Penalties under Service Tax (Finance Act 1994)

1. Valuation of
Services
under
Service Tax__________________________________________________________________
Keshav Garg
(B. Com, CA, CS, ISA(ICAI)
+91 9888-090-008
Mygst.mytax@gmail.com
servicetaxindia@outlook.com

2. Charging Provision of
Service Tax (Sec 66B)
There shall be levied a tax at the rate
of fourteen percent on value of all
services, other than those specified in
the negative list, provided or agreed
to be provided in the taxable
territory by one person to another
and collected in such manner as
may be prescribed.

3. Analysis of Charging
Provision
1. Unlike Section 3 of Central Excise Act 1944, the very
charging section of service tax includes reference to
value of services.
2. If there is NO value, NO Service Tax can be charged.
3. Since the rate of charge and value both form part of
charging section, other provisions like abatement,
composition etc. are optional.
4. By any other provision charge of service tax cannot
exceed the rate mentioned in the charging provisions.
5. Section 67 of Finance Act 1994 read with Service Tax
(Determination of Value) Rules 2006 deal with
principles of valuation of taxable services.

4. Valuation Scheme
u/s 67(1)
Situation Valuation
1. Where the provision of service is
for a consideration in money
Gross Amount Charged by
the service provider for
such service provided or to
be provided by him.
2. Where the provision of service is
for a consideration not wholly or
partly consisting of money.
Such Amount in MONEY,
with the addition of service
tax charged, as is
equivalent to the
consideration.
3. Where the provision of service is
for a consideration which is not
ascertainable.
The amount as may be
determined in the
prescribed manner.

5. Other Provisions of
Section 67.
1. Section 67(2) allows the assessee to calculate service
tax based on reverse working in a situation where in
the amount is inclusive of service tax. For instance:
2. Gross Amount as per Section 67(3) includes any
amount received towards the taxable service before,
during or after provision of such service.
Gross Amount Charged (inclusive of
Service Tax)
INR 150,000/-
Service Tax Component on above would be:
150,000 X 14.5/114.5
INR 18,995/-

6. Summary of Valuation (Section 67)
Valuation
Wholly in
Money
Gross Amount
Charged
No Notional
Values
Wholly or
Partly in
Money
Equivalent
Money
Consideration
Not
Ascertainable
Value of services
provided to third
party
Market Value as
determined, not
lower than cost.
Where
consideration is

7. NO Notional Value to be
adopted
1. In order to call an activity as Service, consideration must
be charged. Any activity without the consideration will
NOT qualify as service as per definition u/s 65B(44) .
2. In Kiran Motors Limited v/s CCE 2009 (16) STR 74
(Ahmd. Trib) held that where services are provided free
of cost, there could be no levy towards service tax. No
Notional values can be triggered in such cases.
3. If the service is provided at a value which is lower than
market value or MRP, service tax can be demanded only
on amount actually charged and not on Gross MRP.
4. Service Tax cannot be demanded on discounts offered at
the time of entering the contract.
5. If it cannot be proved that security deposits are
influencing the consideration, the same cannot be brought
under charge of service tax. Magarpatta Township v/s
CCE 2014 (33) STR 53 (Tri-Mumbai)

8. Taxation of Gross Amount
1. As per Rule 5(1) of Service Tax (Determination of Value)
Rules 2006, any expenditure or costs incurred by the
service provider in the course of providing taxable
service, all such expenses shall be treated as
consideration for the taxable services and shall be
included in the value for purpose of charging service tax.
2. Discounts/Commissions passed on to the customers
cannot be reduced from the value of taxable services.
3. Even where the exact amount of cost incurred is charged
to the customers, service tax is still applicable. But in
case the services are subsidized, service tax is applicable
only on the subsidized value. West Coast Paper Mills
v/s CCE 2009 (16) STR 627 (Bang. Tribunal)

9. Valuation of Non Monetary
Consideration Section 67(1)(ii)
1. In case of Non Monetary Consideration the
equivalent Market value shall be the value of
service. Such market value shall be deemed to
include the service tax charge and therefore
reverse calculation as per section 67(2) shall
be done.
2. “Consideration” means everything received or
recoverable in return for a provision of services
which include monetary payments, non
monetary payments, as well as deferred
payments.

10. Valuation in case the consideration
is not ascertainable (Sec 67(1)(iii)
1. Valuation shall be done as per the provisions of Service Tax
(Determination of Value) Rules, 2006.
2. Such situations usually arises in case of embedded
consideration where the consideration for services is
embedded with the consideration of goods.
3. Rules provide for valuation in respect of following situations:
a)Determining service component in works contract.
b)Service in relation to money changing.
c) Service component in supply of food items
d) Determination of value where such value is not
ascertainable.

11. Service Tax (Determination of Value)
Rules 2006
1. Where the value of service is not ascertainable (Rule 3):
a) the value shall be the gross amount charged by the
service provider to provide similar service to any other
person and gross amount charged is the sole
consideration.
b) Where the value cannot be determined as per clause
(a), the cost of provision of such service shall be
deemed to be the value of such service.
2. In case of net of tax payments contracts the amount has
to be grossed up for charging of service Tax:
Net of Tax Payment (after TDS) INR 100,000/-
Gross Amount (Before TDS)
100,000 X 100/90
INR 111,111/-
Valuation for Service Tax (Rule 7) INR 111,111/-

12. Reimbursement of
Expenses
1. The use of word “such” in the valuation provisions
implies that tax can be charged only on the amount
charged for service and not on any other item.
2. Circumstances under which the claim of reimbursement
of expenses is permissible :
a) Pure Agent Basis
b) Neither Intends to hold nor holds any title in goods and
services procured.
c) Does not use such goods/services so procured.
d) Receives only the actual amount incurred to procure
such goods/services.
3. If the expenses are intricately connected with and
inseparable part of the services rendered, then no claim
of reimbursement of expenses can be made.

13. 4. If the liability of an expense is of service provider and the same is
reimbursed by the service recipient, it cannot be classified as
reimbursement of expenses.
5. In Idea Mobile Communications Ltd. v/s CCE 2011 (23) STR
0433 (SC) it was held that during the course of rendition of
telecommunication services, SIM Card has no intrinsic value and
therefore has to be treated as service.
6. In Intercontinental Consultants and Technocrafts Private
Limited v/s UOI 2013 (29) STR 9 (Del. HC) rule 5 has been
held unconstitutional. It held that expenditures incurred for
provision of services should not be included in valuation of service.
It held that such rule is ultravires to Section 67.
7. Thereafter Finance Act 2015 amended the explanation to section
67 and specifically inserted that consideration shall include any
reimbursable expenditure or cost incurred by the service provider
and charged, in the course of providing the service except in some
specified circumstances.
8. The law has amended the term “consideration” and not “gross
amount Charged” under section 67 and therefore even after
amendment the Delhi High Court judgement will stand good.

14. Valuation of Service Portion
in Composite Contracts
1. Service Tax (Determination of Value) Rules 2006,
provide for valuation of service component of a
composite contract.
Situation Rule
Applicable
Service Component in Works Contract 2A
Service Component in Food Supply 2C
Service Component in Money changing 2B

15. Valuation of Works Contract
Value of
Service
Cannot be
Determined
Execution of
Original Works
Contract
40% of
total
amount
Maintenance/
Repair
70% of
total
amount
Other
works
contract
70% (60% up to
30.09.2014)
Can be
determined
Gross – Value of
Material

16. Determination of Service Component in
Food Supply (Rule 2C)
Supply of Food as part of service Rates
Applicable
In a restaurant 40%
As a part of outdoor catering 60%
1. In case of an outdoor caterer, it was held that cost of LPG
cylinders supplied free of cost is not includible in the value of
taxable services. P. Srinivasan v/s CCE 2014 (33) STR 652
(Tribunal Chennai).

17. What do we mean by
“total amount”?
1. As per Explanation (II) to clause (ii) of rule 2A of the “total
amount” would be the sum total of Gross Amount Charged for
the works contract and the fair market value of all goods and
services supplied in or in relation to works contract , Less:
a) Amount charged for such goods/services provided by service
receiver.
b) The Value Added Tax or Sales Tax, if any.
2. Completion and Finishing services has to be classified as
original works since they relate to an incomplete or unfinished
building or civil structure. Carpenters v/s CCE 2014(33) STR
573 (Tri- Mumbai).
3. In case of free issued material, whose consideration has not been
charged to the customer, the same cannot be added into service
tax calculation mechanism. Bhayana Builders (P) Ltd. v/s
Commissioner of ST Delhi (2013) (32) STR 49 (Tri)

18. Determining the value of service in
relation to Money Changing
1. Definition of Service u/s 65B(44) specifically excluded the
activities undertaken only in money from the purview of
service tax. But any exchange of currency for a
consideration shall be chargeable to tax as prescribed in
rule 2B.
2. The value of Taxable service shall be the difference
between the buying rate/selling rate and the RBI
reference rate for that currency.
3. If RBI reference rate is not available then the value shall
be 1% of the gross amount in Indian Rupees provided or
received by the person changing the money.
4. If Foreign Currency is exchanged for another foreign
currency, the value of taxable service shall be equal to 1%
of the lesser of the two amounts the person changing
the money would have received by converting the
currencies into Indian Rupees at the Reference Rate
provided by RBI.

19. Penalties under Service Tax

20. Brief on Penalties under law
Nature of Penalty Section Offence/Default
1. Deprivation of Revenue 76 Penalty for failure to
pay service tax
2. Non Compliance of Law 77 Penalty for
contravention of rules
and provisions of the
Act
3. Deprivation of Revenue 78 Penalty for
suppressing etc. the
value of taxable
services.
4. Non Compliance 78A Personal Penalty

21. Procedure for levying
Penalty.
1. Show Cause Notice (SCN) is a must if the department
wants to levy penalty under the law. Imposition of
penalty without SCN violates the principles of natural
justice. Ashwani and Associates v/s CCE 2006 (2)
STR 289 (Del. Trib).
2. Penalty can be imposed only under the provisions which
are in existence at the time of issue of SCN even though
the offence was committed before. West Minister
International Private Limited v/s CCE 140 ELT 244
(Del).
3. As per section 73(3), where the service tax along with
interest has been paid before the issue of SCN and duly
intimated to the department, No SCN can be served.
4. Circular No 137/167/2006-CX.4 dated 03/10/2007 clarified
that section 73(3), provides for the conclusion of
adjudication proceedings on payment of service tax and
interest and that not only adjudication proceedings but
also penalty proceedings stand concluded.

22. Case laws where the penalty
proceedings have been dropped on
submission of service tax along with
interest.
1. Esskay Shipping (P) Ltd. (Banglore Trib) 2014
(34) STR 235
2. Calderys India Refractories 2014(36) STR 102
(Tri- Mumbai)
3. Sagar Enterprises 2010 (18) STR 212 (Tri-
Ahmedabad)
4. Machino Basel India Limited 2011 (273) ELT
53 (P & H HC)
5. Vinayaka Travels 2011 (23) STR (Karnataka
HC)

23. Amended Sections of Penalty
(.w.e.f. – 14.05.2015)
Section No. Old Provision New Provision
76 (No Fraud)
& 78 (Fraud)
100 Rs per day or 1%
per month from date of
default. Maximum
Penalty was barred at
50% of Service Tax
Liability
Non discretionary Minimum Penalty.
-- Fraud – 100 %
-- others– 10%
No such Waiver –
except reasonable cause
as mentioned in Section
80.
Complete Waiver of Penalty if ST along
with Interest is paid within 30 days of date
of service of notice.
In case of fraud, penalty can be reduced up
to 15% if reduced penalty + Intt +
Service Tax is paid within 30 days of
notice.
Only 25 % of penalty has to be paid if the ST
+ Intt. is paid within 30 days of order. In
case of fraud penalty also has to be paid.

24. Different Scenarios in Penalty
Provisions from 14.05.2015
Situation Applicable Provisions
SCN issued after 14.05.2015 New Sections 76 and 78 shall
apply.
SCN issued before 14.05.2015 but
order passed thereafter
New Sections 76 and 78 as laid
down by transitory provision of
section 78B.
Order in original issued before
14.05.2015
Old sections 76 and 78 subject to
reasonable clause u/s 80.

25. THANK YOU
Kindly Give your reviews and suggestions about the session :
CA. Keshav Garg
Ph. & WhatsApp : +91-9888-090-008
E-mail: servicetaxindia@outlook.com
mygst.mytax@gmail.com
For Regular updates on Indirect taxes –
Goods and Service Tax
WhatsApp <Name> <Mobile No> <City>
at +91-9888-090-008.
Mail your queries at: mygst.mytax@gmail.com