CHAPTER 4

Valuation of Taxable Services

Question 1
Briefly explain the following with reference to the provisions of Finance Act, 1994 and Service
Tax (Determination of Value) Rules, 2006
(i)

Bundled Service

(ii)

Gross amount charged

(iii) Original Works in the context of Rule 2A of Valuation Rules, 2006

(iv) Total amount in the context of Rule 2A of Valuation Rules, 2006
Answer
(i)

Bundled Service: Bundled service means a bundle of provision of various services

wherein an element of provision of one service is combined with an element or elements
of provision of any other service or services. For example, air transport services provided
by airlines wherein an element of transportation of passenger by air is combined with an
element of catering service on board.
According to provisions of section 66F of Finance Act, 1994, the taxability of a bundled
service shall be determined in the following manner:
Position of various
elements of such
service

Treatment for the purpose of charging service tax

If various elements
of such service are
naturally bundled in
the ordinary course
of business

As provision of the single service which gives such bundle its

essential character. For example, if a hotel provides a 4D/3N package with the facility of breakfast, it will be considered a
case of naturally bundled service. Since the service of hotel
accommodation gives the bundle the essential character, it
will be treated as service of providing hotel accommodation.

If various elements
of such service are
not
naturally
bundled in the
ordinary course of
business

As provision of the single service which results in highest

liability of service tax. For example, two floors of a house are
given on rent for two different purposes-Ground Floor for the
purpose of running a shop and first floor for residential
purpose. Renting for aforestated two purposes is not naturally
bundled in the ordinary course of business. Resultantly, if
consolidated rent agreement is entered for providing renting
of both the said floors, it will be considered as a single

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4.2

Indirect Tax Laws

service which results in highest liability of service tax.
Renting of residential dwelling for use as residence falls
within the purview of Negative List of Services under section
66D. On the other hand, renting for the purpose of running a
shop is subject to service tax. Since the latter category of
renting attracts highest liability of service tax between two
services bundled together, entire renting would be treated as
renting for commercial purposes. As a consequence, service
tax will be levied on the gross amount charged for renting of
both the floors.

(ii) Gross amount charged: Explanation (c) to section 67 of the Finance Act, 1994 provides
that gross amount charged includes payment by cheque, credit card, deduction from
account and any form of payment by issue of credit notes or debit notes and book
adjustment.
However, in case of transaction of taxable service is with any associated enterprise,
any amount credited or debited, as the case may be, to any account, whether called
Suspense account or by any other name, in the books of account of a person liable to
pay service tax will also fall within the purview of term gross amount charged.
The significance of term gross amount charged lies in the fact that wherever any
taxable service is provided for a consideration in money, service tax is chargeable on the
gross amount charged by the service provider for such service provided or to be
provided by him.
(iii) Original Works in the context of Rule 2A of Valuation Rules, 2006: According to
substituted Rule 2A of Service Tax(Determination of Value) Rules, 2006 with effect from
01.07.2012 the term original works means :
(i)

All new constructions;

(ii)

All types of additions and alterations to abandoned or damaged structures on land

that are required to make them workable;

(iii) Erection, commissioning or installation of plant, machinery or equipment or

structures, whether pre-fabricated or otherwise.
The significance of term original Works can be appreciated from the fact that when
works contract is for execution of original works, value of service portion shall be
forty percent of the total amount charged for the works contract in pursuance of
Rule 2A of Service Tax(Determination of Value) Rules, 2006. As a result, less
service tax amount will be payable as compared to other two situations under
foregoing Rule.
(iv) Total amount in the context of Rule 2A of Valuation Rules, 2006: According to
Explanation 1(b) to Rule 2A of Service Tax(Determination of Value) Rules, 2006 total
amount means the sum total of the gross amount charged for the works contract and

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Valuation of Taxable Services

4.3

the fair market value of all goods and services supplied in or in relation to the execution
of works contract, whether or not supplied under the same contract or any other contract,
after deducting
(i)

The amount charged for such goods or services, if any; and

(ii)

The value added tax or sales tax, if any, levied thereon.

Computation of Total amount can be appreciated from the following practical example:
(i)

Gross Amount charged for the works Contract

(ii)

Add: Fair Market Value of goods/services (supplied by the

contractee)

` 70,000

(iii)

Less: The amount charged for such goods/services (supplied by

the contractee)

` 10,000

(iv)

Less: the value of VAT, levied on goods supplied by the

contractee

`1,00,000

` 1,250

(v) Total Amount (i) + (ii) (iii)-(iv)

` 1,58,750
Further, according to Proviso to Explanation I (b) the fair market value of goods and
services so supplied is required to be determined in accordance with the generally
accepted accounting principles.
Question 2
Explain in brief the manner of determination of value as per rule 3 of the Service Tax
(Determination of Value) Rules, 2006.
Answer
Subject to provisions of Section 67 of Finance Act, 1994, the value of taxable service, where
such value is not ascertainable, shall be determined by the service provider in the following
manner as per Rule 3 of the Service Tax (Determination of Value) Rules, 2006:
(a) The value of such taxable service shall be equivalent to the gross amount charged by the
service provider to provide similar service to any other person in the ordinary
course of trade. However, the aforementioned gross amount charged must be the sole
consideration.
(b) Where the value cannot be determined in accordance with above clause, the service provider
is required to determine the equivalent money value of such consideration. However,
such value shall in no case be less than the cost of provision of such taxable service.
Question 3
Compute service tax liability from the following particulars:
Gross Amount charged by the service provider for providing works contract
service

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` 1,00,000

4.4

Indirect Tax Laws

Actual Value of material transferred in the above works contract

CENVAT Credit of duty on value of material transferred
Service Tax paid on Input Services
CENVAT Credit of capital goods used in the provision of works contract
service
Rate of Service Tax

` 70,000
` 8,750
` 1,000
` 1,000
12.36%

Answer
Computation of Service Tax liability
S.No.

Particulars

Amount

(i)

Gross Amount charged

(ii)

Actual Value of goods transferred

(iii)

Value of service portion in the execution of works contract

i.e. (ii)- (i)

` 1,00,000
` 70,000
` 30,000

Service Tax on ` 30,000 @12.36% = 3,708

Less: CENVAT credit On Inputs
On Input Services
On Capital Goods (50%)

= NIL
= 1,000
= 500

Service Tax Payable

` 2,208

Question 4
Write a brief note explaining the circumstances under which expenditure or costs incurred by a
service provider as a pure agent of the recipient of service shall be excluded from the value of
taxable services under the Service Tax (Determination of Value) Rules, 2006.
Answer
Exclusion of Expenditure or costs incurred as a pure agent: Expenditure or costs incurred
by the service provider as a pure agent of the recipient of the service shall be excluded
from the value of the taxable service if all the following conditions are satisfied cumulatively
as per Rule 5(2) of Service Tax(Determination of Value) Rules 2006:(a) The service provider acts as a pure agent of the recipient of the service while making
payment to the third party.
(b) The recipient of service receives and uses the goods or services so procured by the
service provider in his capacity as pure agent of the recipient of service.
(c) The recipient of service is liable to make payment to the third party.
(d) The recipient of service authorizes the service provider to make payment on his behalf.

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Valuation of Taxable Services

4.5

(e) The recipient of service knows that the goods and services for which payment has been
made by the service provider shall be provided by the third party.
(f)

The payment made by the service provider on behalf of the recipient of service is
separately indicated in the invoice issued by the service provider to the recipient of
service.

(g) The service provider recovers from the recipient of service only such amount as has
been paid by him to the third party.
(h) The goods or services procured by the service provider from the third party as a pure
agent are in addition to the service he provides on his own account.
In order to truly appreciate the application of above-mentioned conditions in practical
situations, following simple example is given:
Delhi based Mr. Raj is a commission agent of Mumbai based XYZ Ltd Thus, Mr. Raj provides
Business Auxiliary Services to XYZ Ltd. He is directed by XYZ Ltd. to purchase certain
goods on its behalf to the extent of ` 10,00,000/- and to make the payment to the concerned
seller. Further, Mr. Raj also takes the purchase invoice of said goods in the name of XYZ Ltd.
Mr. Raj raises the invoice of ` 50,000/-[together with service tax @ 12.36%] as commission
charges on XYZ Ltd. in respect of his Business Auxiliary Services. Besides, he will include
above-mentioned ` 10,00,000/--in the invoice but will not charge any service tax on it because
in respect of this amount he is acting as pure agent of XYZ Ltd. The above-mentioned
conditions of pure-agent are being tested below:
(a) The service provider [Mr. Raj in the present case] acts as a pure agent of the recipient of
the service [i.e. XYZ Ltd. in the present case] while making payment to the third party
[i.e. concerned seller of said goods]
(b) The recipient of service [i.e. XYZ Ltd.] receives and uses the goods so procured by the
service provider in his capacity as pure agent of the recipient of service.
(c) The recipient of service [i.e. XYZ Ltd.] is liable to make payment to the third party.
(d) The recipient of service [i.e. XYZ Ltd.] authorizes the service provider [i.e. Mr. Raj] to
make payment on his behalf.
(e) The recipient of service [XYZ Ltd.] knows that the goods for which payment has been
made by the service provider [Mr. Raj] shall be provided by the third party [concerned
seller of said goods]
(f)

The payment made by the service provider [Mr. Raj] on behalf of the recipient of service
[XYZ Ltd.] is separately indicated in the invoice issued by the service provider to the
recipient of service.

(g) The service provider [Mr. Raj] recovers from the recipient of service only such amount as
has been paid by him[` 10,00,000/-] to the third party[concerned seller of said goods]

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Indirect Tax Laws

(h) The goods procured by the service provider [Mr. Raj] from the third party [concerned
seller of goods] as a pure agent are in addition to the service he provides on his own
account.
Since all the prescribed conditions are fully satisfied in the present case, it may be safely
inferred that Mr. Raj acts as pure agent on behalf of XYZ Ltd. in the present case.
Question 5
Kirti Ltd. was awarded a contract in September, 2012 for providing plastering services in
respect of an immovable property for ` 2,00,000/-. The material required for plastering is also
required to be supplied by Kirti Ltd. Whether the foregoing plastering services are subject to
Service Tax and if so, how the service tax liability will be computed?
Answer
Kirti Ltd. has agreed to provide materials which are leviable to tax as sale of goods. In
addition, it is also required to provide its services to its client. Therefore, its services fall within
the scope of term works contract as defined under Section 65B (54) of Finance Act, 1994. As
a result, aforestated Services of Kirti Ltd. are subject to Service Tax. As the value of materials
transferred in the execution of said works contract has not been separately given, the value of
Works Contract Services has to be determined in accordance with Rule 2A(ii) of Service
Tax(Determination of Value) Rules, 2006 which is effective from 01.07.2012. Further, the
present contract will get covered under Rule 2A(ii)(C) of Service Tax (Determination of Value)
Rules, 2006. Therefore, Service Tax shall be payable on sixty per cent of the total amount
charged for the works contract .The computation of service tax payable has been exhibited
below:
Sixty per cent of the total amount charged
Rate of Service Tax
Amount of Service Tax payable

` 1,20,000/- [` 2,00,000 X 60%]

12.36%
` 14,832/-[which is 7.416% of the total
amount charged of ` 2 lakh]

Question 6
Indian Oil Corporation [IOC] has awarded a contract in August, 2012 for ` 140 lakh to M/s
Jagjit Construction Ltd. in respect of alterations to one of its buildings. The said building was
abandoned by IOC five years ago. The materials required for carrying out the alterations will
be supplied by Jagjit Construction Ltd. itself. The purpose of awarding the foregoing contract
is to make the said building workable. Whether the aforestated services of Jagjit construction
Ltd. are subject to Service Tax and if so, determine the amount of service tax payable?
Answer
According to Explanation 1(a)(ii) to Notification No. 24/2012 dated 06.06.2012 original works
means all types of additions and alterations to abandoned or damaged structures on land that
are required to make them workable. Since Jagjit Construction Ltd. has been awarded a

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Valuation of Taxable Services

4.7

contract for carrying out alterations in respect an abandoned building with a view to make it
workable, the contract falls within the purview of term original works. Further, as there is
involvement of materials {which is subject to VAT] during the course of execution of such
contract, it will fall within the purview of Works Contract. As the value of materials transferred
in the execution of said works contract has not been separately given, the value of Works
Contract Services has to be determined in accordance with Rule 2A(ii) of Service
Tax(Determination of Value) Rules, 2006 which is effective from 01.07.2012. Further, the
present contract will get covered under Rule 2A(ii)(A) of Service Tax (Determination of Value)
Rules, 2006. Therefore, Service Tax shall be payable on forty per cent of the total amount
charged for the works contract .The computation of service tax payable has been exhibited
below:
Forty percent of the total amount
charged
Rate of Service Tax
Amount of Service Tax payable

` 56 lakh [` 140 lakh X 40%]

12.36%
` 6,92,160/-[which is 4.944% of the total
amount charged of ` 140 lakh]

Question 7
Airports Authority of India (AAI) awarded a contract for construction of an airport in Nicobar
Islands to Ananyana Construction Ltd. for ` 2345 lakh in August, 2012. Whether the
aforestated services of Ananyana construction Ltd. are subject to Service Tax and if so,
determine the amount of service tax payable?
Answer
According to Explanation 1(a)(i) to Notification No. 24/2012 dated 06.06.2012 original
works means all new constructions. Since in the present case Ananyana Construction Ltd.
has been awarded a contract for construction of an airport in Nicobar Islands, the contract falls
within the purview of term original works. However, it is to be borne in mind that Entry No.
14(a) of Notification No. 25/2012 dated 20.06.2012 provides, amongst other things,
exemption to services by way of construction of an airport. Therefore, aforestated services of
Ananyana construction Ltd. are not subject to Service Tax

Exercise
1.

Discuss whether the Central Excise Officer has power to reject the value of taxable
service.

2.

Write a detailed note on concept of pure agent.

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