TDS Paid By Indian Company For Foreign Service Provider Not Taxable As Service Value: CESTAT Bangalore

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that TDS paid separately by an Indian company on behalf of a foreign service provider cannot be included in the taxable value for service tax purposes. This applies when the agreement requires the Indian company to bear the tax.

A Bench of Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi set aside a service tax demand of ₹13.49 lakh against Promac Engineering Industries Limited. The demand related to TDS on payments to a Japanese company for technical know-how and engineering assistance.

"In such situation, TDS cannot be considered as part of the taxable value and the demand against TDS under IPR is unsustainable.", the tribunal ruled.

The dispute arose after the tax department conducted an audit of Promac Engineering's records and found differences between the taxable value declared in its service tax returns and the figures recorded in its financial statements. The department consequently raised demands under Intellectual Property Rights (IPR) services and Goods Transport Agency (GTA) services, besides disputing certain CENVAT credits.

Promac Engineering argued that it had entered into agreements with Japan-based Taiheiyo Engineering Industries Ltd. for technical know-how and assistance relating to cement manufacturing equipment. Under the agreements, the service charges were payable to the Japanese company, while the TDS liability was separately borne by Promac. Therefore, the TDS amount could not be treated as part of the consideration paid for the services.

The Revenue, however, contended that TDS was paid on behalf of the foreign service provider and could be claimed as tax credit under the Double Taxation Avoidance Agreement (DTAA). It argued that such payment formed part of the total consideration and was therefore liable to service tax.

Rejecting the Revenue's stand, the Tribunal relied on its earlier decision in VSL India Pvt. Ltd. v. CST, Chennai, which held that TDS is a statutory tax obligation and does not automatically become consideration for services. The Tribunal also distinguished the Madras High Court's decision in Sify Technologies Ltd., which had been relied upon by the department.

The Tribunal further examined a separate demand of ₹1.65 lakh relating to GTA services. The amount had already been paid as advance service tax and adjusted against subsequent liabilities. However, the department disputed the adjustment because the company had not followed the prescribed procedure under Rule 6(1A) of the Service Tax Rules, 1994.

Relying on its earlier ruling in Plantech Consultants Pvt. Ltd., the Tribunal held that a procedural lapse could not justify denying adjustment of tax already paid. It observed that the government could not retain an excess payment merely because the prescribed procedure had not been strictly followed.

Accordingly, the Tribunal set aside the service tax demands under IPR and GTA services along with the corresponding penalties. However, it upheld the demand of ₹6,297 relating to ineligible CENVAT credit and the reduced penalty of ₹1,575, which the company had already paid.

The appeal was thus partly allowed.

For Appellant: Advocate M.S. Nagaraja

For Revenue: P.S. Srinivas, Assistant Commissioner (Authorised Representative)