Service tax not payable on TDS amounts deducted from royalty payments to foreign companies

CESTAT Chennai held that service tax is not payable on TDS amounts deducted from royalty payments to foreign companies. The tribunal ruled that TDS paid to government exchequer arises from statutory liability and cannot be considered consideration for taxable services unless specifically mandated by law. Citing Supreme Court precedent in Jain Bros. case, the tribunal found no legislative provision sanctioning double taxation on TDS amounts. Following earlier decisions including Adani Bunkering case, CESTAT determined appellant not liable for service tax on TDS paid on behalf of foreign service provider, setting aside the demand order and allowing the appeal.

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Issues:
Appeal against Order in Appeal No. 73 & 74/2015 dated 30.3.2015 passed by Commissioner of Service Tax (Appeals - I), Chennai.

Detailed Analysis:

Issue 1: Tax Liability on TDS portion of royalty payment
The appellant, a service provider under various categories, entered into an agreement with a foreign company, paying royalty on net sales. The department alleged non-payment of service tax on the TDS portion of the royalty retained by the appellant. Show Cause Notices were issued for recovery. The appellant argued that they discharged service tax on the entire consideration paid to the foreign provider and separately paid TDS. Citing Section 67 and Rule 7 of Service Tax Valuation Rules, the appellant contended that service tax is payable only on the amount charged by the service provider. Previous tribunal decisions supported the appellant's stance. The Tribunal held that service tax is not applicable to TDS paid by the appellant, setting aside the demand confirmed in the impugned order.

Issue 2: Legal Interpretation of Taxation and TDS
The Tribunal analyzed the legal aspect of taxation and TDS payments. Referring to a Supreme Court case, it acknowledged the possibility of double taxation if expressly sanctioned by the legislature. However, it emphasized that TDS, being a statutory liability, cannot be considered as part of the consideration for taxable services unless mandated by law. The Tribunal agreed with the appellant's argument that TDS should not be subject to service tax unless specifically provided for by the legislature. Citing previous tribunal decisions, the Tribunal concluded that TDS deposited over and above the invoice value is not liable to service tax.

Conclusion
The Tribunal ruled in favor of the appellant, holding that service tax is not payable on the TDS portion of royalty payments made to a foreign service provider. Citing relevant legal provisions and previous tribunal decisions, the Tribunal set aside the demand confirmed in the impugned order and allowed the appeals with consequential relief, if any, as per law.

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