CESTAT: TDS Paid to Overseas Service Provider Not Taxable Under Service Tax

CESTAT: TDS Paid to Overseas Service Provider Not Taxable Under Service Tax

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

D. M. Misra (Judicial Member) and Pullela Nageswara Rao (Technical Member) noted that after the appellant realised that the TDS had been wrongly paid, a refund application was filed.

The appellant/assessee, a manufacturer and seller of electronic connectors, is liable to pay service tax under the reverse charge mechanism under Section 66A of the Finance Act, 1994, on the IPR services and Management Consultancy services it imports from related parties located outside India.

Acting on intelligence, the authorities initiated an investigation and issued a show cause notice to the appellant for recovering service tax on imports of technology under the IPR service and management consulting services from group companies abroad, which had been wrongly exempted from service tax under the notification dated September 10, 2004, since April 2011. The demand was confirmed on adjudication, including service tax on the TDS amount paid, with interest and penalty.

The assessee argued that there was no suppression of facts in claiming the benefit of the notification, as the TDS amount was being paid to the government and therefore no facts were being concealed.

The department argued that by failing to include the TDS amount in the gross taxable value and discharge service tax on it, the appellant had deliberately misused the exemption notification to evade service tax payment.

The issue for consideration was whether to include the TDS amount in the gross taxable value for service tax purposes.

The tribunal noted that Section 195 of the Income Tax Act, 1961, requires tax to be deducted at source when payments are made to non-residents or foreign companies. This is to prevent revenue loss in case the non-resident does not file an income tax return in India. As such, TDS is a tax obligation that cannot be considered part of the value or consideration for the transaction, goods, or services. It is common for business contracts or agreements to specify the value or consideration and who will bear the TDS obligation. However, this does not mean that TDS is part of the value or consideration. The agreed-upon value or consideration is strictly the choice of the parties, while TDS depends on the rate in force at the relevant time.

The tribunal upheld the appeal and set aside the orders.