Valuation of Taxable Service: exclude owner-paid employee salaries lacking nexus to operator fees, so not taxable under valuation rules.

Valuation under the Finance Act requires inclusion only of amounts charged by the service provider as consideration for the service; the operative legal test is a nexus between the charged amount and the taxable service. Contractual terms and documentary employer compliance showing key personnel as employees of the hotel owner (including hiring/termination control and statutory filings) indicate no nexus to the foreign operator's management fees. Prior departmental and adjudicatory practice supports excluding such salaries. Consequently, salaries paid by the owner to the general manager and department heads are not includible in the operator's gross service charges and are not exigible to service tax.

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Issues: Whether salaries paid by the hotel owner to the general manager and other department heads are includible in the operator/management fees charged by the foreign operator and hence exigible to service tax under Section 67 of the Finance Act, 1994.

Analysis: The dispute turns on the valuation rule in Section 67 of the Finance Act, 1994 which fixes the value of a taxable service as the gross amount charged by the service provider 'for such service'. The legal test requires a nexus between the amount charged and the taxable service; only amounts charged by the service provider as consideration for the service enter the valuation. The contractual terms showing that key personnel are employees of the hotel owner, and clauses reserving hiring, termination and approval rights with the owner, indicate an employer-employee relationship rather than employment by the foreign operator. Documentary compliance with statutory employer obligations (such as provident fund contributions and issuance of Form 16) corroborates that relationship. Prior departmental and adjudicatory orders in similarly situated cases support treating such personnel as employees of the owner and not as paid by the foreign operator. Applying the statutory definition and controlling precedents, amounts not charged by the service provider as consideration for its services and lacking a nexus to the service cannot be included in the gross amount charged under Section 67.

Conclusion: The salaries paid by the hotel owner to the general manager and other department heads are not includible in the operator/management fees charged by the foreign operator and therefore are not exigible to service tax under Section 67 of the Finance Act, 1994. Appeal allowed in favour of the assessee.

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