2023 (3) TMI 1498 - AT - Service Tax

Undervaluation - demand of service tax - Inclusion of TDS in the value of service provided by foreign service providers - Applicability of reverse charge mechanism (RCM) for Service Tax - HELD THAT - It is found that as per the invoice, the Appellant is paying Service Tax on the value of services provided by foreign service provider and as per the statutory provisions, the Appellant was required to deduct Income Tax at source. In that circumstances, the Income Tax component which is to be deducted at source, if refunded to the service provider, the same shall be refunded to the Appellant itself. In that circumstances, the value of service provided by the foreign service provider remains the same as what the tax deducted by the Appellant at source the same is borne to the Appellant. When TDS has been borne by the Appellant and only the consideration for services as agreed upon by the parties has been paid to service provider, therefore, the amount of TDS cannot be included in the taxable value to determine the Service Tax liability. Therefore, as TDS liability has been borne by the Appellant and the value of service provided has already been paid to the service provider, the Appellant has correctly arrived at the taxable value of service received by them and paid the Service Tax thereon correctly under reverse charge mechanism. There are no merits in the impugned orders, the same are set aside - the Appeals filed by the Appellant are allowed.

Summary

Issues Involved:

1. Demand of Service Tax on account of undervaluation.
2. Inclusion of TDS in the value of service provided by foreign service providers.
3. Applicability of reverse charge mechanism (RCM) for Service Tax.

Summary:

1. Demand of Service Tax on account of undervaluation:

The Appellant, engaged in the manufacture of fertilizer, received "Scientific & Technical Consultancy Services" from foreign service providers without offices in India. As per Section 68(2) of the Finance Act, 1994, read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, the Appellant paid Service Tax under the reverse charge mechanism (RCM). The Revenue issued show cause notices demanding differential Service Tax, alleging that the Income Tax deducted at source (TDS) should be included in the value of the service provided by the foreign service provider.

2. Inclusion of TDS in the value of service provided by foreign service providers:

The Appellant argued that the value for Service Tax purposes, u/s 67 of the Finance Act, 1994, is the actual amount charged by the service provider. The TDS was borne by the Appellant and grossed up only for TDS payment purposes, not as part of the service consideration. The Tribunal referenced multiple decisions, including M/s. Magarpatta Township Development & Construction Co. Ltd. and M/s. Garware Polyster Ltd., which established that TDS borne by the service recipient should not be included in the taxable value of the service.

3. Applicability of reverse charge mechanism (RCM) for Service Tax:

The Tribunal examined the statutory provisions and agreements, concluding that the TDS component, if refunded to the service provider, would be refunded to the Appellant. Therefore, the value of the service remains the same, and the TDS borne by the Appellant does not alter the service value. The Tribunal cited the case of TVS Motor Company Ltd., where it was held that TDS is a statutory obligation and not part of the service consideration.

Conclusion:

The Tribunal found no merit in the Revenue's demand for including TDS in the service value for Service Tax purposes. The impugned orders were set aside, and the Appeals filed by the Appellant were allowed with consequential relief. The operative part of the order was pronounced in the open Court.