TDS on Foreign Service Provider Not Part of Taxable Value: CESTAT

TDS on Foreign Service Provider Not Part of Taxable Value: CESTAT

Introduction

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that service tax cannot be levied on the TDS amount deposited with the Government on behalf of a foreign service provider. The ruling reinforces that TDS is a statutory levy, not consideration for services rendered.

Factual Background

• The appellant, Indian Additives Ltd., had an agreement with Chevron Oronite Company LLC (USA) for payment of royalty on net sales of its products.
• While the appellant paid service tax on the royalty remitted to Chevron, the Department alleged non-payment of service tax on the TDS portion deposited with the Government of India.
• Three show cause notices were issued, and the adjudicating authority confirmed the demand with interest and penalty. The Commissioner (Appeals) upheld the order.

Procedural History

Aggrieved, the appellant approached the CESTAT, relying on its earlier rulings where it had been held that TDS does not form part of taxable value.

Contentions and Observations

• Appellant’s Argument:

o Service tax was already discharged on the royalty actually payable to Chevron.

o TDS was a statutory requirement under the Income Tax Act and not part of consideration.

o Under the agreement, Chevron was entitled to receive royalty net of Indian taxes, and the obligation to deposit TDS lay with the appellant.

• Revenue’s Argument:

o Since the appellant bore the TDS burden, it should be treated as part of the consideration for services received.

• CESTAT’s Ruling:

o The bench comprising M. Ajit Kumar (Technical Member) and S.S. Garg (Judicial Member) rejected the Department’s view.

o It held that TDS is a statutory levy and cannot be treated as payment towards services.

o Service tax is chargeable only on the amount billed by the service provider.

o The TDS deposited with the Government does not form part of this value.

o The Tribunal relied on its earlier consistent rulings in the appellant’s own cases and similar matters.

Reasoning and Analysis

This ruling draws a clear line between statutory obligations (like TDS) and consideration for services. It affirms the principle that taxable value must be confined to the contractual amount payable to the foreign service provider, not amounts withheld and deposited with the Indian Government as tax.

Implications

• Provides substantial relief to assessees engaging foreign service providers, shielding them from duplicative tax liability.
• Clarifies that Service Tax (and by extension GST principles) must apply only to actual service consideration, not statutory levies.
• Reinforces consistency in Tribunal’s approach, enhancing taxpayer certainty.