MARCH 29, 2016

By H S Prasad, Coromandel International Limited

Brief on TDS:

ANY  payment made to any service provider is subject to TDS under Income Tax Act. If such service provider is a person resident outside India, still it is subject to TDS. But the service provider does not agree to deduct TDS. He expects the agreed amount to be paid to him in foreign currency. This being the situation, the amount paid to the service provider is grossed up by working back with TDS rate to arrive at the gross amount. The difference between such gross amount and the net amount paid is the TDS portion which is borne by the recipient of service in India.

Issue involved:

The amount paid to the service provider who is residing outside India is subject to service tax under reverse charge since it being import of service. In terms of Section 67 of the Finance Act, 1994, service tax is payable on the Gross Amount charged by the service provider. The issue is whether the TDS grossed up, as discussed above, also forms part of the Gross Amount for the purpose of discharge of service tax.

Ex-parte Order:

In the case of TVS Motors case reported in - 2012-TIOL-1639-CESTAT-MAD, similar issue was contested before the Chennai Tribunal with an ex-parte order holding that such grossed up amount of TDS is a part of assessable value for the purpose of charging service tax. On filing the appeal before the Supreme Court, the matter was remanded to the Tribunal for fresh consideration (see - 2014-TIOL-28-SC-ST. As a result, the ex-parte order passed by the Chennai Tribunal is no longer valid.

Notwithstanding the above, the CESTAT order passed earlier has become a permanent feature in the objections by departmental audit resulting in issuance of notices and confirmation of the demands of service tax on the TDS portion .

Pursuant to the above, assessee who has the facility of availing CENVAT credit does not want to take a risk and accordingly starts paying service tax on TDS portion and avails the credit of the same. But the assessee who has engaged in manufacture of exempted goods and is not in agreement with the TVS Motors judgement, started contesting the issue with the hope of getting relief at higher forums.

Relief by Mumbai bench:

Similar issue was raised in the case of Magarpatta Township Development and Construction Co. Ltd reported in - 2016-TIOL-660-CESTAT-MUM. The bench was pleased to pass a detailed speaking order giving relief to the assessee.

The bench after going into the details of Valuation of services under Section 67 of the Finance Act, 1994 and read with Rule 7 of the Service tax Valuation rules prevailing at that time (which is no longer applicable now) held that -

- Section 67(i) very clearly mandates that for discharging the Service Tax liability, amount which is charged by the service provider is the amount.

- TDS amount has not been recovered from the service provider and also that there is no material to hold that this amount is paid is consideration for services received from service provider.

- There is nothing on record to indicate that the service recipient had recovered that amount of Income Tax paid by him on such amount paid to the service provider from outside India.

- Accordingly, service tax is required to be discharged only on the amount which has been billed by the service provider.

Hope this judgment may put an end to the saga of demanding service tax on TDS portion.