The Chennai Bench of the Custom, Excise, and Service Tax Appellate Tribunal (CESTAT) has delivered a significant ruling stating that no service tax is applicable on Tax Deducted at Source (TDS) paid for payments made to foreign service providers. This ruling clarifies a contentious issue in tax compliance for service providers engaging with international entities.
According to the tribunal, TDS deposited to the Income Tax Department concerning payments to foreign service providers, which exceed the invoice value of services, does not attract service tax. The bench, comprising P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member), emphasised that this interpretation upholds clarity in tax liabilities for service providers under various categories like intellectual property rights and technical consulting services.
The case involved an appellant who had paid royalties to Chevron Oronite Company LLC, USA, and had already remitted service tax on the full consideration paid to the foreign entity. However, the appellant had not accounted for the TDS portion separately in their service tax filings. This discrepancy led to show cause notices and subsequent penalties imposed by the tax authorities.
In defense, the appellant argued that under their agreement with Chevron, the service tax was paid on the entire consideration before deducting TDS, which was separately remitted to the Indian government.
The tribunal’s ruling underscored that TDS payments are not to be considered as part of the taxable service value under Section 67(1)(a) of the Finance Act, 1994. It highlighted that unless specifically mandated by legislation, such payments should not incur double taxation under service tax laws.
By affirming that service tax does not apply to TDS remitted on behalf of foreign service providers, the tribunal has provided clarity and relief to taxpayers navigating complex tax regulations concerning international transactions. This decision sets a precedent in ensuring adherence to legal obligations without subjecting taxpayers to unintended tax liabilities.
