Rs. 11,500)
(-) Excise duty paid on capital goods (Rs. 30,000 × 50%)
(Rs. 15,000)
Net Service tax payable by Hotel Saravana Bhawan
Rs. 42,500
20. M/s. Sudha Caterers has got an outdoor catering contract to supply food for a social function to Mr. Raj & Family. As per the terms
of the contract they need to supply 8 dishes as specified by Mr. Raj & Family at an agreed price of Rs. 40,000. On account of
miscommunication, M/s. Sudha Caterers has understood it as 7 dishes and at a later point of time, Mr. Raj & Family has supplied
certain materials, the the fair market value of which is Rs. 15,000 M/s. Sudha Caterers has paid Rs. 5,000 towards such material to
Mr. Raj & Family. What is the value of taxable service for this contract. Assume that M/s. Sudha Caterers is not eligible for SSP
exemption.
Activity of supply of food/drinks is declared service as per Sec 66-E. the service portion in such activity constitutes ‘declared service’.
When such supply is done as ‘outdoor catering’, then value of such service portion is taken as 60% of ‘Total Amount Charged’ as per
Rule 2-C of STVR, 2006.
•
•
•
Computation of ‘total amount charged’
Gross Amount Charged for the supply
Rs. 40,000
(+) FMV of goods supplied by service recipient
Rs. 15,000
(-) Amount paid by service provider
(Rs. 5,000)
Total Amount Charged for outdoor catering
Rs. 50,000
Value of taxable service = Rs. 50,000 × 60% = Rs. 30,000
Service tax liability = Rs. 30,000 × 14% = Rs. 4,200
21. Hotel Woodlands has offered its "Krishna hall" to Mr. Baboo, for conducting a social function. Hall charges are not collected
separately but Mr. Baboo has to order food from Hotel Woodlands. The price per plate has been fixed based on the menu given by
Mr. Baboo @475/- and the no. of plates ordered is 200 No's. What is the value of taxable service in this case by Hotel Woodlands?
This is a case of bundled service, wherein it involves following 2 sservices:
• Declared service of ‘renting of immovable property’
• Declared service of ‘service portion in activity of supply of food/ drink’
Though this is bundled service, but it is intended to be treated as a separate specific service’ (the intention as reflected by creation of a
specific separate entry in E/N 26/2012). Specific description of such service being in existence, such bundle shall be treated as that
specific description of service only.
The taxable value of service in this activity shall be taken as ‘70% of Total Amount Charged’.
• Value of taxable service = (200 plates × 475)* 70%=Rs. 66,500
• Service tax payable thereon = Rs. 66,500 × 14% = Rs. 9,310
22. Discuss the taxability of catering services under following situations considering the following exemptions :
Mega Exemption – 25/2012
Entry No 19
Service provided in relation to serving of food/beverages
by a Restaurant, Eating Joint or a mess other than those having the facility of air conditioning or central air-heating
in any part of the establishment, at any time during the year, .
Entry No 19-A
Services provided in relation to serving of food or beverages
by A CANTEEN maintained in a factory covered under the Factories Act, 1948, having the facility of airconditioning or central air-heating at any time during the year.
Entry No 9
•
All services (including catering) by Educational Institution to students, faculty and staff are exempt.
© DG Education (P) Ltd
•
1)
Catering services (including mid-day meals scheme sponsored by the Govt) provided to Educational Institution
are exempt.
Mr A running following eating joints:
a) AC eating joint in CP, Delhi
b) Non-AC eating joint in laxmi nagar
a)
b)
2)
[Service Tax : Valuation of Services]
Catering services in A/C eating joint – Taxable [ST = (TAC * 40%) * 14%]
Catering services in Non-A/C eating joint – Exempted – ST= 0
Mr B has taken sapce on rent in PVR Cinema. Running A/C eating joint there.
Catering services in A/C eating joint – Taxable [ST = (TAC * 40%) * 14%]
[PVR has provided service of renting of immovable property to Mr A (ST on that renting is payable @14% by PVR Cinema]
3)
A Ltd is running a factory which is registered under Central Excise Act (as it is manufacturing excisable goods) but not
registered under Factories Act, 1948 (as it is having very few workers). It is also running a canteen for its employees and
providing food on chargeable basis.
•
•
•
4)
Entry No 19-A is not applicable [as factory is not registered under Factories Act]
Benefit of Exemption Entry No 19 can be claimed if the canteen is non-A/C canteen.
If canteen is A/C, then ST payable [ST = (TAC * 40%) * 14%]
B Ltd is running a factory which is not registered under Central Excise Act (as it is manufacturing non-excisable goods) but
registered under Factories Act, 1948 (as it is having large number of workers). It is also running a canteen for its employees
and providing food on chargeable basis.
•
If canteen is AC, then Exemption Entry No 19-A is applicable [as factory is registered under Factories Act] --- No ST
payable
If canteen is non-A/C, then Exemption Entry No 19 is applicable --- No ST payable
•
5)
C Ltd is running a call centre for some Telecom Company. It is registered under FA, 1994 (being provider of taxable service
to telecom company). It is also running a canteen for its employees and providing food on chargeable basis.
•
•
•
6)
Entry No 19-A is not applicable [as there is no factory]
Benefit of Exemption Entry No 19 can be claimed if the canteen is non-A/C canteen.
If canteen is A/C, then ST payable [ST = (TAC * 40%) * 14%]
B Ltd is running a factory which is registered under Factories Act, 1948 (as it is having large number of workers).
• It has let out space to ABC for running canteen in its factory. Commercial rent is charged for this.
• ABC running A/C canteen in factory of B Ltd. Employees are charged for supply of foods.
Catering services -- SP (ABC) & SR (Employees)
-- Place of service = Canteen maintained in factory registered under Factories Act
• It shall be noted that in terms of Entry No 19-A, service provided by a canteen maintained in a factory registered under
Factories Act, 1948 is exempt. It is immaterial whether such canteen is run by the factory owner (employer) or by third
party.
• Though ABC is running canteen, yet canteen is being maintained/run in factory registered under Factories Act. Hence,
exemption shall be available to ABC also.
• Since canteen is AC, Exemption Entry No 19-A is applicable [as factory is registered under Factories Act]
.
Author Note:
1. Exemption Entry No 19-A is qua service and not qua service provider or qua service receiver.
.
2.
7)
Some experts are of opinion that Entry No 19-A is applicable only when canteen is run by factory owner itself.
Author differs from their view. Practically, very few factory owners run/maintained canteen at their own. Hence, logic of exemption will be
defeated if its applicability is restricted to cases where canteen is run/maintained by the factory owner only.
.
B Ltd is running a factory which is registered under Factories Act, 1948 (as it is having large number of workers).
• It has provided space to ABC for running canteen in its factory. No rent is charged.
© DG Education (P) Ltd
8)
•
ABC running A/C canteen in factory of B Ltd. Employees are charged for supply of foods but at prices fixed by B ltd.
•
•
Same answer as stated in point (7) – Exempted Service
Not charging rent does not make any difference
B Ltd is running a factory which is registered under Factories Act, 1948 (as it is having large number of workers).
• It has provided space to ABC for running canteen in its factory. No rent is charged.
• Electricity expenses also borne by B Ltd.
• ABC running A/C canteen in factory of B Ltd. Employees are charged for supply of foods but at prices fixed by B ltd.
•
•
9)
[Service Tax : Valuation of Services]
Same answer as stated in point (7) – Exempted Service
Not charging rent does not make any difference. Not charging electricity expense does not make any difference.
X TRUST is running a SCHOOL.
• It is also running a canteen in school.
• ABC running A/C canteen in School. Students / Staff are charged for supply of foods but at prices fixed by X TRUST.
•
•
•
Catering services provided by School to its students/ staff – Exempted Service
School is an educational institution whose ‘education is into negative list’. Thus, it is eligible for exemption entry 9.
In terms of Entry No 9, all (any) services provided by Educational Institution to students, staff and faculty are exempt.
10) X TRUST is running a SCHOOL.
• It has provided space to ABC for running canteen in its factory. Rent is charged.
• ABC running A/C canteen in School. Students / Staff are charged for supply of foods/ snacks / drinks.
•
•
Renting services provided by School to ABC – Renting of immovable property is declared service and chargeable to ST.
Even renting by school (for commercial purposes) is chargeable to ST.
Catering services provided by ABC to students/ staff –
o Entry No 19-A is not applicable [as there is no factory]
o Benefit of Exemption Entry No 19 can be claimed if the canteen is non-A/C canteen.
o Since canteen is A/C canteen, therefore ST payable [ST = (TAC * 40%) * 14%]
11) Akshya Patra (Banglore) is preparing food in its kitchen and supplying that food to a Govt School under ‘Mid Day Meal
Scheme Sponsored by Government’. Daily food is prepared in kitchen and then supplied and served at schools.
• Catering services provided by Akshay Patra to School –
o School is an educational institution whose ‘education is into negative list’. Thus, it is eligible for exemption entry 9.
o Outdoor catering services provided to School (including mid-day meals program sponsored by Govt) are exempt.
o No ST payable
RULE 3: Valuation of any service of which consideration is unascertainable
23. Explain in brief the manner for determination of value as per Rule 3 of the Service Tax (Determination of Value) Rules, 2006?
(Nov 2008 4 Marks)
Rule 3 of the Service Tax (Determination of Value) Rules, 2006 provides for determination of value where such value is not
ascertainable. In such cases, valuation shall be done by applying any of the following 2 methods sequentially:
(i) The taxable value shall be the Gross Amount Charged for providing similar service to another person;
(ii) The taxable shall be the equivalent monetary value of such consideration. However, this cannot in any case be less than the cost
of provisioning of service.
REJECTION OF SELF-ASSESSED VALUE -- RULE 4
24. State briefly the provision regarding rejection of value and determination of value by CEO under Rule 4 of the Service Tax
(Determination of Value) Rules, 2006.
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
(Nov 2011 Marks 3)
Rule 4 of Service Tax Valuation Rules, 2006 makes following provisions relation to rejection of self-assessed value:
(1) CEO shall have the power to satisfy himself as to the accuracy of any information furnished or document presented for
valuation.
(2) Where the CEO 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 CEO shall, after providing reasonable opportunity of being heard, determine the value of such taxable service.
Author:
1. Scope of Rule 4 is limited to rejection of self-assessed value and determination of proper value by officer.
2. Once value has been determined by CEO, assessee is left with 2 options. If he agrees with value determined by officer, then he shall
make voluntarily payment in terms of Sec 73 (with interest). However, if he is not in agreement with value determined by officer, then he
shall wait for SCN and adjudication order of CEO.
ELEMENTS INCLUDIBLE/EXCLUDIBLE FROM TAXABLE VALUE
RULE 5: Inclusion/Exclusion of expenditure incurred by SP and then recovered from SR
25. Answer the following with reference to Service Tax (Determination of Value) Rules, 2006 (Valuation Rules):
(i) 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. Who is “pure agent” under the valuation rules?
(Nov 2007 3 Marks)
Rule 5 of Valuation Rules, 2006 provides for exclusion of such expenditure or costs which has been incurred by the service provider
as a “Pure agent” of the recipient of service. In terms of that rules, a service provider can be said to be acting as pure agent of service
provider if he fulfills the following conditions:
1) He enters into agency agreement with the service receiver to the effect prior to incurring such costs/expenditure;
2) He never intends to hold title of goods and services procured while acting as agent;
3) He himself does not use such goods and services;
4) He receives only actual cost he incurred in procurement of such goods and services.
26. Write a brief note explaining to circumstances under which expenditure or costs incurred by a service provider as a pure agent of
the recipients of service shall be excluded from the value of taxable services under the Service Tax (Determination of value) Rules,
2005.
(Nov 2009 4 Marks)
Rule 5 of Service Tax Valuation Rules, 2006** provides that while valuing taxable service, any expenditure incurred by service
provider as PURE AGENT of the recipient of the service shall be excluding from the value. For claiming such exclusion, the following
conditions shall be satisfied:
1) 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;
2) The recipient of service receives and uses the goods so procured.
3) The recipient of service is liable to make payment to the third party;
4) The recipient of service authorizes the service provider to make payment on his behalf;
5) The recipient knows that the goods and services for which payment has been made by the service provider shall be provided by
the third party
6) 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;
7) The service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
8) 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.
**Author:
Rule 5 of STVR, 2006 consists of following 2 sub-rules:
• Rule 5(1): It provides that all expenditure and costs incurred by SP in course of provisioning of service shall form part of value of service.
• Rule 5(2): It provides that such expenditure and costs as are incurred by SP as ‘PURE AGENT’ of SR shall not form part of value of service, if
certain specified conditions (as discussed above) are satisfied. Rule 5(2) has been provided legal support by explanation to Sec 67 (FA, 2015)
.
In terms of above provisions, SP cannot claim exclusion of re-imbursements (on actual basis) towards travelling, boarding and lodging [as these
gets covered by Rule 5(1) and not falling in exclusion of Rule 5(2)].
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
27. Answer the following –
(a) X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television costing Rs. 5 lakh.
Y billed Rs. 15 lakh to X including charges for Television advertisement showing them separately in invoice. Mr. Y says that
value of taxable service in his case is Rs. 10 lakh only, as he acted as pure agent of Mr. X while taking advertisement Compute
service tax to be billed.
(b) A clearing and forwarding agent charges Rs. 50,000 for his services, which includes octroi charges Rs. 10,000 paid on behalf of
his client. Compute the value of taxable service and service tax liability.
(a) Since 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, hence, Mr. Y doesn’t act as agent of Mr. X in taking advertisement Hence, service tax = Rs. 15 lakhs × 14% = Rs
2,10,000/(b)
The clearing and forwarding agent acts as pure agent of the client while paying octroi charges. Hence, value of taxable service =
50,000 – 10,000 = Rs. 40,000, and service tax @ 14% = Rs. 5,600/-.

28. Explain whether the following will be subject to service tax liability:
(i) Re-imbursement of expenses like Customs duty, port dues claimed by the Customs Housing Agents;
(May 2006- 3 Marks)
Though services of CHA is taxable service, no service tax can be levied or demanded in respect of that amount which the CHA
receives from the client by way of re-imbursement of expenses like customs duty and port dues. The reason being that any
expenditure incurred by the service provider in the capacity of “pure agent” of the service recipient shall not be included in the
“taxable value” [Rule 5(2) of Service Tax Valuation Rules, 2006]. Presuming that CHA satisfies all the conditions as mentioned in Rule
5(2) of Service Tax Valuation Rules, 2006, this amount is not includible in taxable value.
29. M/s. Work Force group are a LABOUR CONTRACTOR of manpower to M/s. XYZ. They charge to the principal employer for the
wages of their labour which amounts to Rs. 1,20,000 plus their service charges of Rs. 12,000 for arranging the labour.
The issue is whether service tax is payable on the gross amount charged by them or only their charges for labour. Advice?
As per Rule 5 of Valuation Rules, 2006 the value of taxable service includes any expenditure incurred in the course of providing
service. Accordingly, Rs. 1,20,000 is incurred in the course of providing service and hence includible in value.
**Author:
Labour Contractor is not acting as agent/ pure agent while making arrangement of manpower for the client.
He is arranging labour in capacity of principal.
Thus, labour charges paid to labour shall also form part of taxable value in hands of M/s Work Force.
30. Mr. Y, an architect, finds a client Mr. A who needs services of architect as well as interior decorator. Mr. A asks Mr. Y to find an
interior decorator on his behalf, decide the terms of his engagement and also his remuneration, make payment to him on his (Mr.
A’s behalf) and provide a consolidated bill, showing relevant break–ups, to him (Mr. A). Mr. Y finds a interior decorator Mr. Z,
whose remuneration is fixed at Rs. 2,00,000 (inclusive of all taxes). Mr. Y charges Rs. 8 lakhs towards the value of taxable service
provided by him. Compute the amount of service tax to be charged in the bill by Mr. Y if –
(a) the bill amount includes Rs. 2,00,000 additional towards the cost of interior decorator; or
(b) the bill amount includes Rs. 2,50,000 additional towards the cost of interior decorator.
(a) In this case, bill amount includes only the actual cost of interior decorator. Since Mr. Y has acted as pure agent of Mr. A, he will
get deduction of such cost. Therefore, value of taxable service provided by Mr. Y = 10,00,000 – 2,00,000 =
Rs. 8,00,000, on which service tax = 8,00,000 × 14% = Rs. 1,12,000/CENVAT credit implications: The interior decorator Mr. Z will pay service tax = Rs. 2,00,000 × 14%/114% =
Rs. 24,561.
 The client Mr. A can claim Cenvat Credit of Rs. (1,12,000 + 24,561) = Rs. 1,36,561.
(b) In this case, bill amount includes amount in excess of the actual cost of interior decorator, hence, Mr. Y will not be ‘pure agent’
of Mr. Aand thus, he will not deduction of such cost Therefore, the value of taxable service provided by Mr. Y =
Rs. 8,00,000 + Rs. 2,50,000 = Rs. 10,50,000, on which service tax = 10,50,000 × 14% = Rs. 1,47,000/-.
CENVAT credit implications: The interior decorator Mr. Z will pay service tax = Rs. 2,00,000 × 14%/114% =
Rs. 24,561. The services provided by Mr. Z will be treated as input service in case of Mr. Y and Mr. Y can get CENVAT credit of
Rs. 24,561, which can be used for payment of his service tax liability. The client Mr. A can claim Cenvat credit of Rs. 1,47,000/-.
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
RULE 6: Inclusion/Exclusion of certain specific element
31. Mr. A has given following properties on rent for the quarter July-Aug-Sep, 2015.
1. Property-1
Residential Property given for residential purpose. Rent for the quarter is Rs. 3,00,000.
2.
Property-2
Commercial property given for commercial purpose. Deposit Rs. 1,00,000. Rent for the quarter Rs. 6,00,000.
Interest on delayed payment of rent from time to time Rs. 3,200.
Find out ST Liability.
Service Provider: Mr A (Individual) – Liable to pay ST on quarterly basis (by 6th of following month)
Description of Service: Renting of Immovable Property [Declared Service u/Sec 66-E (a)]
Valuation Principles: Sec 67 read with STVR, 2006 (Rule 6 in particular)
Computation of ST liability of Mr A
Property -1
Rentals receipts - This being residential property and let out for residential purpose, this renting falls into negative list and hence, no
ST liability on such renting.
Property -2
This being commercial renting, this service shall attract ST levy. The value of service shall be as follows:
Particulars
Rent received [In terms of Sec 67(1)(i), taxable value shall be ‘gross amount charged for the service’]
Interest
[Act of accepting delayed payment constitute declared service in nature of ‘tolerance of an act’. However, Rule 6 of
STVR, 2006 provides that interest for delayed payment of consideration for service shall not form part of value of
service.]
Taxable Value
ST@14%
Taxable Value
6,00,000
-----6,00,000
84,000/-

32. Heena Ltd. is engaged in providing taxable services. It received following amounts in the month of September, 2015. Compute the
value of taxable services and the service tax payable by it :
Particulars
Amount (Rs.)
i. Advances from clients for which no service has been rendered so far.
10,00,000
ii. Demurrage charges recovered from the provision of services beyond the agreed period.
25,000
iii. Security deposits forfeited for damages done by service receiver owing to his negligence in the course
of receiving a service (Not due to unforeseen actions)
35,000
iv. Payment received from a client (including Rs. 25,000 paid extra by mistake). However, Heena Ltd.
refused to return the excess payment received.
2,00,000
Note : Heena Ltd. is not eligible for SSP exemption under Notification No. 33/2012 and ST has not been charged separately. Rate of
service tax is 14%.
(5 Marks)
Computation of value of taxable service and service tax
Particulars
Treatment
Rs. lakhs
i)
Advances received from clients for which no Services "agreed to be provided" are also liable to service
10,00,000
service has been rendered so far
tax; hence, advances received are taxable on receipt basis.
ii)
Demurrage charges recovered from the Demurrage charges are also includible in taxable value
25,000
provision of service beyond the agreed under Rule 6 of STVR, 2006. It is a service u/s 66E(e)
period.
(tolerating an Act).
iii)
Security deposits forfeited for damages done Forfeiture of security deposits for "accidental damages"
35,000
by service receiver owing to his negligence in arising due to "unforeseen action" are not includible in
the course of receiving a service (Not due to value under Rule 6. However, in this case, neither there is
unforeseen actions)
"unforeseen action" nor damages are characterized as
"accidental" and cannot be excluded from value. Therefore,
damages are in nature of extra consideration and are liable
to service tax.
iv)
Payment received from a client (including Rs. Payment received from client is liable to service tax. The
2,00,000
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
25,000 paid extra by mistake). However,
Heena Ltd. refused to return the excess
payment received.
excess payment received as a result of mistake of client
becomes consideration for service as per CBEC Guidance
Note, if same is not returned. Refusal of Heena Ltd. to
return excess payment by mistake may result in action
against it under Civil/Criminal law. Nevertheless, for
taxation purposes, for the time being it is liable to service
tax.
Total amount including service tax (as tax has not been charged separately, as given in question, amount is
inclusive of tax)
Service Tax = Rs. 12,60,000 × 14/114 (rounded off to nearest rupee)
12,60,000
1,54,737
Another issue
LIQUIDATED DAMAGES – ST LIABILITY
LIQUIDATED DAMAGES – meaning thereof
• Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate
during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).
ST liability on Liquidated damages
• Liquidated damage arises due to breach of conditions of agreement, contract or MOUs, therefore, if such damages are not due
to unforeseen actions, then, it will be considered as consideration and ST would be applicable.
.
MISCELLANEOUS GENERAL QUESTIONS
33. A has rented his commercial property to Mr B on monthly rent of Rs 2,00,000 (ST extra). Security deposit equivalent to 6 months
rent (= Rs 12,00,000) has also been received from tenant. Security deposit is interest-free.
A has paid ST on rents received by it (on 2,00,000). CEO has issued SCN stating that notional interest on interest-free security
deposit shall be added to the rent agreed upon between the parties for the purpose of levy of ST on renting on immovable property.
Discuss whether the stand of officer is justified.
Description of Service = Renting of immovable property (Declared Service – Sec 66-E(a))
Terms of contract = Monthly rent of Rs 2,00,000 (ST extra) + Security Deposit of Rs 12,00,000 (interest-free and refundable)
MURLI REALTORS (P.) LTD.- TRIBUNAL
• Renting/leasing Service – Consideration is ‘Rent’ and not ‘notional interest on security deposits’
Sec 67 clearly provides that value of service shall be ‘gross amount charged for the service’. The consideration for renting of the
immovable property is the amount agreed upon between the parties and on this amount the assessee is discharging service tax
liability. The security deposit is taken for a different purpose altogether. It is to provide for a security in case of default in rent by the lessee or
default in payment of utility charges or for damages, if any, cause to the leased property. Thus, the security deposit serves a different purpose
altogether and it is not a consideration for leasing of the property. The consideration of the leasing of the property is the rent and, therefore,
what can be levied to service tax is only the rent charged and no notional interest on the security deposit taken can be levied to tax.
•
‘Notional interest on security deposits’: No specific provision for inclusion
There is no provision in service tax law for deeming notional interest on security deposit taken as a consideration for leasing of the immovable
property. Therefore, in the absence of a specific provision in law, there is no scope for adding any notional interest to the value of taxable
service rendered.
• Central Excise Law –‘notional interest on security’ includible only if its influence on value is established by CEO
Even in the excise law, under rule 6 of the Valuation Rules, unless the department shows that the deposit taken has influenced the sale price,
notional interest cannot be automatically included in the sale price for the purpose of levy. In the absence of a provision in law providing for a
notional addition to the value/price charged, the question of adding notional interest on the security deposit as a consideration received for the
services rendered cannot be sustained.
• Unless ‘notional interest on security’ influences the ‘rental charged (value of renting service), it is not includible
In this case, there is not even an iota of evidence adduced by the revenue to show that the security deposit taken has influenced the price,
i.e., the rent in any way. In the absence of such evidence, it is not possible to conclude that the notional interest on the security deposit would
form part of the rent.
• Hence, notional interest on interest free security deposit cannot be added to the rent agreed upon between the parties for the purpose of levy
of service tax on renting of immovable property.
© DG Education (P) Ltd
[Service Tax : Valuation of Services]
[Author:
• Under excise, we have Explanation II to Rule 6 of CEVR, 2002 which specifically provides for addition of notional interest.
• However, it shall be noted that even in the absence of specific provision, if it is proved that notional interest is disguised consideration
(hidden consideration), then it shall be added. Courts have always upheld such addition even under excise law when explanation II was
not there in excise.
• Thus, if CEO can prove that rental charged is lower due to benefit of notional interest, then addition of notional interest can be made. But
in the absence of any such proof, no addition on account of notional interest can be made.
• Further, even where addition of notional interest is justified, adoption of rate of 18% p.a. can be challenged as it is neither the bank rate of
interest on deposits or loan, nor market rate of interest. Thus, adoption of arbitrary rate is against concept of valuation.]