CA FINAL IDT CLASSES IN CHENNAI Raj, Grad.

CWA 1

SERVICE TAX VALUATION

Situation Value of taxable service

Value =

Sec 67(1)(i) – In a case where the provision of service is for a consideration in money, the value shall be gross
amount charged by the service provider for such service provided or to be provided by him.

Value = (Its money value)

Sec 67(1)(ii) – In a case where the provision of service is for a consideration not wholly or partly in money, the
value shall be such amount in money, with the addition of service tax charged as is equivalent to
consideration.

Value = (Its money value)

Sec 67(1)(ii) – In a case where the provision of service is for a consideration not wholly or partly in money, the
value shall be such amount in money, with the addition of service tax charged as is equivalent to
consideration.
Service tax (Determination of value) Rules, 2006
shall apply

Sec 67 (1) (iii) – In a case where the provision of service is for a consideration which is not ascertainable, the
value shall be the amount as may be determined in the prescribed manner (i.e. Valuation Rules)

Why to Join Indirect tax class?

 In group-2, Advanced management accounting, ISCA and Direct tax are some what difficult to score.
 At times it is proved that Direct tax will be the most difficult paper
 It Is also know to all that Advanced management accounting needs lot of time to solve.
 ISCA, depends on the valuer but not the students.
 The only paper to score and which will make you to clear the entire group is Indirect tax (Aim for 80 +
marks in IDT). Join classes in SREERAM COACHING POINT.

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011
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Value for service recipient -1 =

Rule 3 (a) - the value of such taxable service shall be equivalent to the gross amount charged by the
service provider to provide similar service to any other person in the ordinary course of trade and the
gross amount charged is the sole consideration.

Value of Service = EQUIVALENT MONEY

VALUE of consideration which should not be
less than COST of provision of service.

Rule 3(b) - Where the value cannot be determined in accordance with clause (a), the service provider
shall determine the equivalent money value of such consideration which shall, in no case be less than the
cost of provision of such taxable service.
Value = As determined by the excise officer
after giving an opportunity of being heard.

(If assessee is not satisfied with the value

then he can go for appeal)

Rule 4 - Where the Central Excise Officer is satisfied that the value so determined by the service provider is not
in accordance with the provisions of the Act or these rules, he shall issue a notice to such service provider to
show cause why the value of such taxable service for the purpose of charging service tax Should not be fixed at
the amount specified in the notice. The Central Excise Officer shall, after providing reasonable opportunity of
being heard, determine the value of such taxable service for the purpose of charging service tax in accordance
with the provisions of the Act and these rules.

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
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Value =

Rule 5(1) - Where any expenditure or costs are incurred by the service provider in the course of providing
taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided
or to be provided and shall be included in the value for the purpose of charging service tax on the said service.

Value =

Rule 5(2) - The expenditure or costs incurred by the service provider as a pure agent of the recipient of service,
shall be excluded from the value of the taxable service.

ISSUES IN VALUATION:


Issue-1: Who has to determine the value?

 Rule 3 of valuation rules makes it clear that Value of taxable service shall be determined by
“Service provider”

 Issue-2: Are free services liable to service tax?

 No, Service tax is not leviable on free services. The following case laws will clarify the issue.
‘No service tax is payable if SIM cards are given free as bonus’ – Bharati cellular Ltd.
‘An assessee, who was a stock broker, didn’t charge brokerage in respect of certain transactions.
It was held that Sec. 67 does not have any deeming provision and hence service tax is not
leviable’ – Chandravadan Desai V. CCE
The above treatment is applicable only when there is really free service and not when its cost is
recovered through different means.

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011
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 Issue-3: TVS motors sells 2 wheelers to customers through dealers with a free service during
warranty period. In case of services to motor vehicles, though the service is termed as ‘free
service’, actually the amount is paid to service provider (i.e. automobile dealer) by the
manufacturer of automobile (i.e. TVS motors). The dealer didn’t pay service tax on the ground
that he didn’t receive money from customers (i.e. Service recipient) but from a third party (i.e.
Manufacturer). Is the dealer’s argument correct?

 The words used in sec. 67 are “charged for such service provided or to be provided by him” but it
does not specify that the amount should be ‘charged’ to service reciver.
Thus, the charge may be to anyone. It is not necessary that ‘charge’ should be only to
receiver of service. Even if amount is ‘charged’ to some other person and not to receiver of
service, service tax will become payable. Though the customer gets service free, it is not free
service and would be taxable.

 Issue-4: TAX O KEY Ltd. appointed Mr. Giridharan as its statutory auditor and paid amount to
hotel and travelling agency for the accommodation and travelling expenses of auditor. The
service provider (i.e. auditor) does not include the said amount paid by the company in the
value of taxable services provided and argued that he didn’t receive that amount from the
service recipient and it is directly paid by it to hotel and travelling agency. Is the treatment
adopted by auditor correct?


As per Sec. 67, amount need not be ‘charged’ by service provider. Money paid to third party on
behalf and for the purpose of service provider is includible in the value of taxable services
provided by service provider. Definition of ‘consideration’ also makes it clear that consideration
need not be received by the service provider himself.

 Issue-5: X ltd. holds 27% shares in Y ltd. (X and Y are associated under section 92A of Income tax
Act). X ltd. provides consultancy services to Y ltd. and sent a bill for Rs. 30,000 to Y ltd. Y ltd.
adjusted the amount through book entry and X ltd. also done the same. X ltd. didn’t pay service
tax on the groung that it didn’t receive service charges and service tax from Y ltd., But
department demanded duty from X ltd. Advise?

 The department through its letter clarified that service tax is leviable on taxable services provided
by the person liable to pay service tax even if the amount is not actually received, but the amount
is credited or debited in the books of account of the service provider. However, this provision is
restricted to transaction between associated enterprises. In case of reverse charge, tax liability
will be when book entry is made by service receiver.


Issue-6: Whether the payment made by service recipient to service provider, not in relation to
service is includible in the value of taxable service?


No, as laid down in the following cases.
(i) CKP Mandal V. CCE
Facts:
 CKP Mandal, who was a mandap keeper entered into contract with other contractor.
 The contract is for giving the contractor exclusive rights for rendering services of
catering and decoration to the hirer of community hall.
 Any other contractor was not to be allowed to provide these services to the hirer of
community hall.
 The contractors had given donation of Rs. 8.35 lakhs to the appellants (CKP Mandal) as
contribution to corpus fund.
Issue: The department demanded duty from CKP Mandal on the ground that it has received Rs.
8.35 lakhs for the contract (i.e. Sale of rights).
Decision: The court held that the amount received was not in relation to service of mandap
provided by CKP mandal and hence tax is not required to be paid on this amount.

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011
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(ii) Cultural Society of Angamally V. CCE

It was held that amounts received as donation and public/ government grants for
activities of society are not related to services provided by society. These are excludible from
taxable value for charging service tax.


Issue-7: Hotel Marudhar palace charges 10% of the bill amount as service charges and
department has asked them to pay service tax on it. The assessee has submitted that the
amount @ 10% collected from customers is subsequently disbursed among the staff;
therefore it is not part of their income and cannot be included in the gross amount charged by
them. Examine the case?


The charge should be for taxable service provided or to be provided. Thus, if anyother amount is
charged which is not for taxable service provided or to be provided, service tax is not payable
on such charge.
The 10% service charge which was later distributed as tips to employees. It was held that
tax is payable on gross amount charged to customer and hence would include this ‘service
charge’ also. – Hotel Mela plaza V. CCE

VALUE ADDED TAX

Illustration on Basic Concept:
Mr. S acquires goods from Mr. T for Rs. 1,000 on which tax is 10%, Mr. S
adds Rs. 400 value of goods and sells at Rs. 100 profit. The tax rate is 20%. What is
the ultimate price for customer
(a) If VAT system is not present
(b) If VAT system is implemented
Without VAT With VAT
Sale price of Mr. T 1000 Sale price of Mr. T 1000
Add: Tax @ 10% 100 Add: Tax @ 10% 100
Amount paid by Mr. S 1,100 Amount paid by Mr. S 1,100
Cost to Mr. S 1,100 Cost to Mr. S (1,100 – 100) 1,000
Add: Profit and Value of goods 500 Add: Profit and Value of goods 500
Sale price of Mr. S 1,600 Sale price of Mr. S 1,500
Add: Tax @ 20% 320 Add: Tax @ 20% 300
Cost to Customer 1,920 Cost to Customer 1800

Tax payable by Mr. S 320 Tax payable by Mr. S (300 - 100) 200

Observation Explanation Advantage

From the above illustration, the cost to
consumer when VAT system is
implemented is less compared to without
VAT system. The consumer saves Rs. 120.
The tax payable by Mr. S to the
The cost saved by the government is decreased when VAT
consumer and tax system is implemented i.e. Rs. 120.
revenue lost by the Therefore the government loses its
government is one and revenue in order to contribute it to
the same. consumer.
Avoids cascading effect of tax
A persistent criticism of VAT has
been that since the tax is payable
on the final sale price, the VAT
usually increases the prices of
goods. However, VAT does not have
any inflationary impact. With the
introduction of VAT, tax impact on
RM is totally eliminated. Therefore,
there will be no increase in prices.

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011
 CA FINAL IDT CLASSES IN CHENNAI Raj, Grad. CWA 6

Why the VAT credit should not be considered in the cost and how it can be set
off with tax payable?
Logical Explanation Accounting Explanation
The VAT paid on purchases is available as credit. For purchases:
Whenever a portion of cost incurred is available as Purchases A/C ----- Dr.
credit, it should not be considered while calculating VAT credit Receivable A/C --- Dr.
the net cost incurred. To Cash/Creditors A/C
If it is considered then cost to consumer will increase For Setoff:
and leads to cascading effect of tax which is against
VAT payable A/C --- Dr.
the VAT system.
To VAT credit receivable A/C
The credit so available will be utilised for payment of
VAT liability. To Cash (Bal. if any)

APPEALS UNDER EXCISE, CUSTOMS AND SERVICE TAX

Issue of show cause notice & Demand

Adjudication

Confirmation of demand/ order

Appeal

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011
 CA FINAL IDT CLASSES IN CHENNAI Raj, Grad. CWA 7

SREERAM COACHING POINT

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FOR SAMPLE VIDEO CLASS

ON SERVICE TAX VALUATION

CLICK HERE: http://www.youtube.com/watch?v=IjgGVF8Ei3k

ON TRANSACTION VALUE
CLICK HERE:
http://www.youtube.com/watch?v=ARMyqhHJto8&feature=related

SREERAM COACHING POINT, Ph: 9840954207 Class Timings: SAT & SUN – 2 P.M to 5 P.M
(Admissions are in Progress for November 11 batch) Class Starts from: 18th June 2011