Service tax applicability on debit notes

[Guest]

In X Group of companies, there are three companies. In one co.A of the said group, there is one employee who is IT/EDP Manager. This employee look after the IT needs of all three companies. His salary cost is shared by other two companies also in a pre agreed ratio.They have a MOU for this purpose and also for sharing other common costs like travel, conveyance etc. Is service tax applicable on Debit notes raised by Co. A on other two companies for such sharing ? Is TDS also applicable on this ??

[Madhukar N Hiregange]

In normal course when only the costs are being shared there is no service between the companies. It maybe ensured as a measure of abundant caution that the rule 5(2) conditions are also met.

[Guest]

I am of the view that the cost of sharing employee’s salary with costs like his travel, conveyance etc between the separate entitles in the group is liable for tax deduction u/s 194J of the Income tax Act and company sharing the cost is obliged to deduct TDS on payments made against debit notes. In addition, based on Service tax Valuation rules, I feel that the activity would also attract Service tax and the company raising the debit notes is required to charge/pay service tax on the sharing amount/reimbursements.

AI Summary

Tax deduction at source obligations may arise and service tax may apply to intercompany cost-sharing debit notes. One view is that mere internal cost-sharing does not create a taxable service, subject to meeting valuation and allocation conditions; an alternative view is that intercompany sharing of an employee's salary and related costs may require the paying company to deduct Tax Deduction at Source on debit note payments and require the issuer to charge and pay Service Tax under valuation rules on the reimbursements.