2023 (1) TMI 1470 - AT - Service Tax

Group company expense reimbursements without service provision not subject to service tax liability

Hindustan Construction Company Ltd. Versus Commissioner of Central Goods and Service Tax, Navi Mumbai

The CESTAT Mumbai ruled that reimbursements received by appellants from group companies for expenses incurred on their behalf do not constitute taxable ... Levy of service tax - business support service - reimbursements received by the appellants from their group companies for expenses incurred on their behalf - reimbursements can be considered as 'consideration' for the purpose of levying service tax as per the Explanation to Section 67 of the Finance Act, 1994 or not - HELD THAT:- The period involved in the present dispute is from 01.04.2015 to 31.03.2017. The phrase ‘service’ has been defined in Section 65B ibid to mean ‘any activity carried out by a person for another for consideration, and includes a declared service.’. On reading of the said definition clause, it transpires that in order to constitute a service, there must be involvement of more than one person i.e., a service provider and a service receiver; and that there must be ‘consideration’ for provision of such service. The phrase ‘consideration’ explained in the Explanation, appended to Section 67 ibid has provided that ‘consideration’ includes any amount that is payable for the taxable services provided or to be provided. In the present case, the appellants herein have not provided any taxable service to their group companies, which is evident from both the SCN and the impugned order. The reimbursement of the cost/expenses incurred by the appellants as per actual, cannot be regarded as consideration, flowing to the appellants towards the taxable services provided by them - in absence of any provision of service by the appellants to their group companies, mere claim of reimbursement of actual cost and expenses should not form a part of provision of any taxable service, for payment of service tax thereon. Conclusion - The reimbursement of expenses incurred by one entity on behalf of another, without the provision of a service, does not constitute a taxable service. Such reimbursements do not qualify as 'consideration' for service tax purposes. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the reimbursements received by the appellants from their group companies for expenses incurred on their behalf constitute a taxable service under the category of 'business support service' as defined in Section 65(104C) of the Finance Act, 1994.Whether such reimbursements can be considered as 'consideration' for the purpose of levying service tax as per the Explanation to Section 67 of the Finance Act, 1994.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of Reimbursements as 'Business Support Service'Relevant legal framework and precedents: The definition of 'service' under Section 65B of the Finance Act, 1994, and the category of 'business support service' under Section 65(104C) are central to this issue. The Tribunal also referenced the Supreme Court judgment in Intercontinental Consultants and Technocrats Pvt. Ltd.Court's interpretation and reasoning: The Tribunal found that the appellants did not provide any taxable service to their group companies. The activities were merely for cost-effectiveness and involved reimbursement of expenses, not provision of service.Key evidence and findings: The original authority's order lacked specific discussion on the nature of services provided. The Tribunal noted that the reimbursement of expenses was based on cost-sharing arrangements without any service element.Application of law to facts: The Tribunal applied the definition of 'service' and 'consideration' to conclude that the reimbursements were not for any service provided but were mere cost-sharing transactions.Treatment of competing arguments: The Tribunal rejected the department's argument that sourcing services for group companies constituted 'business support service' due to the absence of service provision.Conclusions: The Tribunal concluded that the reimbursements did not constitute a taxable service under 'business support service' as no service was provided by the appellants to their group companies.Issue 2: Reimbursements as 'Consideration' for Service TaxRelevant legal framework and precedents: Explanation to Section 67 of the Finance Act, 1994, particularly clause (ii), which includes reimbursable expenditure as 'consideration' under certain conditions.Court's interpretation and reasoning: The Tribunal emphasized that reimbursements for actual expenses incurred do not qualify as 'consideration' for taxable services in the absence of service provision.Key evidence and findings: The Tribunal noted that the impugned order failed to demonstrate how the appellants provided any specific taxable service to their group companies.Application of law to facts: The Tribunal applied the legal definition of 'consideration' and found that the reimbursements were not for any service provided but were cost-sharing measures.Treatment of competing arguments: The Tribunal dismissed the notion that reimbursements could be considered 'consideration' for service tax purposes without the provision of a service.Conclusions: The Tribunal held that the reimbursements did not constitute 'consideration' for any taxable service, and thus, no service tax was applicable.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'In absence of any provision of service by the appellants to their group companies, mere claim of reimbursement of actual cost and expenses should not form a part of provision of any taxable service, for payment of service tax thereon.'Core principles established: The reimbursement of expenses incurred by one entity on behalf of another, without the provision of a service, does not constitute a taxable service. Such reimbursements do not qualify as 'consideration' for service tax purposes.Final determinations on each issue: The Tribunal set aside the impugned order, concluding that the appellants were not liable to pay service tax on the reimbursements received from their group companies.This summary provides a structured analysis of the legal judgment, focusing on the issues considered, detailed analysis of each issue, and significant holdings. It maintains the original legal terminology and significant phrases, as per the requirements.