TAX VALUE BASED ON PROFIT & LOSS ACCOUNT OR ACTUAL COST

[RV PERUMAL]

MY CLIENT IS ONE OF THE WORKS CONTRACT SERVICE PROVIDER. FOR THE YEAR 2016-17, HE PAID THE TAX IN 60:40 BUT AS PER THE AUDITED PROFIT & LOSS ACCOUNT THE DEPARTMENT DEMANDED TO PAY SERVICE TAX BECAUSE THE COST OF MATERIAL IS LESS THAN 60%. THE DEPARTMENT HAS ASCERTAINED THE PURCHASE VALUE FROM THE BOOKS OF ACCOUNTS. ACTUALLY THE PURCHASE IS CORRECT. WHETHER ANY WAY TO PROVE 60% IS THE RIGHT ONE OR NOT? IF ANY JUDGMENTS OR NOTES AVAILABLE PLEASE PROVIDE

[KASTURI SETHI]

Sh.R.V. PERUMAL Ji,

First preference for valuation is on actual basis. If the assessee is unable to split ‘Sale & Service’, then he can resort to deemed sale method i.e. 60 : 40. In this scenario, the assessee is able to segregate between the figures of sale & service. Rule 2A of Service Tax (Determination) Valuation Rules, 2006 is very much clear. Hence your client is hoping against hope. The burden of proof is cast upon the assesse who intends to avail exemption or concessional rate of tax. ST and VAT are mutually exclusive but proof of payment of VAT on the portion of 60% is required to be produced by the assesse in order to avail exemption on sale value portion of 60%.

Thus the view/objection of the department is correct.

[RV PERUMAL]

Respected Sri Kasthuriji

Thank you very much for your immediate sharp reply

[Amit Agrawal]

Assuming that VAT was also paid under composition scheme available under VAT (i.e. similar to what is done for service tax by your client under Rule 2A (ii) of Service Tax (Determination of Value) Rules, 2006), Department cannot use 'purchase price of material' - as can be seen from P&L - to force your client to pay additional service tax.

In any case, client's 'Purchase Price of material / goods' is not equivalent to 'value of property in goods transferred in the execution of the said works contract'.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[RV PERUMAL]

Thank you very much Sri Amithji

AI Summary

Valuation of works contracts: burden on taxpayer to prove actual or deemed allocation to avoid service tax revaluation.
Valuation of works contracts follows actual allocation of sale and service where segregation is available; Rule 2A prefers actual basis and places the burden of proof on the assessee seeking deemed allocation. Proof of tax payment on the sale portion is required to support exemption or concessional treatment. Purchase price in books is not necessarily the value of property in goods transferred, and payment under a VAT composition scheme may affect the department's ability to substitute purchase cost for contract valuation.