CESTAT: Service Tax Cannot Be Levied on TDS in Foreign Remittances

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Case Background

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai ruled that
service tax cannot be levied on the TDS portion of foreign currency remittances made under the
Income Tax Act, 1961. The appeal was filed by International Flavours & Fragrances India Pvt. Ltd.
challenging the levy of service tax on TDS paid on imported services under the reverse charge mechanism
for the period July 2012 to October 2013.

The Dispute

The company had imported services such as testing, auditing, and consultancy from foreign providers.
While making payments, it deposited TDS under Section 195A of the Income Tax Act, 1961.
Authorities demanded service tax on the TDS portion, contending it was part of the consideration for taxable services.
This demand was initially upheld by the adjudicating authority and later by the Commissioner (Appeals).

Appellant’s Stand

The appellant argued that the levy of service tax on TDS was unsustainable.
In terms of Rule 7(1) of the Service Tax (Determination of Value) Rules, 2006,
the taxable value of imported services is limited to the actual consideration charged by the foreign service provider.
TDS was remitted purely to comply with statutory obligations and not as part of the service provider’s charges.

Tribunal’s Findings

The CESTAT bench comprising M. Ajit Kumar (Technical Member) and P. Dinesha (Judicial Member)
agreed with the appellant. It held that:

• TDS is a statutory obligation under the Income Tax Act, not consideration for services.
• Taxable value is confined to the invoiced amount by the foreign service provider.
• When an assessee “grosses up” TDS, it is merely to comply with law, not an increase in service charges.

The tribunal referred to past rulings including VSL India Pvt. Ltd. and Adani Bunkering Pvt. Ltd.
to confirm that TDS paid beyond the invoice value cannot be included in taxable value for service tax purposes.

Impact of the Ruling

The decision provides significant relief to businesses importing services under the reverse charge mechanism.
It reinforces that statutory deductions like TDS should not inflate the taxable value of services for levy of service tax.
The order strengthens clarity in taxation and protects assessees from unjustified demands.