I reproduce the valuable feed-back received from the experts in the field. Response to the query
by Mr. Datey is also given below.
The main query has now been defined more sharply by Mr. Gururaj :
(i) There is no specific provision which authorizes addition of TDS amount to value of
(ii) Under CE law, duty itself is a deductible amount from the gross receipt;
(iii) Even in Service tax, Section 67 permits similar computation as cum-tax-value;
(iv) Taxes must not form part of assessable value.
Mr. Datey, however opines differently that TDS is what the person needs to pay as tax to the
govt. and entitles him to take set-off. Therefore, it is a part of the consideration.
Mr. B.N.Gururaj, Advocate :
The first example almost never happens. No foreign service provider would agree to deduction
of Indian tax out of the sums due to him - not in my experience in any case. Therefore, in
practice, the Indian service recipient deducts tax at source, but bears the incidence himself. As
far as service tax is concerned, the service recipient has to pay service tax on the amount payable
as consideration. Tax remitted cannot be construed as income. At least, in Indirect Taxes, which
principle has been followed: under CE law, duty itself is a deductible amount, where the price is
inclusive of duty. Under service tax also, section 67 itself allows treatment of consideration as
Where the tax in question which is to be deducted is a direct tax, there is no need to treat it
differently under indirect taxes. Taxes must not form part of the assessable value. To this extent,
in the stay matter, the Chennai Bench has taken reasonable view.
Besides, the settled principle of law is that charge of tax must be construed strictly. Therefore, by
analogy drawn Income Tax law, TDS amount cannot be grossed up on the value of service.
There must be specific provision which authorises such addition of TDS amount to value of
One may soon expect such an amendment, if the government is in too much hurry to await the
enactment of GST.
Mr. Devarajan CMA, Devarajan Swaminathan & Co.: From a transaction perspective, it is clear
that the agreement is structured on
a "net of tax" basis.
Taking your example forward, the service tax should be on 125$
Net amount 100 US$
tds@20% works out to 25US$
gross amount 125US$
Service tax on 125US$.
This is in sync with the provisions of section 195A of the IT Act.
125$ is also the "consideration" for the services rendered, as the TDS amount is
BORNE by the service receiver ON BEHALF of the Service Provider. The primary
liability for payment of tax is with the service provider that is clearly
reflected in section 195A.
This is one more perspective other than the one Datey Saab just mentioned.
Non issuance of TDS Certificate would be non compliance with Section 203, it
does not challenge the theory. (Not the issue here)
If this is not the case, pls do let me know. Will help me interpret legal
Mr. V S Datey : Really TDS is not a 'statutory levy'. This is actually an amount paid on behalf
of customer. He can and indeed does take credit of the TDS paid by u. Thus, TDS is not 'tax' at
all. It is actually amount paid on behalf of customer to govt. hence it is part of consideration to
him and service tax should apply.
By Rebecca : “If no TDS certificate is issued to the Service Provider to enable him to take set-
off, then can we challenge this theory ? “
Mr. V S Datey : If he does not issue TDS certificate, it is clear violation of a statutory
provision. How u can challange a theory on basis of some clear violation of a statutory
Clarification by Rebecca to Mr. Datey : This simply means that where the tax is deducted from
the sum payable to foreign service provider, he is issued a TDS cert. to enable him to take set-
of under DTT in his country. This is a case where burden of TDS is being borne by him (SP)
and not the service receiver. On the other hand, where the service-receiver has agreed to
pay him a net full amount of USD 100, but has to bear the incidence of TDS himself, why
would he still issue a TDS certificate to the service provider? (For procedural purposes, in
both cases, deposit compliance is done by Indian service receiver, which is an unrelated
issue.) However, it is a secondary query.
Mr. Gaurav Gupta, ACA, ACS, LL.B. : As per the various judicial rulings, credit for the tax
deducted at source ('TDS') can be claimed even if the TDS certificate has not been issued /
received. However, the deductee is required to prove that TDS has been actually deducted and,
deducted under the provisions of the statute.
Please note this is reply to your subsequent query and not to the primary issue.
Mr. Sitaram Agarwal, B.Com., LL.B., LL.M. (England), FICWA, FCS :
The main concern of the Department is realization of Service Tax on payment made to foreign
service provider and accordingly law provides that availer of foreign service is made liable to
ensure that service tax on foreign service is deposited in public exchequer, whether service
availer deduct at source while making remitting payment to foreign service provider or service
availer in India make payment of his own.
In India when Indian transporter does not charge service tax from service availer than service
availer is made liable to deposit service tax on service availed and is also entitled to input credit
for the amount of service tax deposited. Similarly, liability of service tax on foreign service
provider has been shifted on India service availer. Thus charge of service tax on gross amount
(service charges + service tax) is not only unauthorized but tantamount to double taxation (tax
on tax), again cannon of taxation and totally unjustified, but only harassment of innocent
assesses. CBEC should issue circular to clarify the subject matter to field staff as well as public
: When payment is made to a foreign service provider, TDS is effected. Simultaneously,
Service Tax is also paid on such gross amounts inclusive of TDS, on reverse charge basis.
Issue : What when the agreement may specify that foreign Service Provider shall be paid
the agreed amount and the tax shall be borne by Indian service receiver.
Example (1) : Agreed Renumeration = USD 100
Applicable Tax = 20%
Remitted amount : USD 80
Service Tax Paid on = USD 100
Example (2) : Agreed Renumeration = USD 100
Applicable Tax = 20%
Remitted amount : USD 100
Service Tax Paid on = USD 100
Department's view = It should be on USD 120
The argument can be taken that amount payable to foreign parties as per the contract
entered with the parties have been remitted to them and service tax have been paid on that
amount. As per Indian Income Tax Laws service receiver is required to charge income tax
on the transactions with the foreign parties. He has duly paid the said amount to the credit
of the Central Government. In those cases where liability to pay such tax was on him
(service Receiver) he has paid tax to the credit of the Central Government on grossing up
basis and no amount have been paid/ credited in this regard to the foreign parties.
As per his understanding of the example-2, it is not consideration for any service but a
statutory levy and no service tax is leviable on statutory levy.
Last year, Chennai CESTAT passed the following order. Relevant portion is highlighted.
2009 (16) S.T.R. 729 (Tri. - Chennai)
IN THE CESTAT, SOUTH ZONAL BENCH, CHENNAI
Ms. Jyoti Balasundaram, Vice-President and Shri P. Karthikeyan, Member (T)
T.V.S. MOTOR COMPANY LTD.
COMMISSIONER OF C. EX., CHENNAI
Stay Order No. 411/2009, dated 18-5-2009 in Application No. ST/S/133/2009 in Appeal No.
Stay/Dispensation of pre-deposit - Valuation - Service tax paid on entire technical
consultancy payment made to foreign service providers for off-shore services - Demand by
grossing up amount by including TDS amount - Prima facie force in appellant’s contention
that provision for grossing up of amount under Section 195A of Income Tax Act, 1961
applicable for computing income tax and not Service tax - Demand revenue neutral as
services received used in manufacture and Cenvat credit admissible - Strong prima facie
case made out - Pre-deposit waived - Section 67 of Finance Act, 1994 - Section 35F of
Central Excise Act, 1944 as applicable to Service tax vide Section 83 of Finance Act, 1994.
[paras 1, 2, 3]
Salim and Associates v. Commissioner — 2007 (7) S.T.R. 48 (Tribunal) — Distinguished
REPRESENTED BY : Shri K.S. Venkatagiri, Advocate, for the Appellant.
Shri V.V. Hariharan, JCDR, for the Respondent.
[Order per : Jyoti Balasundaram, Vice-President] . - We have heard both sides on the
application for waiver of pre-deposit of service tax of Rs. 1,65,53,563/ - confirmed on the
amount paid to foreign service providers for “off-shore services” rendered to the applicants
during the period March 2004 to September 2007 by grossing up the amount paid by
including TDS amount therein.
2. We find prima facie force in the submission of the applicants that they are liable to pay
and have paid service tax with reference to the amount charg ed and received by the
service provider and that the provision for grossing up of the amount under Section 195A
of the Income Tax Act is applicable only for the purposes of computing the method of
payment of income tax and not for the purpose of computing service tax. Prima facie, the
decision of the Tribunal in Salim & Associates v. Commissioner of C. Ex., Calicut, 2007 (7)
S.T.R. 48 (Tri.-Bang.) relied on by the Revenue is distinguishable on facts - in that case it
was held that tax deducted at source cannot be excluded for the purpose of demand of
service tax while in the present case, such is not the case of the applicants who have paid
service tax on the entire technical consultancy payment to foreign service providers for
‘off-shore services’ rendered during the period in dispute. We, further, note that in any
event the services received by the applicants are used in relation to the manufacture of the
excisable goods and the applicants are, therefore, eligible to Cenvat credit and the demand
is completely revenue-neutral.
3. In the light of the above discussion, we hold that strong prima facie case for
unconditional waiver has been made out on merits and hence allow the prayer of the
assessees for waiver of pre-deposit and stay of recovery of the amounts adjudged, pending
Debate on the issue is invited.