Is receipt of service tax taxable?

FOREIGN ENTERPRISES

Service tax is a special tax which was imposed by the Finance Act, 1994. The tax is payable at the rate of 8 per cent of the value of taxable services rendered in India.

Service tax is payable on the gross amount charged for services provided in the country. The amount of service tax is included in the bill sent by the service provider to his client.

Take the case of a foreign company which renders certain technical services to its Indian clients by providing technical experts (like engineers).

According to the provisions of the Finance Act, 1994, the foreign company charges 8 per cent service tax on the amount of the fee charged for services rendered in India.

The question is: whether, while calculating the gross amount received by the foreign company, the amount of service tax should also be included.

In the case of Chowringhee Sales Bureau P. Ltd. vs CIT [1973] 87 ITR 542, the Supreme Court had held that the sales tax collected by an auctioneer would form part of its trading or business receipts.

Accordingly, one view that could be considered is that service tax would be included in the "gross income" of the foreign company for the purpose of computing tax thereon since service tax would be in the nature of trading receipt similar to sales tax.

The other view is that service tax is not like "income" in the hands of the foreign company. Further, it is not a "consideration for rendering any managerial, technical or consultancy services".

The amount of service tax charged is not a consideration for the services rendered but is a special levy imposed by statute and collected by the service provider from the client to whom the services are rendered.

The amount of service tax collected by the service provider is to be paid to the central government. Thus, under statute, the service provider only acts as a conduit for collection of service tax and pay it to the central government.

The charging of the service tax by a foreign company and the payment thereof by an Indian client are throughout under an overriding legal obligation of paying the service tax to the central government.

The amount does not benefit the foreign company at any stage and the foreign company is legally under the obligation to pay the same to the central government.

In effect, the foreign company only acts as an agent for collecting the tax on behalf of the central government. No part of the service tax remains with the service provider.

The view that service tax cannot be considered as gross income also gets support from the decisions in several other cases, like CIT vs Sudarshan Chemicals Industries Ltd. 245 ITR 769 (Bom); CIT vs Chloride India Ltd. 256 ITR 625 (Cal); IFB Agro Industries Ltd. vs Dy. CIT 83 ITD 96 (Cal. ITAT SB) and Jt. CIT vs Groz Backert Asia Ltd. 86 ITD 291 (Chd. ITAT).

In view of the above cases, it is felt that service tax is not includible in the base on which tax on income, by fees for technical services, is to be levied on a foreign company.

agar@nda.vsnl.net.in