2026 (2) TMI 337 - AT - Service Tax

Service tax treatment of TDS paid on behalf of service providers: appeal allowed as TDS excluded from taxable value

Treatment of tax deducted at source (TDS) for service-tax valuation: the TDS mechanism is a collection procedure under income tax law, but amounts paid by ... Gross amount charged - valuation u/s 67 - nexus between amount charged and the taxable service - service tax on TDS paid on behalf of the assessee - TDS not includible in taxable value where paid over and above contract value -Whether Revenue Authorities were correct in demanding service tax on the amount paid as TDS on behalf of the appellant is justified or otherwise. - HELD THAT:- The TDS being paid by NHAI to the Government is as per the provisions of the Income Tax Act, 1961. Tax Deducted at Source (TDS) is a way of collection of income tax under the provision of Chapter XVII of the Income Tax Act. Section 198 provides that all the sums deducted in accordance with provisions of the chapter shall for the purpose of computing the income of the assessee, be deemed to be the income received. Therefore, service tax is payable on the entire contract value between the service provider and the service recipient. In the present case, NHAI has paid income tax, over and above the agreed contract value. The appellant has paid service tax on the invoices. Thus, the deductions by the NHAI do not form part of the consideration. Therefore, the appellant’s contention that such amount cannot be added for the purpose of service tax is correct. Thus, we find that the facts are quite different from the earlier decision of this Bench. In the present case, TDS/deductions are not part of the agreed contractual value and therefore, not liable to service tax. Therefore, appeal is liable to be allowed and is accordingly, allowed. Issues: Whether service tax is leviable on amounts of Tax Deducted at Source (TDS) paid by the service recipient on behalf of the appellant where such TDS payments are over and above the agreed contractual/invoice value for the taxable service.Analysis: Section 67 of the Finance Act, 1994 requires service tax to be levied on the 'gross amount charged' by the service provider for the service rendered and contemplates that only amounts 'charged' by the service provider and having nexus as consideration for the taxable service enter into the taxable value. Explanation C to Section 67 limits inclusion to amounts that are charged by the service provider or otherwise form part of the contract value. Where TDS amounts are paid by the service recipient over and above the agreed contract/invoice value and the service provider has charged and paid service tax on the invoiced amount, those TDS payments do not constitute amounts 'charged' by the service provider nor do they have the requisite nexus as consideration for the taxable service. Relevant prior decisions distinguishing inclusion where TDS is reflected as income charged by the service provider from situations where TDS is discharged by the recipient over and above invoiced contract value are applicable. The factual position here is that NHAI paid TDS out of its own funds in addition to paying the full invoice/contract value and the appellant had already discharged service tax on the invoiced amounts.Conclusion: Service tax is not leviable on TDS amounts paid by the service recipient over and above the agreed contract/invoice value; the appeal is allowed in favour of the assessee.