APRIL 02, 2018

By Tarun Gulati, Advocate, PDS Legal

WHILE valuation in Central Excise, Customs and VAT Laws has been a much debated issue and principles have largely been settled by various decisions rendered by Courts over the past few decades, authoritative decisions of Courts in the realm of Service Tax law, which is of a relatively more recent vintage, were hard to come about. Two recent and back-to-back decisions by the Supreme Court on issues relating to Service Tax valuation clear the air on vexed questions on which a lot of litigation had arisen over the years.

The first decision is in the case of Commissioner of Service Tax vs. Bhayana Builders (P) Ltd. , 2018-TIOL-66-SC-ST by which the larger bench decision of the CESTAT was upheld by the Supreme Court. The issue involved in that case was whether the value of goods/materials supplied free of cost by the service provider who was providing commercial construction services could be taken into account while determining the value of taxable services where the service provider had chosen to pay service tax on a presumptive basis @ 33% of the gross amount charged from any person as prescribed in Notification – ST 15/2004-ST dated 30.09.2004. The case may have involved the interpretation of the Notification but the importance of the decision lies in the interpretation of Section 67 of the Finance Act, 1994 ("the Act")given by the Supreme Court, which will have far reaching consequences in settling disputes relating to valuation in Service Tax. While construing Section 67 of the Act, it was noticed that Section 67 uses the words "gross amount". By the use of the word, "gross", all that the Legislature had indicated was that the tax is payable on the full amount of the bill charged by the service provider to the service recipient without any deduction of expenses but that does not mean that all amounts charged by the service provider can be taxed. Further, Section 67 of the Act also used the word, "charged" which denoted that the Legislature intended that the tax had to be limited to the amount billed or the contract value and nothing beyond that. The Service Tax Department was, therefore, bound to limit itself to the contours of the contract between the service provider and the service recipient and could not travel beyond the contract value to include any other amount to determine the taxable value.

In deciding the above case, a very important test which was laid down by the Supreme Court was the "nexus test". It was held that there has to be a nexus between the consideration charged and the service rendered for it to become a taxable value for computing Service Tax because Section 67 of the Act used the words "for such service provided". It was held that it is not just any amount charged by the service provider which can be brought to tax but only those amounts which had a nexus with the service provided by the service provider. After stating the above, it was held that the goods supplied free of cost by the service recipient are neither forming part of the contract value nor are "charged" by the service provider to the service recipient and cannot, therefore, be regarded as "consideration" for the service provided by the service provider to the service recipient.

A similar principle was laid down by the Supreme Court in the context of Central Excise valuation in the case of Collector of Central Excise vs. Indian Oxygen Ltd. 2002-TIOL-88-SC-CX. In that case, the Supreme Court had not allowed the addition of the rental charges for gas cylinders in the value of the gas for the purpose of Central Excise valuation on the ground that " the supply of gas cylinders is ancillary to the supply of gases but it is strictly not incidental thereto ".

Similarly, in the context of sales tax, the Supreme Court in State v. Rajasthan Chemist Association, 2006-TIOL-80-SC-CT, had once again laid down the nexus test to state that the measure of the tax has to have a nexus with the taxable event.

In the context of customs laws, by means of several judgments it has been held that the consideration that is sought to be added to the transaction value must necessarily relate to the imported goods.

The nexus test applies pervasively in all indirect taxes. Therefore, any charge which does not have a nexus with the service provided or which is strictly not incidental to the contract for provision of service cannot be included in the value of service.

The "nexus test" applied by the Supreme Court to the service tax provisions is important not only in the context in which the case was decided but will have ramifications much beyond the issue in controversy in that case. There may be several amounts that a service provider may charge from the service recipient. If it can be established that such amounts have no correlation to the service provided and are not, in fact, charges for the service provided, it can be argued that such amounts should not be regarded as "gross amount charged" for the service and should not be levied to service tax.

In the same hue, is the decision of the Supreme Court in Intercontinental Consultants and Technocrats Pvt. Ltd. - 2018-TIOL-76-SC-ST where the Supreme Court upheld the decision of the Delhi High Court - 2012-TIOL-966-HC-DEL-ST which had struck down Rule 5 of the Service Tax (Determination of Value) Rules, 2006 ("the Rules") as being contrary to Section 67of the Act. Once again, while considering the Scheme of Section 67 of the Act, the Supreme Court noticed the language used by the legislature and held that by the use of the word, "such" taxable service, it was clear that the amount charged should be for providing the taxable service. Out of pocket expenses or reimbursements which are charged by the service provider on actuals cannot be considered as amounts charged for providing taxable services. Once the statutory provision itself did not provide for charging to tax any amount which was not charged for providing the taxable service, Rule 5 which attempted to make reimbursements as part of the taxable value was beyond the provisions of the Act and had to be struck down. Once again it is the nexus between the amount charged and the service provided which was reiterated in the above judgment.

Many issues relating to valuation are pending at different levels of the judicial hierarchy. These two judgments of the Supreme Court will go a long way in providing relief to assessees where demands on valuation of taxable services have been raised by the Service Tax department.

(The views expressed are strictly personal.)