SOME ISSUES IN VALUATION OF SERVICES

[Dr. Sanjiv Agarwal]

Rendering Free Services (Services without Consideration)

Service Tax (Determination of Value) Rules, 2006 in rule 3 addresses the issue of determining the value of taxable service. It addresses two situations — one where consideration is not wholly or partly in money and two, where consideration is not ascertainable. In both the cases, there must be some consideration, whether in money form or in non-ascertainable form. The valuation rules shall apply only when some consideration is received or given. There is no deeming provision in section 67 or the rules framed thereunder.

If there is no consideration, there is no value of taxable service or its value is nil and therefore, there cannot be any levy of service tax thereon [also see Chandravadan Desai v. CCE, Calcutta-I (1998) 98 ELT 515 (CESTAT, Calcutta)]. The Tribunal held that section 67 does not have the concept of deeming provision of valuation of taxable service. The departmental appeal before Supreme Court was dismissed. [(1999) 105 ELT A 193 (Supreme Court)].

The definition of 'consideration' as explained in Section 67 is clear i.e., any amount that is payable for the taxable services provided. If no amount is paid (including past, present and future liability), there is no consideration involved. In general understanding, consideration means, something in return. It is an act or forbearance or its promise. Section 2(d) of Indian Contract Act, 1872 defines consideration to mean anything regarded as compense or equivalent for what one does or undertakes for another's benefit.

The Service Tax (Determination of Value) Rules shall come into operation only when —

(i)    Consideration is involved.

(ii)    Consideration is partly in cash or partly in other than cash (say, kind).

(iii)   Consideration is there but it is not ascertainable or cannot be determined.

(iv)   All costs are not included in the value of taxable service and reimbursement of expenses are excluded from the value.

(v)   Question of 'pure agent' has to be decided.

It may be noted that there is no clarification on this aspect by CBEC so far.

In GAC Shipping (India) Pvt. Ltd. v. CCE & C, Cochin (2008) 13 STT 154 (Cestat, Bangalore), where assessee had received amounts in connection with various expenditure incurred on behalf of its clients which were not related to services rendered, it was held that no service tax could be levied on it.

In ASL Motors Pvt. Ltd. v. CCE & ST, Patna (2008) 9 STR 356 (Cestat, Kolkata), it was held that service tax was not leviable on amount representing dealer's margin or part thereof which has already been subjected to sales tax towards free services.

In Cultural Society of Angamally v. CCE, Cochin (2008) 13 STT 227 (Cestat, Bangalore), it was held that donations out of free will and public grants could not be considered to be part of value of taxable services of conducting indoor games music and dance classes, holding exhibitions and other social work related activities including library.

General Exemptions and Scope of Notifications

Service tax includes full and partial exemptions and abatements from service tax. The exemption notifications are issued by Ministry of Finance under powers conferred by section 93 of the Finance Act, 1994 which are binding in nature. These exemptions are conditional or unconditional and may be for a fixed period or otherwise. The exemption notification is effective from the date on which it is issued or from the effective date which cannot be retrospective. In Union of India v. Ganesh Das Bhojraj (2000) 116 ELT 431 (Supreme Court), it was held that a notification comes into force from the date of its publication. An exemption notification cannot be interpreted in a way so as to enhance a duty or tax liability, which is otherwise not there. [Shakti Sugars Ltd. v. Union of India (1983) 12 ELT 484 (Madras); Kiran Spinning Mills v. CCE (1981) 7 ELT 896]. Statutory provisions cannot be overruled by exemption notification. It was held in Hemraj Gordhandas v. HH Dave; CCE AIR (1970) 5 SC 755 that an exemption notification should be construed strictly and there is no scope for any intendment. [Also see Rajasthan Spinning & Weaving Mills Ltd. v. CCE (1995) 77 ELT 474 (Supreme Court)]. Supreme Court in Hotel Balaji v. State of AP (1993) AIR SCW 3 held that a subordinate legislation could not be used to interpret the main Act unless the Act itself provides. [Also see Laghu Udyog Bharti v. Union of India (2003) 112 ELT 365 (Supreme Court)].

Abatement

For certain services, a specified percentage of abatement is allowed from the gross amount collected for rendering the services subject to the conditions, inter alia, that CENVAT Credit has not been availed by the service provider and the benefit under the Notification No. 12/2003-ST dated 20.6.2003 has also not been availed.

In Shriram Properties Ltd. v. Commissioner of Service Tax & Another (2007) 208 CTR 141 (Karnataka High Court), it has been held that Notification No. 01/2006-ST dated 1.3.2006 which provides for a consolidated abatement list in service tax, gives option to the assessee to seek benefit of either the Cenvat credit of duty on service tax paid on input services or to avail benefit under Notification No. 01/2006 and does not enhance the tax liability of the assessee. This does not result in either enhancement of tax liability or being discriminatory under provisions of section 93 of the Finance Act, 1994. Exemption can be granted either generally or subject to conditions as specified in the Notification and Notification No. 01/2006 is issued under the said authority of law. Notification No. 1 provides option to the assessee to seek benefit of either Cenvat credit or benefit of exemption/abatement under Notification No. 1. It provides for a different manner of computation of tax liability and if, after so quantifying, it is observed that the service tax payable by assessee is more than that under the normal provisions, benefit is allowed to the extent of differential amount. As such, it does not enhance the liability of service tax. It only implies that an assessee claiming benefit under one option cannot be entitled for benefit under other option. Only one option can be availed.

The court observed:

"In fact, it may be noticed that the notification is one which provides for a different manner of arriving at the liability and after so quantifying, if it is found that the tax payable by a person is higher under the normal provisions of the Act, then to the extent of difference of liability as between the tax liability determined in terms of the notification and the liability actually payable, the person is provided the benefit of concession/exemption. Therefore, the concession of this nature in the first instance comes only if the method of determination of liability as suggested in the notification is less than the actual liability. In a given case, if the liability is much more or equal to the liability under the provisions of the Act as otherwise determined, then there is no benefit to a person under the present notification. In a notification of this nature, if the person is put to election that either he can opt for Cenvat credit of duty on service-tax input services or to avail benefit under the present notification which is an option which is extended to a person which he can seek for, avail of or ignore, no grievance can be made that putting a person to such option is bad".

It was held that the exemption notification always comes subject to the conditions to which the exemption is granted and there is no question of courts dissecting the notification to extend the benefit but not to insist compliance of the condition for a particular assessee. It is for the legislative to take care of to what class of persons certain benefits are extended and in what manner.

 

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