Rule 3 of Point of Taxation rules, 2011.

3.Determination of point of taxation.- For the purposes of these rules, unless otherwise provided, 'point
of taxation' shall be,- (a) the time when the invoice for the service provided or agreed to be provided is
issued: Provided that where the invoice is not issued within the time period specified in rule 4A of the
Service Tax Rules,1994, the point of taxation shall be the date of completion of provision of the service.
(b) in a case, where the person providing the service, receives a payment before the time specified in
clause (a), the time, when he receives such payment, to the extent of such payment. Provided that for
the purposes of clauses (a) and (b),- (i) in case of continuous supply of service where the provision of the
whole or part of the service is determined periodically on the completion of an event in terms of a
contract, which requires the receiver of service to make any payment to service provider, the date of
completion of each such event as specified in the contract shall be deemed to be the date of completion
of provision of service; (ii) wherever the provider of taxable service receives a payment up to rupees one
thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such
excess amount, at the option of the provider of taxable service, shall be determined in accordance with
the provisions of clause (a). Explanation .- For the purpose of this rule, wherever any advance by
whatever name known, is received by the service provider towards the provision of taxable service, the
point of taxation shall be the date of receipt of each such advance.

TAXABILITY OF SERVICES

The taxability of services or the charge of service tax has been specified in section 66B of the Act. To be a taxable a service should
be –

♦  provided or agreed to be provided by a person to another

♦  in the taxable territory

♦  and should not be specified in the negative list.

A. Provided or agreed to be provided

1.  What is the significance of the phrase ‘agreed to be provided’?

The phrase “agreed to be provided” has been retained from the definition of taxable service as contained in the existing clause (105)
of section 65 of the Act. The implications of this phrase are –

♦  Services which have only been agreed to be provided but are yet to be provided are taxable

♦  receipt of advances for services agreed to be provided become taxable before the actual provision of service

♦  advances that are retained by the service provider in the event of cancellation of contract of service by the service receiver
become taxable as these represent consideration for a service that was agreed to be provided.

The taxability of services or the charge of service tax has been specified in section 66B of the Act. To be a
taxable a service should be – • provided or agreed to be provided by a person to another • in the
taxable territory • and should not be specified in the negative list. 3.1 Provided or agreed to be provided
3.1.1 What is the significance of the phrase ‘agreed to be provided’? The phrase “agreed to be provided”
has been retained from the definition of taxable service as contained in the erstwhile clause (105) of
section 65 of the Act. The implications of this phrase are – • Services which have only been agreed to be
provided but are yet to be provided are taxable • Receipt of advances for services agreed to be provided
become taxable before the actual provision of service • Advances that are retained by the service
provider in the event of cancellation of contract of service by the service receiver become taxable as
these represent consideration for a service that was agreed to be provided. 3.1.2 Does the liability to
pay the service tax on a taxable service arise the moment it is agreed to be provided without actual
provision of service? No. The point of taxation is determined in terms of the Point of Taxation Rules,
2011. As per these Rules point of taxation is – • the time when the invoice for the service provided or
agreed to be provided is issued; • if invoice is not issued within prescribed time period( 30 days except
for specified financial sector where it is 45 days) of completion of provision of service then the date of
completion of service; • the date of receipt of payment where payment is received before issuance of
invoice or completion of service. Therefore agreements to provide taxable services will become liable to
pay tax only on issuance of invoice or date of completion of service if invoice is not issued within
prescribed period of completion or on receipt of payment. For specific cases covered under the said
Rules, including continuous supply of service, please refer to the Point of Taxation Rules, 2011.

5. Service tax on advance payments As per amended rule provisions applicable from 16 June 2005 when
payment relatable to taxable services are received during the course of provision of service, service tax
is liable to be paid to the extent of receipt of payment. In other words, a person is liable to pay service
tax as soon as the consideration towards the taxable services is received. 5.1 We found instances where
service tax was not paid on advances received. ¾ During 2005-06 to 2007-08 M/s Larsen and Toubro
Ltd., in Kolkata ST commissionerate, received advance payment for CCS from M/s Bhusan Steel & Strips
Ltd., M/s Tata Steel Ltd. and M/s NTPC etc. It did not pay applicable service tax of ` 18.13 crore on
receiving the advances. ¾ During April 2007 to February 2008 M/s. Larsen & Toubro Ltd. in Ahmedabad
ST commissionerate, received advances of ` 35.01 crore for CCS and ` 160.80 crore for WCS. It did not
pay applicable service tax of ` 7.63 crore on receiving the advances. When we pointed this out (April
2009), the department (Ahmedabad ST commissionerate) reported (August 2009) that two SCNs for non
payment of service tax of ` 16.72 crore and ` 6.88 crore had been issued. ¾ M/s Tarapore and Company,
in Jamshedpur commissionerate, received advances of ` 1.05 crore and ` 95.70 lakh in November 2006
and February 2007 respectively for providing CCS. It did not pay service tax of ` 24.78 lakh. ¾ M/s Anant
Raj Construction & Developers Pvt. Ltd., registered under WCS, in Delhi commissionerate, formed on 4
October 2007, with a paid up capital of ` 50 lakh, as a wholly owned subsidiary company of M/s Anant
Raj Industries Ltd for the purpose of providing WCS to their holding company for construction of various
Building/civil structures. The assessee received amounts from its holding company and accounted for
them under the head ‘Loan’, which amounted to ` 57.11 crore as on 31 March 2008. These “loans” were
actually advances received from holding company because as per contract the assessee was provided
advances for supply of goods and construction work. By treating the advances as loans, they did not pay
service tax of ` 2.33 crore. The department replied (February, 2009) in respect of the second case that
the assessee had stated that he was discharging his service tax liability on the adjustment bills issued
after executing the work. The reply of the assessee confirmed that it was not complying with the
provisions of the Act on the advances received. In respect of the fourth case, department replied (April
2010) that SCN had been issued to the assessee.

In all the above cases, the department had to ascertain the time period between the receipt of the
advance and dates when the service tax was paid against these amounts. This represented the delay in
payment for which interest had to be charged. In case some part of tax had not been paid, it had to be
recovered with appropriate interest and penalty.

Rule3 of Point of Taxation rules, 2011-.Determination of point of taxation.- For the purposes of these
rules, unless otherwise provided, 'point of taxation' shall be,- (a) the time when the invoice for the
service provided or agreed to be provided is issued: Provided that where the invoice is not issued within
the time period specified in rule 4A of the Service Tax Rules,1994, the point of taxation shall be the date
of completion of provision of the service. (b) in a case, where the person providing the service, receives
a payment before the time specified in clause (a), the time, when he receives such payment, to the
extent of such payment. Provided that for the purposes of clauses (a) and (b),- (i) in case of continuous
supply of service where the provision of the whole or part of the service is determined periodically on
the completion of an event in terms of a contract, which requires the receiver of service to make any
payment to service provider, the date of completion of each such event as specified in the contract shall
be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable
service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice,
the point of taxation to the extent of such excess amount, at the option of the provider of taxable
service, shall be determined in accordance with the provisions of clause (a).

Explanation .- For the purpose of this rule, wherever any advance by whatever name known, is
received by the service provider towards the provision of taxable service, the point of taxation shall
be the date of receipt of each such advance.

Inserted vide Notification 6/2017-Service Tax. [(1A) Without prejudice to the provisions contained in
sub-rule (1), every person liable to pay service tax, may, on his own volition, pay an amount as service
tax in advance, to the credit of the Central Government and adjust the amount so paid against the
service tax which he is liable to pay for the subsequent period:

SECTION 67.Valuation of taxable services for charging service tax. —

(3) The gross amount charged for the taxable service shall include any amount received towards the
taxable service before, during or after provision of such service.

Hajee A.P. Bava & Co.

Versus

Commissioner of Central Excise

FINAL ORDER NO. 55192 OF 2013

Deposits Fall under Gross Consideration

Revenue inter-alia submits that notional interest earned on the refundable interest free security deposit
needs to be added to the value for the purposes of valuation of service under Section 67 of the Finance
Act, 1994; that receipt of interest free security deposit is in lieu of ad-idem between two contractees
and is a condition of contract between the two persons i.e. applicant club and proposed members; that
interest earned on said deposits results in enriching the applicant by additional consideration which
should be taken as part of “gross consideration” under Section 67 of the Finance Act, 1994; that if
members do not give said interest free security deposits, the cost of providing services would increase
and such burden would shift to members. Revenue further submits that the legislative intent for
determining value under Section 67 ibid is to determine the true value of the service in ordinary course
of trade and value should be such which must be the sole consideration for the service. Revenue also
relied upon stay order dated 07.07.2015 in case of Phoenix International Ltd vs. CCE & ST, Noida.

CIT vs. Tollygunge Club Ltd. (1977) 2 SCC 790 and CIT vs. Bijli Cotton Mills (P) Ltd (179) 1 SCC 496- cases
where deposits was not held as consideration.

It is noticed from Section 67(1)(i) ibid that consideration received in money for services rendered is
liable to Service Tax. In the case before us, refundable security deposit ranging from Rs. 1.50 lakhs to Rs.
10 lakhs is to be taken by the applicant for a period of 20 years, for most of the categories of members.
Since refundable security deposit is proposed to be taken from members in money (ranging from Rs.
1.50 lakhs to Rs. 10 lakhs), Section 67 (1) (ii) and (iii) ibid are not applicable. Further, said deposit is for
security towards various facilities and amenities in the club. Therefore, refundable security deposit is not
for any services rendered. Applicant proposes to take refundable security deposit from proposed
members and same is not a consideration for service provided or to be provided, as same would be
refunded to members. Further, Section 67(1)(i) ibid inter-alia envisages that Service Tax chargeable on
any taxable service with reference to value, be the gross amount charged by the service provider for
such service provided or to be provided by him. Therefore, “charged” means amount collected or to be
collected by the service provider for service provided or to be provided by him. Notional interest on
refundable security deposit is not a “charge” by the applicant. Since there is no “charge”, there is no
service in the present case.

Applying the ratio of judgment of Hon’ble Supreme Court in CIT vs. Tollygunge Club Ltd. to the case
before us, it can be concluded that refundable security deposit and interest thereon, is not a
consideration. Therefore, it cannot be charged to Service Tax.

(b) Refundable security deposit and interest there-on should not be subjected to Service Tax as per
provisions of the Finance Act, 1994.- Ruling No. AAR/ST/10/2015

TREATMENT OF SECURITY DEPOSIT

It is an amount paid by customer to the Work Contractor, in various forms like Bank Guarantee, Cash, etc., it may be noted that
Security Deposit is a deposit, which is utilised by the supplier only on occurrence of a contingent event. In case such even not occur,
then the Security deposit will be refundable to the customer on completion or according to the terms and conditions of contract
agreement.

Since “Deposit” does not include in definition of “Consideration” and hence no GST will be levied on it. If on happening of a
contingent event if Security deposit is adjusted into consideration then GST will be paid on it. 

TREATMENT OF SECURITY DEPOSIT UNDER GST;

Security Deposit is also be treated as Deposit; we have discussed earlier. A contractor may provide Security Deposit in various
forms, such as Bank Guarantee, EMD, FD etc. and same shall be refunded on completion of contract.
A contractor is liable to discharge GST liability of Security Deposit only when same has been adjusted on happening of a contingent
event as defined on the Agreement.

If you make a security deposit, the intention is usually that it will be refunded to you
when you meet the obligations to which the deposit relates. The deposit may be
consideration for a taxable supply. However, it would be pointless for the supplier to
charge GST on the deposit if the deposit is to be refunded, in which case the GST
would have to be refunded to the supplier.

However, some security deposits later become incorporated in the consideration for a
taxable supply. At some point the deposit ceases to be held as a security deposit and is
offset against the remaining consideration that is payable. GST should be charged on
such deposits if they become part of the consideration for the taxable supply.

Also, if a security deposit made in relation to a taxable supply is forfeited, GST should
be payable on the deposit.