TDS Paid From Assessee’s Own Account Can’t Form Part Of Consideration Of Service Charges Paid To Overseas Service Provider, No Service Tax Payable: CESTAT

The Bangalore Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the TDS amount paid to the Income Tax Department by the appellant from his own account cannot form part of the consideration of the service charges paid to the overseas service provider, and service tax is not payable.

The bench of D. M. Misra (Judicial Member) and Pullela Nageswara Rao (Technical Member) have observed that subsequent to the payment of the TDS, realizing that it was wrongly paid, a refund application was filed.

The appellant/assessee is in the business of manufacturing and selling electronic connectors. The ‘IPR services’ and ‘Management Consultancy’ services imported from related parties located outside India are chargeable to service tax under the reverse charge mechanism under Section 66A of the Finance Act, 1994.

On the basis of intelligence, the appellant had wrongly availed himself of the exemption notification dated September 10, 2004, to the extent of research and development cess paid on the imports of technology under the IPR service. It has imported management ‘consulting services' from its group companies abroad but has not discharged service tax on the TDS amount paid from April 2011 onwards. The investigation was initiated, and on completion, a show cause notice was issued to the appellant for recovery of an amount under the category of intellectual property other than copyright service. An amount was also proposed to be recovered from the TDS amount with interest and a proposal for a penalty. On adjudication, the demand was confirmed.

The assessee contended that there is no question of suppression of facts with respect to availing of the benefit of notification. The TDS amount is being paid to the government; no fact is suppressed.

The department contended that since the appellant had failed to discharge service tax on the TDS amount by including it in the gross taxable value, he also wrongly availed of the benefit of notification with intent to evade payment of service tax.

The issue raised was whether the TDS amount should be included in the gross taxable value on which service tax was paid.

The tribunal noted that Section 195 of the Income Tax Act, 1961, deals with tax to be deducted at source when payment is made to non-residents or foreign companies. It is basically to plug any revenue loss that may occur if, by any chance, the non-resident doesn’t file an income tax return in India. Thus, the TDS is a tax obligation that can never take on the character of value or consideration for the transaction, the goods, or the services. It is not uncommon that any business contract or agreement between parties primarily focuses on the value or consideration and then spells out who would bear the TDS obligation. It cannot be construed as meaning that TDS is also a part of such value or consideration. It is also because any value or consideration agreed upon is strictly the choice of the parties, but the TDS depends on the rate in force at the relevant point in time.

The tribunal allowed the appeal and quashed the orders.

Counsel For Appellant: Neethu James

Counsel For Respondent: K. Vishwanath

Case Title: FCI OEN Connectors Ltd Versus Commissioner of Central Tax, Cochin

Case No.: Service Tax Appeal No. 20315 of 2016

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