2012 (7) TMI 191 - AT - Service Tax

Valuation under service tax - inclusion of TDS (withholding tax) where burden born by the recipient (payer) in the gross value - Technical consultancy and project consultancy services - Held that - As per Section 66A the service covered by that section is treated as if the recipient had himself provided the service in India. Thus by such legal fiction the consideration inclusive of income tax deducted at source shall be assessable value for the purpose of the Act in the hands of the service recipient - No pleading on material facts by the appellant as to how the facts in issue suggest and support defence of appellant that income tax deducted at source shall not form part of the gross amount of taxable service received when Rule 7(1) of Service Tax (Determination of Value) Rules, 2006 provides that actual consideration charged for the service provided or to be provided shall be assessable value in respect of services covered by Section 66A. The agreement with the service providers abroad speaks of the price of contract payable was net of taxes and taxes if any payable in addition to the price of contract was payable by the payer thereon as price of the contract and such factual aspect remaining unrebutted by appellant clearly establishes that tax payable in India was to form part of contract price. Thus consideration charged for the service provided shall include income tax deducted at source as per terms of contract and is in accord with Section 66A read with Rule 7(1) of the Service Tax (Determination of Value) Rules 2006. There shall not be levy of service tax on the engineering consultancy services availed from foreign consultant abroad prior to 18.4.2006, and at the applicable rate for the period 19.4.2006 to 30.9.2007 on the gross amount of consideration inclusive of income tax deducted at source - no levy of penalty u/s 78 considering the difficulty in understanding the law applicable at inception and date of incidence to taxability - partly in favour of assessee.

Summary

Issues Involved
1. Validity of Vakalatnama filed by the appellant's counsel.
2. Tax liability on services rendered outside India prior to 18.4.2006.
3. Valuation of taxable service and inclusion of income tax deducted at source.
4. Applicability of cum-tax benefit.
5. Imposition of penalty under Section 78 of the Finance Act, 1994.

Detailed Analysis

1. Validity of Vakalatnama Filed by the Appellant's Counsel
The Tribunal noted that no valid Vakalatnama was filed by the appellant's counsel, Shri K.S. Venkatagiri. An application for adjournment was submitted without a proper signature, and no Vakalatnama was found on record. The Tribunal emphasized the importance of a properly executed Vakalatnama as per the Apex Court's ruling in Uday Sankar Triyar Vs. Ram Kalesawar Prasad Singh and Anr., AIR 2006 SC 269, which outlines the necessary details and signatures required for a valid Vakalatnama. Consequently, the adjournment request was declined due to the absence of a valid Vakalatnama.

2. Tax Liability on Services Rendered Outside India Prior to 18.4.2006
The appellant argued that services rendered outside India prior to 18.4.2006 were not liable to service tax. The Tribunal agreed with this proposition, citing that Section 66A of the Finance Act, 1994, which taxes services provided by foreign service providers, was incorporated only with effect from 18.4.2006. This position was supported by the Apex Court's decision in Union of India Vs. Indian National Shipowners Association, which held that no liability arises for services received from abroad prior to this date. Therefore, the adjudication order was modified to exclude tax liability for services received before 18.4.2006.

3. Valuation of Taxable Service and Inclusion of Income Tax Deducted at Source
The core issue was whether the income tax deducted at source (TDS) should be included in the gross amount for service tax valuation. The Tribunal examined Section 67 of the Finance Act, 1994, and Rule 7(1) of the Service Tax (Determination of Value) Rules, 2006, which state that the assessable value should be the gross amount charged for the service provided. The Tribunal found that the agreement with M/s. Prodrive Automation Technology (Europe) Ltd. indicated that the price was net of all taxes, implying that TDS should be included in the gross amount. Thus, the Tribunal upheld the tax demand on the gross value inclusive of TDS for the period from 19.4.2006 to 30.9.2007.

4. Applicability of Cum-Tax Benefit
The appellant requested the cum-tax benefit, which allows for the service tax to be calculated on a value inclusive of the tax itself. The Tribunal directed that this benefit should be considered by the Authority at the time of raising the modified demand, in accordance with the law.

5. Imposition of Penalty Under Section 78 of the Finance Act, 1994
The Tribunal considered the complexity and the initial uncertainty in understanding the applicable law and decided to waive the penalty imposed under Section 78 of the Finance Act, 1994. The Tribunal acknowledged the appellant's difficulty in comprehending the tax liability at the inception of the law's application.

Conclusion
1. No service tax levy on engineering consultancy services availed from foreign consultants prior to 18.4.2006.
2. Service tax to be levied on the gross amount of consideration inclusive of TDS for the period from 19.4.2006 to 30.9.2007.
3. Adjudication order modified accordingly.
4. Cum-tax benefit to be granted if admissible.
5. No penalty under Section 78 of the Finance Act, 1994.

The judgment was pronounced in open court on 13.6.2012.