Bala Raja Rajan, B.Com, FCA
The PM has been vocal about fair taxation and reducing litigation. A couple of days ago we heard Mr. Mukul Rohtagi, the newly appointed Attorney General about taking steps to reduce litigation in general and PSU-Government litigation in particular. This is certainly music to the ears of the Industry and trade. While it is too early to judge the action on the ground by the current Government, the facts on the ground give an entirely different picture.
Recently, the DGCEI [Directorate General of Central Excise Intelligence] has slapped a demand notice for Rs. 4.6 cr on the country’s largest oil national company M/s Indian Oil Corporation, a PSU.
Before getting into the legal aspects, I would like to set out briefly the facts. Like any other manufacturer, IOC also engages GTAs [Goods Transport Agencies] to transport their goods to industrial customers. During transportation toll charges are paid when crossing tolls points by the transporter. GTA being a service covered by the reverse charge mechanism, IOC pays service tax on the transport component in GTAs bills. DGCEI alleges in the notice that toll charges form a part of the transportation cost and should be included in the value for service tax payment. Accordingly demand for service tax of Rs 4.64 crore plus interest, penalty and additional penalty is being raised on the toll charges paid by IOC to re-imburse the transporters.
The crux of the matter therefore is whether toll amounts indicated in the transporter’s invoices would be a re-imbursement to the transporter or is an intrinsic part of the services provided by the transporter. DGCEI contention is it is an intrinsic part of the cost of transportation, as without incurring the expenditure on toll charges, the provision of service of GTA is not possible.
Before going for a detailed discussion, let us see what the law exactly says in relation to the expenditure incurred by the service provider, Rule 5 of the Service tax (Determination of Value) Rules, 2006 states as below.
Inclusion in or exclusion from value of certain expenditure or costs.–
(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..
Explanation. - For the removal of doubts, it is hereby clarified that for the value of the telecommunication service shall be the gross amount paid by the person to whom telecommunication service is actually provided.
(2) Subject to the provisions of sub-rule (1), 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 if all the following conditions are satisfied, namely:-
(i) the service provider acts as a pure agent of the recipient of service when he makes
Payment to third party for the goods or services procured
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Explanation1.–For the purposes of sub- rule (2), “pure agent” means a person who–
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.
Explanation2.– For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.
By the above definition and explanations in the said Rule, the intention clearly is to include any expenditure incurred by the service provider. However the same Rule, also provides an exception for service providers acting as “pure agents”. Pure agents need not include expenses incurred on behalf of the principal which is actually payable by the principal. GTA as the name itself suggests is an Agent, the toll charges are paid by the transporter as an agent of the principal in the capacity of Pure Agent only.
After all, toll is a form of levy by a statutory body, so by taxing a levy again would lead to unintended cascading where there is no credit mechanism. This would be a retrograde step and the fundamental principle of value added taxation will be defeated. Taxes and levies cannot be considered as value adding activities and certainly should not be taxed.
In a similar situation where clearing agents pay customs duty on imports on behalf of importer, the service tax authorities cannot impose service tax on customs duty included in the agent’s invoices. Even thoughwithout paying the customs duty the imported goods cannot be cleared out of customs.
Moreover such notices may trigger similar notices across Commissionerates on identical grounds. In a similar situation in the Budget 2011, the Customs law was amended by providing that cess will not be levied on cess when clearing imported goods.
As tax professionals and tax officers, one should ensure that the spirit and underlying principles are not forgotten in the enthusiasm to collect more taxes through hyper-technical interpretations.