Service tax valuation includes reimbursements in gross receipts, while bona fide belief can justify waiver of penalty.

Reimbursements towards petrol, kerosene, telephone, electricity, transportation and miscellaneous expenses are included in the assessable value for service tax where they form part of the gross amount received for rendering the service; costs of inputs, input services and related expenses cannot be artificially separated as reimbursable exclusions. The demand on merits is therefore sustained, along with interest. Penalty under Section 76 may, however, be waived where the assessee held a bona fide belief and conflicting decisions existed on the taxability of reimbursements, in which case Section 80 can be applied to grant relief from penalty.

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Issues: (i) Whether reimbursements towards petrol, kerosene, telephone, electricity, transportation and miscellaneous expenses were to be included in the assessable value for service tax. (ii) Whether penalty under Section 76 of the Finance Act, 1994 was sustainable in view of the assessee's plea of bona fide belief and the existence of conflicting decisions.

Issue (i): Whether reimbursements towards petrol, kerosene, telephone, electricity, transportation and miscellaneous expenses were to be included in the assessable value for service tax.

Analysis: The issue was treated as settled by the Larger Bench decision holding that service tax is payable on the gross amount received. Costs incurred on inputs, input services and other expenses used for rendering the service cannot be artificially segregated and treated as reimbursable for exclusion from the taxable value.

Conclusion: The reimbursements were includible in the assessable value and the demand of duty with interest was upheld against the assessee.

Issue (ii): Whether penalty under Section 76 of the Finance Act, 1994 was sustainable in view of the assessee's plea of bona fide belief and the existence of conflicting decisions.

Analysis: Prior to the Larger Bench ruling there were conflicting views on the treatment of reimbursements. In that background, the assessee's bona fide belief that such amounts were not includible was accepted and Section 80 was applied to relieve the assessee from penalty.

Conclusion: The penalty was set aside in favour of the assessee.

Final Conclusion: The demand on merits was sustained, but the penalty was deleted because the assessee's conduct was covered by the existence of conflicting legal views.

Ratio Decidendi: Reimbursements forming part of the amount received for services are includible in the taxable value, but penalty may be waived where the assessee acted under a bona fide belief supported by conflicting decisions.

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