Reimbursement of expenses not to form part of taxable value for Service Tax

Dear Professional Colleague,

Reimbursement of expenses not to form part of taxable value for Service Tax

We are sharing with you an important judgement of the Hon’ble Madras High Court  in the case of Commissioner of Service Tax Vs. M/s. Sangamitra Services Agency[2013 (7) TMI 862] on the following issue:

Issue:

Whether Reimbursable expenses forms part of the taxable value for the chargeability of Service Tax - Clearing and Forwarding service?

Facts of the case:

The Sangamitra Services Agency (“the Assessee“) is providing Clearing and Forwarding service (“C&F”) to its Principal. Various expenses were incurred by the Assessee, which was reimbursed to the Assessee by their Principals for the service of C&F of excisable goods on the actual basis.

The Revenue alleged that various charges like freight, labour, electricity, telephone, etc., which were reimbursed by the Principals on actuals should be included in the taxable value of C&F Service.

In this regards, the Hon’ble CESTAT held that the reimbursable expenses received by the assessee need not be added to the taxable value related to C& F Agents Service. The Hon’ble CESTAT relied on the judgment of Sri Sastha Agencies Pvt Ltd., Vs. Asst. Commissioner [2006 (11) TMI 193 - CESTAT, BANGALORE ], holding that no element other than remuneration received by a Clearing & Forwarding agent from their Principal was to be included in the taxable value of the service.

Thereafter the authorities filed appeal to the Hon’ble High Court against the order of the Hon’ble Tribunal raising the following substantial question of law:

“Whether the decision of Tribunal that the reimbursable expenses received by the assessee need not be added to the taxable value related to clearing and forwarding agents service is correct, when the Rule 6(8) of Service Tax Rules, 1994 stipulates that Gross amount of remuneration or commission should be the taxable value in relation to the services provided by a Clearing and Forwarding Agent?

Rule 6(8) of the Service Tax Rules, 1994 (“the STR”) which was omitted vide Notification No.10/2006 dated April 19, 2006 is reproduced as under for the ease of reference:

“The value of the taxable service in relation to the services provided by a clearing and forwarding agent to a client for rendering services of clearing and forwarding operations in any manner shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client engaging such agent.”

The authorities contended that as per the provisions of Rule 6(8) of the Service Tax Rules, 1994, the value of taxable service in relation to the services provided by the C&F Agent to the client for rendering services of Clearing and Forwarding operations, in any manner, shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client. The authorities further submitted that considering the charges collected towards freight, labour, electricity, telephone etc., in connection with clearing and forwarding services, the same would form part of remuneration / commission.

Held:

The Hon’ble High Court observed and held that

• In the absence of any material to show the understanding between the Principal and the Client that the Commission payable by the Principal was all inclusive, it is difficult to hold that the gross amount of remuneration/commission would nevertheless include expenditure incurred by the assessee providing the services; that all incidental charges for running of the business would also form part of the remuneration or commission (by whatever name called). The phrase 'by whatever name called' must necessarily have some link or reference or nature to the receipt of remuneration or commission.

Thus, if a receipt is for reimbursing the expenditure incurred for the purpose, the mere act of reimbursement, per se, would not justify the contention of the Revenue that the same, having the character of the remuneration or commission, deserves to be included in the sum amount of remuneration / commission.

• As per Rule 6(8) of the Service Tax Rules, 1994, the gross amount referred to therein would apply to receipts of such sum, which would bear the character of remuneration or commission, in that, the said sum is brought under the head 'receipts'.

• The Hon’ble High Court observed that the expenditure incurred does not fall under the expression 'remuneration or commission'.

• Therefore, the Hon’ble High Court rejected the contention of the Department and dismissed the appeal.

Way forward:

Recently, the Hon’ble Delhi High Court in the W.P. (C) 6370/2008 of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India & ANR (2012 (12) TMI 150 - DELHI HIGH COURT) has passed judgement on related following issue:

Issue:

• Whether reimbursement of expenses includible in gross consideration for the chargeability of Service Tax?

• Whether Rule 5(1) of Service Tax (Determination of Value) Rules, 2006(“the Valuation Rules”) is ultra vires Sections 66 and 67 of Finance Act, 1994?

Held:

The Hon’ble Delhi High Court, while allowing the petition, observed, “We have no hesitation in ruling that Rule 5(1) of the Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires erstwhile Section 66 and Section 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him.”

Presently, we are heading for litigation on inclusion or exclusion of reimbursement of expenses in gross consideration for the chargeability of Service Tax.

Hence, it is advisable that Service Provider should comply with all specified conditions under Rule 5(2) of the Valuation Rules so as to exclude the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, for the chargeability of Service Tax.

Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.

Thanks & Best Regards.

Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
Mobile: +91 9810604563
E-mail: [email protected]

Released a Book - 'Guide to Service Tax Voluntary Compliance Encouragement Scheme, 2013', authored by Bimal Jain, FCA, FCS, LLB

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