Service Tax Cannot be Levied on TDS on Foreign Remittances Paid under Income Tax Act: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, has held that service tax cannot be levied on the Tax Deducted at Source (TDS) portion of foreign currency remittances made under the provisions of the Income Tax Act, 1961.

An appeal was filed by International Flavours & Fragrances India Pvt. Ltd., challenging the levy of service tax on TDS paid on imported services under the reverse charge mechanism for the period July 2012 to October 2013 .

The appellant imported services such as testing, auditing, and consultancy from foreign service providers. While making payments, it deposited TDS with the Income Tax Department in compliance with Section 195A of the Income Tax Act, 1961.

The tax authorities, however, demanded service tax on the TDS component, contending that it should form part of the consideration for taxable services. The demand was confirmed by the adjudicating authority and later upheld by the Commissioner (Appeals).

The appellant contended that the levy of service tax on the TDS portion was unsustainable in law. It was argued that, in terms of Rule 7(1) of the Service Tax (Determination of Value) Rules, 2006, the taxable value of imported services is limited to the actual consideration charged by the foreign service provider.

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The overseas entities had billed only the agreed service charges, and no deduction of tax was made from the invoice value. The TDS remitted by the appellant was solely in compliance with statutory requirements under the Income Tax Act, 1961, and therefore could not be treated as part of the consideration for services under Section 67 of the Finance Act, 1994.

The bench of M. Ajit Kumar (Technical member) and P. Dinesha (Judicial member) upheld the appellant’s contention, ruling that TDS is merely a statutory obligation under the Income Tax Act and cannot be treated as consideration for services rendered.

It observed that the value of taxable services is confined to the amount invoiced by the foreign service provider, whereas TDS is determined by statutory rates and has no nexus with the agreed service charges.

The Bench further noted that when an assessee “grosses up” TDS, it is only to comply with income tax provisions and does not signify an enhancement of the service provider’s remuneration.

The tribunal referred to earlier cases, including VSL India Pvt. Ltd. and Adani Bunkering Pvt. Ltd., and confirmed that the TDS component paid over and above the invoice value cannot be included in the taxable value for service tax purposes.

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