No Service Tax Applicable on TDS portion when TDS amount has been borne by Taxpayer

CESTAT, Chennai: When the TDS amount has been borne by the assessee and only the consideration for the services as agreed upon by the parties has been paid to the service provider, the same cannot be included in the taxable value for determining the Service Tax liability.

M/S. TVS Motor Company Ltd. vs. The Commissioner of Central Excise & Service Tax; Service Tax Appeal No. 219 of 2009; 31.08.2021

Facts:

• The appellants are engaged in the manufacture of motor vehicles and IC engines. During the period from March 2004 to September 2007, appellants received Technical Consultancy Services and Project Consultancy Services from various service providers who were not having their offices in India.
• As per Section 68(2) of the Finance Act, 1994, read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, if the service provider does not have an office in India and his usual place of residence is in a country other than India, then the service receiver who has his business establishment in India is liable to pay Service Tax on behalf of the service provider. The appellants thus paid Service Tax on the value of service charges under reverse charge mechanism though they were the service recipients. While paying the Service Tax, they did not include the tax deducted at source (TDS) for determining the taxable value.
• The Department was of the view that the TDS portion has also to be included in the taxable value for discharging Service Tax. Show Cause Notice No. 10/2007 dated 19.11.2007 was issued proposing to demand the differential Service Tax along with interest and also for imposing penalty. After due process of law, the Original Authority vide Order-in-Original No. 01/2009 dated 05.01.2009, confirmed the demand along with interest and imposed penalty under Section 78 of the Finance Act, 1994. Hence, the appeal in Service Tax Appeal No. 219 of 2009.

Issues:

1. Whether the appellants are liable to pay Service Tax under reverse charge mechanism in terms of Section 66 of the Finance Act, 1994 read with 2(1)(d)(iv) of the Service Tax Rules, 1994, before the introduction of Section 66A of the Finance Act;
2. Whether the appellants are liable to pay Service Tax on the TDS portion deducted while paying the consideration to the service provider.

Held :

• The liability to pay Service Tax under reverse charge mechanism would arise only after the introduction of Section 66A with effect from 18.04.2006 to the Finance Act, 1994. [ref:  M/s. Indian National Shipowners Association v. Union of India reported in 2009 (13) S.T.R. 235 (Bom.).; 2010 (17) S.T.R. J57 (S.C.). 7.2].
• The bench, therefore, concluded on the said lines that the demand of Service Tax till 18.04.2006 cannot sustain and therefore the same was set aside
• From conditions in the agreement, it is agreed by the parties that TDS has to be borne by the appellant who is the service recipient. Section 67 of the Finance Act, shows that Service tax is payable on the gross amount charged by the service provider.
• The Department does not dispute that the TDS amount is borne by the appellant. The case of the Department is that when the TDS amount is grossed up with the actual consideration agreed between the parties, the TDS portion would become part of the consideration and has to be included in the taxable value.
• Section 195 of the Income Tax Act, 1961, provides for the Tax Deducted at Source (TDS) for the non-residents. This would mean any sum that is paid to the non-resident which bears the character of income and gross amount, the whole of which may or may not represent income or profits. It is also a requirement that the document should mention that the Indian Counterpart of the transaction would bear the tax for deducting TDS by grossing up the value. To comply with this provision, as per the accounting practice, the appellant has grossed up the TDS amount with the actual consideration.
• For the purposes of discharging their obligation of deducting tax at source, the appellants have grossed up the TDS to the actual consideration. After deposit of TDS, the service provider has received only the amount that has been agreed between the parties. There is no dispute about the fact that TDS amount has been borne by appellant.
• From the judgments in the case of M/s. Hindustan Oil Exploration Co. Ltd. [2019 (2) TMI 1248 – CESTAT Chennai], M/s. Indian Additives Ltd. [2018 (6) TMI 523 – CESTAT Chennai];, M/s. Centre for High Technology [2018 (8) TMI 243 – CESTAT New Delhi], it can be conveniently derived that when the TDS amount has been borne by the assessee and only the consideration for the services as agreed upon by the parties has been paid to the service provider, the same cannot be included in the taxable value for determining the Service Tax liability.
• Therefore, the second issue was also held to be in favour of the Appellant and it was held that the demand for the entire period cannot sustain and the same was set aside.