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VAT on Service Tax Part of Billing

Pankaj Gandhi Jaiswal  
on 14 March 2016

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Section 2 (25 ) States

(25)  “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.

Explanation I.— The amount of duties levied or leviable on goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962) or the Bombay Prohibition Act, 1949 (Bom. 25 of 1949), shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of, the seller or the purchaser or any other person.

Explanation II.— Sale price shall not include tax paid or payable to a 16[seller] in respect of such sale.

Explanation III.— Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods;

17[Explanation IV. deleted w.e.f. 1-7-2007]

Notification Dated 26.03.2015/ BILL NO XVI of 2015 Chapter V Amendments States

See Page 2 Explanation 1A Attached

Explanation 1 A : Sale Price Shall not include the amount of service tax levied or leviable under the finance act 1994 and collected separately from the purchaser.

Judicial Ruling Says

Fact :

The assessees had undertaken certain works contract. They were liable to pay VAT on the transfer of property involved in the execution of works contract and to pay Service tax on the service value. The issue before the Tribunal was whether Service tax would form part of the sale price u/s 2(25) of the Maharashtra Value Added Tax Act, 2002 (MVAT Act). It was held that payments of service tax and VAT are mutually exclusive. Therefore, service tax would not form a part of sale price and consequently no VAT can be levied under the MVAT Act.

Tribunal Ruling:

• Placing reliance on Supreme Court decisions on plain reading of Section 2(25) and 2(33) of the MVAT Act, Service tax cannot form part of definition of ‘sale price’.

• Service tax is leviable on service value. It has no relation with the goods. It is independently leviable on the value of service under Finance Act, 1994.

• The Tribunal relied on the principle laid down by the Supreme Court in the case of Imagic Creative Pvt. Ltd.(supra), wherein the Supreme Court has observed that payments of service tax and VAT are mutually exclusive. Therefore the Tribunal held that by no stretch of imagination, Service tax would be a part of sale price and consequently liable to VAT under the MVAT Act.

• The Tribunal further observed that by way of a legal fiction, which was introduced by the 46th Amendment of the Constitution, works contract was made divisible into contract of supply of goods and supply of labour and services. Therefore, service tax would not be a consideration for sale of goods. It is leviable on the service value and thus, it cannot be included within the inclusive part of the definition of sale price.

• In the case of Netafim Irrigation India P. Ltd, Balanagar, Hyderabad v. State of Andhra Pradesh, the Andhra Sales Tax and VAT Appellate Tribunal held that Service tax, being related to tax on service cannot be subject matter of VAT. The Commissioner of Trade and Taxes determined5 that VAT cannot be charged on the Service tax amount.

• Thus the Tribunal has held that service tax cannot form a part of sale price u/s 2(25) of the MVAT Act in a transaction wherein the sale price is determined subject to rule 58 of the MVAT Rules.

http://www.ey.com/Publication/vwLUAssets/IDT_Alert_Maha_VAT/$FILE/IDT_Alert_Maha_VAT.pdf

One may also refer to an order dated 06-08-2010 of Karnataka Appellate Tribunal at Bangaluru in case of Hotel Leela Ventures Limited Vs. State of Karnataka 2010(69) Kaar. L. J. 453 (Tri) (DB), wherein held that “There must be an actual expenditure incurred at the first instance : then only it can be decided whether such expenditure is pre-sale expenditure or post-sale expenditure ” The observations in the above referred case  holds good for the service tax collected separately because it cannot be said that service tax is an expenditure for work done. All the dealers are collecting the service tax for government and it cannot be said the service tax is a part of turnover.

The Supreme Court in 46 STC 477 in the case of Anand Swarup Mahesh Kumar has stated that no tax can be charged on any other tax if it is collected separately. In this case the Supreme Court held that :-
Where a dealer is authorized by law to pass on any tax payable by him on a transaction of sale to purchaser, such tax does not forms part of the consideration for the purpose of levy of tax on sales or purchases but where there is no statutory provision authorizing the dealer to pass on the tax to the purchaser, such tax does form part of the consideration when he includes it in the price and realizes the same from purchaser.

Our Analysis

1. Considering the act, amendment notification and judicial ruling it is settled that VAT can not be charged on service tax if it separately charged and collected.

2. Also Service tax is not a price for any service or supply made. It is being collected by assessee in the capacity of being agent of government. He merely collect and deposit. Even in TDS court and law clearly describe that there will not be any cascading effect and tax on tax. Service tax is being collected on account and on behalf of government and it is not a service price.

3. Further Explanation-I to the definition of sales price states that “ The amount of duties levied or leviable on goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962) or the Bombay Prohibition Act, 1949 (Bom. 25 of 1949), shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of, the seller or the purchaser or any other person”. Please note that Service tax finds no place in the explanation given above as Levy of service tax is from Finance act 1994.In explanation-I referred above it is mentioned that “Deemed to be part of”, which creates deeming fiction, which proves that otherwise these duties in the normal course are not part of sales price.

4.  Further service tax is statutory liability enforced and collected by central government under clause 29A of article 366 of the constitution of India and according dealer are collecting service tax and has paying the same under the provisions of Finance act 1994. Section 66 of Service tax says that “There shall be levied a tax at the rate of fourteen per cent of the value of taxable services and collected in such a manner as may be prescribed” and rule 4A of service tax rules makes it very clear that the service provider has to show Service tax component separately from the value of services rendered, in an invoice or bill. Thus law authorizes a service provider to pass on the burden of service tax to the customers.

5. Section 42(3) of Maharashtra Value Added Tax does not prohibit collecting the taxes separately, as in case of other composition schemes under section 42. This goes beyond any doubt to prove that taxes cannot be part of sales price in case of dealer executing a work contract and opting for composition scheme. Further to this section 42(3) read with section 2(25) with explanation II, which defines “Sale price shall not include tax paid or payable to a seller in respect of such sale” and amended Explanation 1A, leads to only one conclusion that there cannot be tax on tax.

6.  Further please note that section 2(25) which defines the definition of sales price clearly says that “Anything done by seller in respect of goods”. We all know that service tax can never be charged or collected on value of Goods or Material sold or used in construction, that is the reason why in case of works contract deductions are allowed in respect of Value of Goods or material used while computing service tax liability. So service tax collected from the purchaser does not represent consideration for “sale” but only consideration for rendering service portion in works contract. But the same case is not applicable in case of Excise or Custom duty, which are actually dutiable on Goods only.

7. In case of works contract, one cannot say that service tax paid by principal to contractor is actually levied on value of goods or material supplied during the execution of works contract, because service tax is always leviable on service portion involved in execution of works contract. Further as explained earlier service tax so collected and paid cannot be said to include in turnover of the assessee. Unlikely excise or custom duty as service tax is not levied on goods or material, hence in view of DongYang service tax should not form part of sales price as defined in section 2(25) of MVAT Act.

Our Conclusion:

We say that VAT should not charged on service tax component if it is charged and collected separately.


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