Tribunal rules in favor of appellant on service tax issues, exempts reimbursable expenses and foreign currency receipts

The Tribunal ruled in favor of the appellant on all issues, setting aside the demand for service tax on reimbursement of out-of-pocket expenses, certain foreign currency receipts, payments from clients in Nepal, and disallowance of service tax credit. The judgment emphasized that reimbursable expenses and foreign currency receipts for export services are exempt from service tax, as well as payments from Nepal-based clients. Additionally, the Tribunal held that cenvat credit should not be denied based on the use of photocopies instead of originals. The decision was pronounced on 06.12.2018.

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Issues Involved:

1. Non-payment of service tax on reimbursement of out-of-pocket expenses.
2. Non-payment of service tax on certain foreign currency receipts.
3. Non-payment of service tax on payments received from clients in Nepal.
4. Disallowance of service tax credit availed and utilized.

Issue-wise Detailed Analysis:

1. Non-payment of service tax on reimbursement of out-of-pocket expenses:

The appellant argued that expenses incurred on behalf of clients, such as boarding, travel, lodging, hiring of hotel rooms, gifts, and purchasing product samples, were reimbursed by clients on an actual basis supported by vouchers. They relied on the CBEC Circular F.No.B/11/1/98-TRU dated 07.10.1998 and the Supreme Court decision in Union of India Vs. Intercontinental Consultants and Technocrats Pvt. Ltd., which clarified that reimbursable expenses should not be included in the taxable value of services. The Tribunal agreed, citing that Section 67 of the Finance Act, 1994, as interpreted by the Supreme Court, excludes reimbursable expenses from the taxable value until the amendment in 2015. Thus, the demand for service tax on this ground was set aside.

2. Non-payment of service tax on certain foreign currency receipts:

The appellant received payments in foreign exchange for services provided to clients outside Nepal and in Indian Rupees for clients in Nepal. They claimed exemption from service tax on these receipts, citing Notification No.6/99-ST and Notification No.21/2003-ST, which exempted services paid in convertible foreign exchange. The Department's contention that remittances in foreign exchange for business expenses constituted repatriation was rejected. The Tribunal, guided by the CBEC Circular No.56/5/2003 and supported by case laws like CST Vs. SGS India Pvt. Ltd., held that such receipts are in the nature of "Export of Services" and not liable for service tax. Therefore, the demand for service tax on these foreign currency receipts was set aside.

3. Non-payment of service tax on payments received from clients in Nepal:

The Tribunal considered payments received in Indian Rupees from Nepal-based clients as permitted by RBI as part of the "Export of Services." Following the same rationale applied to other foreign currency receipts, these payments were also exempt from service tax. The demand for service tax on payments from Nepal was thus set aside.

4. Disallowance of service tax credit availed and utilized:

The appellant faced disallowance of cenvat credit for using photocopies of documents instead of originals, which were retained at regional offices. The Tribunal noted no allegations of fraud or misuse and no doubts on the authenticity of the photocopies. Citing the Jammu & Kashmir High Court's decision in Shivam Electrical Industries, the Tribunal found no reason to deny cenvat credit on such grounds. Therefore, the disallowance of service tax credit was set aside.

Conclusion:

The Tribunal set aside the impugned order and allowed the appeal, ruling in favor of the appellant on all issues. The judgment emphasized that reimbursable expenses, foreign currency receipts for export services, and payments from Nepal-based clients are not liable for service tax. Additionally, cenvat credit should not be denied based on the use of photocopies when originals are retained at regional offices. The decision was pronounced in the open court on 06.12.2018.

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