Valuation of services

Valuation of Services
Presented by:
CA Gaurav Gupta
FCA, LLB, DISA
Partner
MGS & Co.
Institute of Chartered Accountant of India
May 25, 2014
Certificate Course on Indirect Taxes
Bilaspur

• Service defined:
(44) “service” means any activity carried out by a person for another for consideration,
and includes a declared service, but shall not include—***
• Consideration explained in Section 67 - “consideration” includes any amount that is
payable for the taxable services provided or to be provided;
• The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land
Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. and Others -
AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not
defined in the U.P. Act, its meaning as derived from the definition of the expression in
Section 2(d) of the Contract Act, 1872 could be considered. After considering the
definition of the expression in the Contract Act and referring to Black’s Law Dictionary;
other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court
held that : the in escapable conclusion that follows is that consideration means a
reasonable equivalent for other valuable benefit passed on by the promisor to the
promisee or by the transfer of to the transferee.
Scheme of Act
Valuation of Services CA Gaurav Gupta 3

• New charging provision (Section 66B)
“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of
twelve per cent. on the value of all services, other than those services 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.”
• In Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India - 2013
(29) S.T.R. 9 (Del.), the Delhi High Court was essentially considering a challenge of
the validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. This
provision was challenged to the extent it includes reimbursement of expenses in the
value of taxable services for the purpose of levy of service tax. Apart from the
challenge to its constitutionality, the provision was challenged on the ground that it is
ultra vires the provisions of Sections 66 and 67 of the Act.
Scheme of Act

• The High Court held that Section 66 of the Act levies tax only on the taxable
services; that this is an inbuilt mechanism to ensure that only the taxable service
shall be evaluated under the provisions of Section 67; that on construing the
provisions of Sections 66 and 67(1)(i) together and harmoniously, it is clear
that the value of taxable service shall be the gross amount charged by the
service provider; and nothing more and nothing less than the consideration
paid as a quid pro quo for the service can be brought to charge.
• The High Court further held that the common thread that runs through Sections 66
and 67 and 94 (the Rule making power), manifests that only the service actually
provided by the service provider can be valued and assessed to tax.
Scheme of Act

• Composite Contracts
G.D.Builders v UOI [2013 (32) S.T.R. 673 (Del.)]
Service Tax is payable and chargeable on the service element of the contract for
construction of industrial and commercial complexes and contract for construction of
complexes as specified and in case of a composite contract, the service element
should be bifurcated and ascertained and then taxed.
Only the service component can be brought to tax as per provisions of Section 67
which stipulates that value of taxable service is the “gross amount charged” by the
service provider for such services provided or to be provided by him and not the
value of the goods provided by customers of service provider and the Service Tax
cannot be charged on the value of the goods used in the contract.
CCE v BALAJI TIRUPATI ENTERPRISES [2013 (32) S.T.R. 530 (All.)
The goods which were deemed to be sold in the execution of works contract that
shall not enter into the purview of the levy of Service Tax.
Scheme of Act

Scheme of Act
Bhayana Builders P. Ltd. [2013 (32) S.T.R. 49 (Tri. - LB)]
The value of goods and materials supplied free of cost by a service recipient to the
provider of the taxable construction service, being neither monetary or non-monetary
consideration paid by or flowing from the service recipient, accruing to the benefit of
service provider, would be outside the taxable value or the gross amount charged,
within the meaning of the later expression in Section 67 of the Finance Act, 1994.

• FREIGHTLINKS INTERNATIONAL (I) P. LTD [2014 (33) S.T.R. 711 (Tri. - Bang.)]
Ocean freight is nothing but reimbursement of actual expenditure and when the Steamer
Agent collecting the freight on behalf of the shipping company and charging his
commission separately it is nothing but a reimbursement of the cost. It was also submitted
that in majority of the cases the appellant is not even a Steamer Agent but books shipping
space for other customers and in such cases he is only doing this for the customers and
charging for his services.

Valuation – Section and Rules
Service tax is levied on various taxable services on the basis of value charged by the
service provider. Its valuation is governed by section 67 of the Finance Act, 1994 read with
the rules under Service Tax (Determination of Value) Rules, 2006.
Section 67 of the Finance Act,1994 deals with valuation of taxable services and intends to
define what constitutes the value received by the service provider as “consideration” from
the service recipient for the service provided.
Implicit in this legislative architecture is the concept that any consideration whether
monetary or otherwise should have flown or should flow from the service recipient to the
service provider and should accrue to the benefit of the later. It means that if any party has
rendered a free of cost service, then they cannot charge service tax on any deemed value.

Value of taxable
services
Provision of service is
for a consideration in
money
Gross amount
charged by the service
provider
for a consideration
wholly or partly not in
money
Amount determined
in money as is
equivalent to the
consideration
for a consideration
which is not
ascertainable
Amount as may be
determined in the
prescribed manner -
Rule 3 of Service Tax
(Determination of
Value) Rules, 2006
Special Cases :
- Works Contract
- Money changing
- Resturant and
catering
Rule 2A, 2B and 2C of
Service Tax
(Determination of
Value) Rules, 2006
Expenditure incurred
on behalf of service
recipient
Rule 5 of Service Tax
(Determination of
Value) Rules, 2006
Specific Inclusions /
Exclusions
Rule 6 of of Service
Tax (Determination of
Value) Rules, 2006

Section 67
Valuation of
Services
for a consideration in
money
for a consideration
wholly or partly not in
money
for a consideration
which is not
ascertainable

Section 67
• Definition of Gross Amount
(b) “gross amount charged” includes payment by cheque, credit card,
deduction from account and any form of payment by issue of credit notes or debit
notes and book adjustment, and any amount credited or debited, as the case may be,
to any account, whether called “Suspense account” or by any other name, in the
books of account of a person liable to pay service tax, where the transaction of
taxable service is with any associated enterprise.

Section 67

Section 67
Gross consideration where consideration is in money and kind
In case, where the service provider receives consideration partially or wholly in kind, it is
provided that in such cases, the consideration shall be equivalent to the sum of
consideration in money and money value of the consideration in kind. Such value shall be
considered to be inclusive of service tax.
For eg. If an engineer designed the house of a car dealer and the car dealer gave him a
brand new car, then the gross value of services (inclusive of service tax) of the engineer
shall be the value of car. In order to reach at the taxable value, such value needs to be
reduced by the amount of service tax calculated as under:
Taxable Value = value of car x 100
112.36

Deemed Valuation must be established:
• Magarpatta Township Dev. & Const. Co. Ltd. v CCE, Pune
The practice of taking security deposit for the premises rented out on lease basis is common
through out the country and the amount of security deposit taken also varies from place to
place and also depends on the property, whether it is for commercial or residential purpose.
This is a general practice prevalent through out the country.
There is no evidence available on record led by the revenue to show that the notional
interest on the interest free security deposit has influenced the consideration received for
renting and it is only a presumption on the part of the revenue.
Relied on the judgement of - I.S.P.L. Industries Ltd. [2003 (154) E.L.T. 3 (S.C.)]

Section 67
Cum Tax Computation
Where the gross amount charged by a service provider, for the service provided or to be
provided is inclusive of service tax payable, the value of such taxable service shall be such
amount as, with the addition of tax payable, is equal to the gross amount charged.
Taxable Value = value of car x 100
112.36
• CCE v. M/s. Maruti Udyog Ltd.- 2002 (141) E.L.T. 3 (S.C.)
• Advantage Media Consultant reported in 2008 (10) S.T.R. 449 (Tri. - Cal.)
It was held in above cases that cum tax value has to be adopted when tax is not
collected separately in view of the provisions of Section 67 of Finance Act, 1994.

Value Rules
Determination of value in cases where consideration is not ascertainable
Rule 3 of the Service Tax (Determination of Value) Rules, 2006 provides for the method
of determination of value of taxable services in cases where consideration cannot be
determined. It is pertinent to mention that though under this Rule, the valuation is done
on best judgement by the assessee, no disclosure is required to be made for the method
adopted.
Best Judgement
Option I – Similar
rate
Option II – As
determined
(atleast cost of
services)

Value Rules
The Rule provides that the value in such cases shall be determined in the following
manner:
• Method I:
Value of such taxable service = 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;
• Method II:
This method shall be applied when value cannot be determined by Method I. It is
provided that in all such cases, value of taxable services shall be determined by the
service provider. However, in no case such value can be less than the cost of
provision of such taxable service.

Value Rules
Power of Adjudicating Officer
Since the value determined under Rule 3 is subjective to the intelligence of the assessee, thus,
Central Excise Officer has been empowered vide Rule 4 of the Service tax (Determination of
Value) Rules, 2006 the Central Excise Officer to ask assessee to furnish documents which are
necessary to satisfy the Officer as to the accuracy of valuation adopted. However, incase the
Central Excise Officer differs with the assessee in the method of adoption of value of taxable
services, he shall first issue a show cause notice and then, after affording reasonable opportunity
of being hear to the assessee shall pass necessary order in respect of determining the valuation in
such case.

Reimbursement
Reimbursement of expenditure incurred during provision of Services
Rule 5(1) of the Service tax (Determination of Value) Rules, 2006 provides that 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.

Reimbursement
• Pure Agent : Rule 5
The only exclusion carved out in the above case, is when the expenditure is incurred
by the service provider in the capacity of a “Pure Agent”.
"Pure agent" has been defined as 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.

Reimbursement
In case the service provider while incurring the expenditure qualifies as a Pure Agent,
then in such a case, the expenditure shall not be added for the purpose of
determination of taxable value if all of the following conditions are satisfied:
 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;
 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;
 the recipient of service is liable to make payment to the third party;
 the recipient of service authorises the service provider to make payment on his
behalf;

Reimbursement
 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;
 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;
 the service provider recovers from the recipient of service only such amount as has
been paid by him to the third party; and
 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.

Reimbursement
Illustration 1.—X contracts with Y, a real estate agent to sell his house and thereupon Y
gives an advertisement in television. Y billed X including charges for Television
advertisement and paid service tax on the total consideration billed. In such a case,
consideration for the service provided is what X pays to Y. Y does not act as an agent
behalf of X when obtaining the television advertisement even if the cost of television
advertisement is mentioned separately in the invoice issued by X. Advertising service is
an input service for the estate agent in order to enable or facilitate him to perform his
services as an estate agent.
Illustration 2.—In the course of providing a taxable service, a service provider incurs costs
such as traveling expenses, postage, telephone, etc., and may indicate these items
separately on the invoice issued to the recipient of service. In such a case, the service
provider is not acting as an agent of the recipient of service but procures such

Reimbursement
inputs or input service on his own account for providing the taxable service. Such
expenses do not become reimbursable expenditure merely because they are indicated
separately in the invoice issued by the service provider to the recipient of service.
Illustration 3.—A contracts with B, an architect for building a house. During the course
of providing the taxable service, B incurs expenses such as telephone charges, air
travel tickets, hotel accommodation, etc., to enable him to effectively perform the
provision of services to A. In such a case, in whatever form B recovers such
expenditure from A, whether as a separately itemised expense or as part of an inclusive
overall fee, service tax is payable on the total amount charged by B. Value of the
taxable service for charging service tax is what A pays to B.

Reimbursement
• Sri Bhagavathy Traders [2011 (24) S.T.R. 290 (Tri. - LB)]
A person selling the goods to another cannot treat cost of raw materials or the cost of labour or other
cost components for inputs services, which went into the manufacture of the said goods as
reimbursements. If the buyer enters into a contract for supply of raw materials after negotiating prices
from the supplier for the raw materials and the raw materials are received by the manufacturer and
the manufacturer pays the amounts to the supplier of raw materials and recovers the same from the
buyer, it can certainly be considered as reimbursements. It is to be noted that in such a case, the
manufacturer has no role about choosing the source of the materials procured or the price at
which the materials procured and the manufacturer is not under any legal or contractual
obligation to pay the amount to the supplier. However, if the manufacturer procures raw materials
from a source of his choice at a price negotiated between him and supplier of the raw materials and
uses the material for manufacture of the final products which he sells, the question of his collecting
the cost of raw materials as reimbursement does not arise. The concept of reimbursement will arise
only when the person actually paying was under no obligation to pay the amount and he pays the
amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the
goods.

Reimbursement
• In Rolex Logistics Pvt. Ltd v. CST, Bangalore 2009 -TMI - CESTAT
BANGLORE), it was held that reimbursement of expenses are not for
services rendered but expenditure incurred on behalf of client by service
provider. Gross amount for service rendered means only for services
rendered. It also interpreted 'reimbursement' as payments made on
behalf of service recipient by service provider in the course of rendering
services. The gross receipt for the services rendered means only for the
services rendered. The value for the purpose of charging service tax as
in the gross amount received as consideration for provision of service.

Reimbursement
• The recent decision of Delhi High Court in the matter of
Intercontinental Consultants and Technocrats Pvt. Ltd v UOI & Anr. [
W.P. (C) 6370/2008 ] has clarified the position further as it holds that
the expenditure or costs incurred by the service provider in the course
of providing the taxable service can never be considered as the gross
amount charged by the service provider “for such service” provided by
him and accordingly has held Rule 5(1) of the Service Tax (Determination
of Value) Rules, 2006 as ultravires the provisions of Section 66 and 67 of
Finance Act, 1994 to the extent it includes re-imbursement of expenses
in the value of taxable services for the purposes of levy of service tax. In
the present matter, the assessee was a consulting engineer and was not
charging Service Tax on reimbursements like travel, hotel stay etc. and
the appeal was against the demand of Service Tax on such
reimbursements.

Reimbursement
• Krishan Kumar [2014 (33) S.T.R. 60 (Tri. - Del.)]
Appellant’s contention is that expenses incurred by the appellants on behalf of
I.B.P./IOC like Tea/Coffee/Consumable salary of employees, handling losses generator
set expenditure, Bank Charges, Electricity Charges, are reimbursed by the I.B.P./IOC
and therefore not liable to service tax. We find that as per Section 67 of the Act, value of
any taxable service shall be gross amount charged by the service provider for such
service provided or to be provided. It does not provide for any deduction from the gross
value for providing the service. We therefore do not agree with contention of the
appellants that no service tax is payable on reimbursable expenses borne by the
appellants and accordingly reject the same.

Reimbursement
• ICC REALITY (INDIA) PVT. LTD. v CCE [2013 (32) S.T.R. 427 (Tri. - Mumbai)]
As per the terms and conditions of the Lease Agreements, the tenants have to pay
electricity charges directly to the MSEB and the appellants are also providing electricity
through generator set in case there is a power failure and the appellants are charging for
the same.
Electricity is specifically covered under Tariff Heading 27 of the Central Excise Tariff Act.
Electricity is also covered under VAT scheudle and charged to Nil rate of tax. Thus,
electricity is goods.
Therefore, the supply of electricity to tenant amounts to sale of goods and not supply of
service. Thus, electricity charges collected from the tenants cannot be formed part of
the assessable value for the purpose of Service Tax as provider of renting of immovable
properties.

Reimbursement
Is Rule 5(1) ultravires Section 66 and Section 67?
The matter has been decided in the appeal matter before Hon’ble Delhi High Court in
W.P. (C) 6370/2008 of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union
of India & ANR (2012-TIOL-966-HC-DEL-ST).
The Petitioner Company was engaged in providing consulting engineer services and
receives payments not only for its service but also for reimbursed expenses incurred by it
such as air travel, hotel stay, etc. It was paying service tax in respect of its services and
not in respect of the expenses incurred by it, which were reimbursed by the clients.
Department sought service tax on the expenses reimbursed by invoking the provisions of
Rule 5(1) of the Service Tax (Determination of value) Rules 2006 which was challenged
by the Company in the Writ Petition.

Reimbursement
Hon’ble High Court rules in favour of assessee holding Rule 5(1) as ultravires holding that
rules can never exceed or go beyond the section which provides for the charge or
collection of the service tax. The Court held that the charge of service tax under section
66 (now 66B) is on the value of taxable services. It is only the value of such service are
rendered by the assessee, which can be brought to charge and nothing more. The
quantification of the value of the service can therefore never exceed the gross amount
charged by the service provider for the service provided by him. The expenditure or costs
incurred by the service provider in the course of providing the taxable service can never be
considered as the gross amount charged by the service provider "for such service"
provided by him. Thus, the Court has made clear that any value which does not form part
of gross value towards taxable services cannot be brought to tax under Finance Act, 1994.

Specific Services
Determination of Value
Rules
Special Cases :
- Works Contract
- Money changing
- Restaurant and catering
Expenditure incurred on
behalf of service recipient
Specific Inclusions /
Exclusions

Specific Services
Determination of taxable value for Specific Services
The Service Tax (Determination of Value) Rules, 2006 provides for specific provisions in
case of certain services. The value of certain components or transactions as unique to
certain service and their inclusion in the value for the purpose of determination of taxable
value is provided in these provisions. The various services and provisions thereon are
discussed in the following paragraphs:
Works Contract Services
Rule 2A of Service tax (Determination of Value) Rules, 2006 deals with valuation provision
in case of works contract. It has been provided that the Rules pertains to works contract as
is referred to in clause (8) of section 66E of the Finance Act, 1994.

Understanding Works Contract
Types of contract
Sale Contract
VAT Applicable
Works contract
Levy of VAT on
transfer of property
in goods and
service tax on
services
Service Contracts
Service Tax
Applicable
NIRC – Chandigarh Branch CA Gaurav Gupta 35

Sales or Works Contract
Dominant Nature Test
• Manner of treatment of such composite transactions for the purpose of taxation, i.e. are
they to be treated as sale of goods or works contract or provision of service, has been
laid down by The Supreme Court in Bharat Sanchar Nigam Limited vs. Union of India
[2006(2)STR161(SC)]
o If the dominant intention is to buy a chattel – it will be a sale even if some labour is
required e.g. a handicapped person goes to Maruti Udyog and wants modification in
the car.
o If dominant intention is to buy skill and labour and use of material is incidental, it will be
works contract. Example, M.F.Hussain drawing a painting of Madhuri Dixit.

Material Merely consumed – No
Works Contract
Dominant Nature Test
• “In a contract of sale, the main object is the transfer of Property and delivery of the
possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works &
Labour” (Hindustan Aeronautics Ltd. 55-STC 314-SC)
• But where material merely consumed, not a work contract.
• Pest Control India Ltd. v. Union of India & Ors. [(1989) 75 STC 188]
o In pest control, by process of spraying or applying chemicals, a place is treated against
insects and pests but in the process the chemicals are themselves consumed and there
remains nothing in which property is transferred, and thus the same is not a works
contract
• Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam vs. M. K.
Velu reported in [(1993) 89 STC 40]
o In a contract to display fireworks, fireworks got consumed in the process of execution of
the work. It was held that thereafter no tangible property remained and thus, there was
no transfer of goods.

Works Contract -
Examples
Works
Contract
building
construc
tion
manufa
cture
installati
on
fabricati
on
Commis
sioning
Repair
improve
ment
fitting
out
processi
ng
erection

Definition of Works Contract
As per Section 65B (54) of Finance Act, 1994:
“works contract" means a contract wherein transfer of property in goods involved in the
execution of such contract is leviable to tax as sale of goods and such contract is for the
purpose of carrying out:
construction, improvement,
erection, repair,
commissioning, maintenance,
installation, renovation,
completion, alteration,
of any movable or immovable property or for carrying out any other similar activity or a part
thereof in relation to such property;

Types of Works Contract
• Erection, commissioning or installation of plant, machinery, equipment or structures, etc
• Construction of a new building or a civil structure or a part thereof,
• Laying a pipeline or conduit
• Construction of a new residential complex or a part thereof; or
• Completion and finishing services
• Repair and Annual Maintainence Contracts
• Turnkey projects including engineering, procurement and construction or commissioning
(EPC) projects.

Whether Works Contract
Repair of vehicle
Yes
Housekeeping with toiletries Yes
Annual Maintenance Contract
of software
No
Cargo Handling services No
Works Contract

Levy of Tax on Works
Contract
Methods of Computation of Value of Taxable Services
Determination of
service portion
in Works
Contract
Actual
Rule 2A (Option
I)
Prescribed
Percentage
Rule 2A (Option
I)
Abatement
(when land
value is
included)
Notification No.
26/2012

Valuation
Section 67 read with Service Tax Determination of Value Rules, 2006
Rule 2A:
Determination of Value of Service Portion in the Execution of a Works Contract
[only for determination of service portion in the execution of a works contract,
referred to in clause (h) of section 66E of the Act]
Option – I
Determination of Actual Service charges
x 12.36%
Option – II
Total Amount Charged
x Specified Taxable Percentage
x 12.36%
- Option II is available only when Option I is not possible for determination of value
- It is clarified that the provider of taxable service shall not take CENVAT credit of duties or
cess paid on any inputs, used in or in relation to the said works contract, under the
provisions of CENVAT Credit Rules, 2004

Valuation
Gross amount Charged
Less:
(i) Value of property in goods transferred,
(ii) value added tax or sales tax
Value of Works Contract Shall include:
(i) Labour charges
(ii) Payment to sub-contractor for labour and services;
(iii) Planning, designing and architect’s fees;
(iv) Hire charges for machinery and tools
(v) Cost of Consumables such as water, electricity, fuel
(vi) Cost of establishment of the contractor relatable to supply of labour and services;
(vii) Other similar expenses; and
(viii) Profit earned by the service provider relatable to supply of labour and services.
Rule 2A : Option – I

Valuation
Gross amount includes Gross amount does not include
Labour charges for execution of the works Value of transfer of property in goods involved in the
execution of the said works contract.
Note:
Where Value Added Tax has been paid on the actual
value of transfer of property in goods involved in the
execution of the works contract, then such value
adopted for the purposes of payment of Value Added
Tax, shall be taken as the value of transfer of property in
goods involved in the execution of the said works
contract.
Amount paid to a sub-contractor for labour and services
Charges for planning, designing and architect’s fees
Charges for obtaining on hire or otherwise, machinery
and tools used for the execution of the works contract
Cost of consumables such as water, electricity, fuel,
used in the execution of the works contract
Cost of establishment of the contractor relatable to
supply of labour and services and other similar expenses
relatable to supply of labour and services
Value Added Tax (VAT) or sales tax, as the case may be,
paid, if any, on transfer of property in goods involved in
the execution of the said works contract
Profit earned by the service provider relatable to supply
of labour and services

Valuation
Example:
o Mr X enters into a agreement with Mr Y for supply and erection of plant in his factory.
o Total Value of contract – Rs 100,00,000
o Value of Goods on which VAT shall be payable at actual basis – Rs 55,00,000.
o Value of Services = Rs . 45,00,000 which shall be exigible to Service Tax @12.36%

Valuation
Rule 2A : Option – II
S. No. Nature of contract Taxable Value
1. Execution of Original Works 40%
2. Execution of contract for maintenance, repair, reconditioning or servicing of
any goods
70%
3. Other works contracts not covered by 1 & 2 above (including completion and
finishing services such as glazing, plastering, installation of electrical fittings
of an immovable property).
60%
1. Original works means
(i) All new constructions;
(ii) All types of additions and alterations to abandoned or damaged structures to make them workable;
(iii) Erection, commissioning or installation of plant, machinery or equipment whether pre-fabricated or
otherwise.
2. Total amount means the gross amount charged plus the value of any material supplied under the same contract or
any other contract. Where supply is free of cost, value shall be determined on FMV.
3. No input tax credit of excise duty paid on goods, property transferred in execution of works contract. However taxes
paid on capital goods and input services will be available.

Effective Tax on Works Contract
Option II
Original Works viz.,
new Constructions,
installation of new
machinery
Valuation – 40%
Effective Rate – 4.944%
Maintenance, repairs,
restoration, servicing etc. of
goods
Valuation – 70%
Other Contracts, including
finishing services of an
immovable proeprty
Valuation – 60%

Valuation
Example:
o Mr X enters into a agreement with Mr Y for supply and erection of plant in his factory.
o Total Value of contract – Rs 100,00,000
o No separate value of Goods.
o Value of Services = 40% of total works contract (being original works) = Rs . 40,00,000 which shall
be exigible to Service Tax @12.36%
Rule 2A : Option – II

Service Tax on Works Contract
Can more than 100% tax be levied under deemed value
• In absence of actual value of goods and services, when both state VAT and Service Tax
provide for deemed value and sum total exceeds 100% of value of service, has Service Tax
been levied on goods portion?
• G D Buidlers [2013 (32) S.T.R. 673 (Del.)]
The notifications in questions dated 10th September, 2004, 7th June, 2005 and 1st March, 2006 granting
exemption of 67% towards the value of the material used for computing the Service Tax payable ensure that
the service element is taxable. It is an alternative to an otherwise subjective determination in each case,
which may be cumbersome and require a detailed examination for ascertainment of the service element.
The formula prescribed is not mandatory or compulsory. Further, it will apply at the option of an assesee. It is
also not contrary to the charging section/provisions of the Finance Act imposing levy of Service Tax. The aim
and purpose of the said notifications is to provide a convenient, alternative, optional and hassle free method
for payment of Service Tax, provided the requirements mentioned in the notifications are satisfied.

Money Changing
Rule 2B – Money Changing
Transaction Options Method of determination of Value
When exchanged from or
to Indian Rupees
When Reserve Bank of
India (RBI) reference rate
for that currency is available
at the time of exchange
Value = (Buying rate or the selling rate - RBI reference
rate) * total units of currency.
Example I: US$1000 are sold by a
customer at the rate of Rupees 55 per US$. RBI
reference rate for US$ is Rupees 55.50 for that
day. The taxable value shall be Rupees 500
[(55.50-55)*100].
Example II: INR70000 is changed into
Great Britain Pound (GBP) and the exchange rate
offered is Rupees 70, thereby giving GBP 1000.
RBI reference rate for that day for GBP is Rupees
69. The taxable value shall be Rupees 1000 [(70-
69)*1000].

Money Changing
Rule 2B – Money Changing
Transaction Options Method of determination of Value
When RBI reference rate for
that currency is not available
at the time of exchange
Value = 1% of the gross amount of Indian Rupees provided
or received
Neither of the currencies
exchanged is Indian Rupee
Value = 1% of the lesser of the two amounts as arrived by
converting any of the two currencies into Indian Rupee on
that day at the reference rate provided by RBI.
Example: 1000 USD exchanged for 780 GBP, when RBI
reference rate was 1 USD = INR 55 and GBP = INR 70.
Then, the value = 1% of Rs 54,600 (780 * 70) or Rs. 55,000
(1000*55), whichever is less, viz. Rs 546.

Restaurant / Outdoor
Catering
Rule 2C – Supply of food and drinks in a restaurant or as outdoor catering
S.No. Description of Taxable Services Value of Service
1 Service involved in the supply of food or any other article of
human consumption or any drink at a restaurant
40% of the Total amount
2 Service involved in the supply of food or any other article of
human consumption or any drink as outdoor catering service
60% of the Total amount
“total amount” has been provided to mean the sum total of the gross amount and the value of all
goods, excluding the value added tax, if any, levied on goods or services supplied free of cost for use
in or in relation to the supply of food or any other article of human consumption or any drink, under
the same contract or any other contract. In case , where the value of goods or services supplied free
of cost is not ascertainable, the same shall be determined on the basis of the fair market value of the
goods or services that have closely available resemblance.

Specific Inclusion
Service Inclusion /
Exclusion
Particular of item to be included / excluded in taxable value
Stock Broker Inclusion Commission or brokerage charged by a broker on the sale or purchase of securities
including the commission or brokerage paid by the stock-broker to any sub-broker
Telecommunication Inclusion Adjustments made by the telegraph authority from any deposits made by the
subscriber at the time of application for telephone connection or pager or facsimile or
telegraph or telex or for leased circuit
Insurer Inclusion Amount of premium charged from the policy holder
Air travel agent Inclusion Commission received from the airline
Actuary, or
intermediary or
insurance
intermediary or
insurance agent
Inclusion commission, fee or any other sum as received from the insurer
Authorised service
station
Inclusion Reimbursement received from manufacturer for carrying out any service of any
motor car, light motor vehicle or two wheeled motor vehicle manufactured by such
manufacturer

Specific Inclusion
Service Inclusion /
Exclusion
Rail travel agent Inclusion Commission or any amount received from the Railways or the customer
Clearing and
forwarding agent
Inclusion Remuneration or commission, paid by the client for the services provided
Insurance agent Inclusion Commission, fee or any other sum paid by the insurer in relation to insurance
auxiliary services
Any service
provider
Inclusion Amount realised as demurrage or by any other name whatever called for the
provision of a service beyond the period originally contracted or in any other manner
relatable to the provision of service. This portion is relevant in the context of
negative list where such amounts may be collected in the name of demurrage but will
actually be in all respects a service. Thus, where the amounts do not actually pertain
to a demurrage etc. and were received as were relating to a service, such amounts
shall be included in the taxable value of services.
Telecommunication Exclusion initial deposit made by the subscriber at the time of application for telephone
connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit
Travel agent Exclusion Airfare collected
Travel agent Exclusion Rail fare
Any Service Exclusion interest on delayed payment of any consideration for the provision of services or sale
of movable or immovable property

Specific Inclusion
Service Inclusion /
Exclusion
Air Travel Exclusion Taxes levied by any Government on any passenger travelling by air, if shown
separately on the ticket, or the invoice for such ticket, issued to the passenger
Any Service Exclusion accidental damages due to unforeseen actions not relatable to the provision of
service
Subsidies and
grants disbursed by
government
Exclusion Such grant or subsidy should not be directly affecting the value of services

Specified Services
Service Inclusion / Exclusion Nature of amount Reference / Source
Stock Broker Inclusion Turnover charges, NSE/BSE/NSDL/CSDL transaction
charges, DEMAT charges and SEBI fees
Instruction F. No. 187/107/2010-
CX. 4, dated 17-9-2010
Stock Broker Exclusions Security Transaction Tax (STT) and Stamp duty Instruction F. No. 187/107/2010-
CX. 4, dated 17-9-2010
Telecommunication
service
Inclusion Gross amount of recharge coupons or prepaid cards or
the like, as charged from the subscriber or ultimate user
F.No. 334/3/2011-TRU, dated 28-2-
2011
Telecommunication
services
Exclusion Surcharge for delayed payment of telephone bills Circular No. 96/7/2007-S.T., dated
23-8-2007
Air Service Inclusion In case of an international ticket value to include, value of
the entire journey even if journey with multiple stopovers
Circular No. 96/7/2007-S.T., dated
23-8-2007
Air Service Inclusion YQ and YR charges F. No. 341/52/2006-TRU, dated 18-
9-2007
Outdoor Catering Exclusion Amount billed to IRCTC towards cost of food supplied to
the passengers by the private contractor is transferred by
Railways to IRCTC which in turns transfers it to the private
contractor
Letter No. 332/38/2006-TRU,
dated 1-8-2006

Specified Services
CHA services Exclusion Where all the following conditions are satisfied, -
(a) The activity/service for which a charge is made,
should be in addition to provision of CHA service;
(b) There should be arrangement between the customer
& the CHA which authorizes or allows the CHA to (i)
arrange for such activities/services for the customer; and
(ii) make payments to other service providers on his
behalf;
(c) The CHA does not use the activities/services for his
own benefit or for the benefit of his other customers;
(d) The CHA recovers the reimbursements on ‘actual’
basis i.e. without any mark-up or margin. In case of CHA
includes any mark-up or profit margin on any service,
then the entire charge (and not the mark-up alone) for
that particular activity/service shall be included in the
taxable value;
(e) CHA should provide evidence to prove nexus between
the other (than CHA) services provided and the
reimbursable amounts. It is not necessary such evidence
Circular No. 119/13/2009-S.T.,
dated 21-12-2009

Specified Services
Commercial
coaching
Exclusion cost of sale of books, notes, etc., when charged separately
from students
Brilliance College [2011 (24) S.T.R.
450 (Tri. - Bang.)]
Telecommunication
services
Inclusion Value of SIM cards Idea Mobile communication Ltd.
[2011 (23) S.T.R. 433 (S.C.)]
Photography
Services
Exclusion Raw material consumed during provision of Photography
service is within definition of sale according to Article
366(29A) of Constitution of India
IN RE :Kohli Brothers Labs (P) Ltd [
2009 (15) S.T.R. 137 (Commr.
Appl.)]
Clearing and
forwarding agent
Exclusion Actual expenses of C&F Agent, when reimbursed towards
freight
J.N. Traders [2007 (7) S.T.R. 216
(Tri. - Chennai)]

Disclaimer
This presentation has been prepared for internal use of ICAI and its members. The contents of this document are
solely for informational purpose. It does not constitute professional advice or a formal recommendation. The
presentation is made with utmost professional caution but in no manner guarantees the content for use by any
person. It is suggested to go through original statute / notification / circular / pronouncements before relying on the
matter given. The presentation is meant for general guidance and no responsibility for loss arising to any person
acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.
Professional advice recommended to be sought before any action or refrainment.
CA Gaurav Gupta
Partner
MGS & Co.
507 B, D-Mall, Netaji Subhash Palace, Delhi - 110034
+91 11 32962487
+91 11 2735 2487
+91 98110 13940
cagauravmgs@gmail.com
Thank you

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