Service tax valuation for telephone rental under advance rental scheme must reflect reduced rental, not unreduced tariff.
Under the Own Your Telephone Scheme, the initial lump sum paid by the subscriber was treated as advance rental and not a deposit, so the reduced rental had to be reflected in the taxable value for service tax. Rule 2(cc) of the Indian Telegraph Rules, 1951 characterises the arrangement as advance rental with a corresponding reduction in rental for a fixed period. The valuation rule in section 67(b) of the Finance Act, 1994 applies its deposit-related adjustment only where the amount is in the nature of a deposit. As the payment was not a deposit, the service tax had to be computed on the reduced rental, and the demand based on the unreduced rental was unsustainable.
Issues: Whether, for the purpose of service tax on telephone rental under the Own Your Telephone Scheme, the subscriber's taxable value was the gross bi-monthly rental of Rs. 380 or the reduced rental of Rs. 340 after giving effect to the initial lump sum payment.
Analysis: Under the Own Your Telephone Scheme, the subscriber makes an initial lump sum payment towards rental and, in consideration of that payment, receives a reduction in rental for a fixed period. Rule 2(cc) of the Indian Telegraph Rules, 1951 treats the arrangement as a scheme of advance rental payment with a corresponding reduction in annual rental, not as a deposit. Section 67(b) of the Finance Act, 1994 values telephone services by the gross total amount received from the subscriber, including adjustments made from deposits; that bracketed part applies only where the amount is in the nature of a deposit. Since the initial payment under the scheme was held to be rental payment and not a deposit, the reduction had to be given effect to while determining the taxable value. On that basis, the amount relevant for service tax was Rs. 340 and not Rs. 380.
Conclusion: The reduced rental of Rs. 340 was the correct taxable value, and the service tax demand based on Rs. 380 was unsustainable.
TaxTMI 
AI Drafter ✕
TaxTMI 
