Introduction:
In the erstwhile Service Tax regime, on import of service, tax was levied in the hands of Indian service recipient. The shifting of tax liability on service recipient was for administrative convenience and hence, said concept has been borrowed in GST era. At the same time, it is incumbent upon such importer to withhold Income Tax TDS on payment made to foreign service provider.
In this article, the author highlights the intricacies of TDS withholding which appears to impact the taxable value under GST.
Issue:
Import of services from non-resident person [‘foreign service provider’] attracts TDS under Section 195 of the Income Tax Act, 1961. TDS is withheld by the Indian service recipient on the amount payable to foreign service provider and deposited with the Government. To clarify the taxable value under service tax, the CBEC vide FAQ, 4th Edition, December 2008 stated that taxable value shall be the gross value including TDS.
However, the net receipt in the hands of foreign service provider is reduced to the extent of TDS. To overcome such reduction, it is agreed that foreign service provider would be rewarded with gross amount and applicable TDS shall be deposited by the Indian service recipient.
Such restructured transaction may be understood from the Indian service recipient’s perspective as:
- Contractual Obligation: In line with the contractual obligation qua the foreign service provider, the Indian service recipient would pay the gross value to foreign service provider [say INR 100].
- Statutory Obligation: Additionally, as a statutory obligation under Income Tax laws, the Indian service recipient is mandated to deposit TDS with the Government [say INR 10].
Now the moot question is whether the taxable value for discharging tax should be confined only to the contractual payment [i.e. INR 100] or the amount of TDS should also be added [i.e. INR 10]?
Analysis:
This issue is not alien and has been a matter of dispute in past. In the case of Magarpatta Township Dev. & Construction Co. Ltd. [2016 (43) S.T.R 132 (Tri.-Mumbai)], the assessee engaged foreign architect for technical consultancy services. As per the agreement, the asseesse paid gross amount to the service provider and deposited Income Tax TDS from its own pocket. The Hon’ble CESTAT held that service tax would be payable on the actual consideration charged for the services by foreign service provider and TDS would not be added in taxable value.
The above decision was followed in the case of Hindustan Oil Exploration Co. Ltd. [2019 (25) GSTL 252 (Tri. Chennai)] and TVS Motor Company Ltd. [2021 (55) GSTL 459 (Tri.- Chennai)].
The above decisions were premised on examination of the valuation provisions under Section 67 of the Finance Act, 1994. Section 67 has been discussed in the case of Bhayana Builders (P) Ltd. [2018 (10) GSTL 118 (SC)]. The issue before the Apex Court was whether the free of cost materials supplied by service recipient to the service provider for construction of property would be loaded to the taxable value. The Court observed that tax is payable on the ‘gross amount charged’ i.e., the amount agreed between service provider and service recipient.
The Court interpreted the term ‘gross’ to mean the total agreed amount and the word ‘charged’ was understood to mean the amount recovered by the service provider. The Apex Court held that any amount which is not charged by the service provider cannot be included.
Thus, it can be safely inferred that the contractually agreed amount between parties was considered as ‘gross amount charged’.
At first blush, the ratio of above case law seems very attractive to be followed. Yet, due emphasis needs to be placed upon the valuation provisions in GST law, which is not similarly worded.
Section 15 of the CGST Act provides that taxable value shall be the ‘transaction value’ i.e., the price actually paid or payable, where supplier and recipient are not related, and price is the sole consideration.
A close look at the scope of ‘transaction value’ suggests that the similar valuation provisions were envisaged under the Central Excise and Customs law. Though the term ‘consideration’ is defined in GST law as any direct or indirect payment in relation to the supply; the term ‘sole consideration’ is not defined.
In this context, the decision of Hon’ble Supreme Court in the case of Fiat India Pvt. Ltd. [2012 (283) ELT 161 (SC)] may be referred. The assessee was manufacturing and supplying goods to its customer at a price which was lesser than the manufacturing cost.
The Court inter alia observed that where any additional benefit in the form of cash, kind, services, etc. is present, then price cannot be ‘sole consideration’. The Court held that selling goods below manufacturing cost was with the intent of penetrating into market and would constitute an extra commercial consideration.
Furthermore, in case of Nirulas Corner House Pvt. Ltd. [2012 (286) ELT 46 (Tri.- Delhi)], the Tribunal held that where price is subject to condition that buyer would discharge some obligation having financial implication on behalf of the seller, there is no ‘sole consideration’.
Needless to mention that the presence of ’sole consideration’ would largely depend upon the facts and circumstances of each case. Thus, it needs to be examined whether the contractual payment made to supplier can be equated with ‘sole consideration’, wherein TDS is borne by service recipient.
One school of thought would be that, indirectly, the service provider is financially benefitted, since TDS is not on account of service provider. Furthermore, the service provider may also claim Income Tax benefits of such TDS in the respective foreign country, under the Double Tax Avoidance Agreements. Thus, it appears that owing to such indirect benefits there is no ‘sole consideration’.
The above interpretation could be challenged as deposit of TDS by service recipient is merely to fulfill statutory obligation and there is no indirect favour. Further, the incidence of TDS upon the service recipient is a ‘condition of contract’ and not ‘consideration of contract’.
One should also ponder that the discharge of TDS by the service recipient, albeit from own pocket, is to avoid any non-compliance. Whether the statutory deposit is being made by Indian service recipient or not, it makes no difference to the foreign service provider.
Conclusion:
It needs to be appreciated that there are twin obligations namely, ‘contractual obligation’ and ‘statutory obligation’. While on one hand, the TDS appears to be an indirect benefit; it also seems to be a tax compliance by service recipient for oneself.
Despite, there being various cases in service tax regime, the same cannot be blindly followed, due to slight difference in the valuation provisions.
Given the above complexity, the issue may witness another round of litigation. A practical approach could be to discharge GST on the TDS amount to avoid tax dispute. However, in cases where tax credit is not available, it would lead to tax cost and nullifies the approach to pay tax. Therefore, a suitable clarification from Government could be helpful to avoid triggering another litigation front.
[The author is an Associate in the Indirect Tax Advisory practice at Lakshmikumaran & Sridharan Attorneys, Pune]
