Service provider must include reimbursable costs in gross value under reverse charge mechanism Section 67

CESTAT Hyderabad dismissed the appeal regarding determination of taxable value for IT support services under a reseller agreement. The tribunal held that under reverse charge mechanism provisions, the appellant as service provider must include reimbursable expenditure/costs in gross value for service tax computation per Section 67. The court found no infirmity in Commissioner (Appeals) orders including operating/marketing expenses in gross value. Regarding extended limitation period and penalty, the matter was remanded for fresh determination by adjudicating authority to decide revenue neutrality as defense. Both show cause notices were issued within normal limitation period.

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Issues:
1. Determination of correct gross value for charging Service Tax on import of services.
2. Inclusion of reimbursable expenses and operating profit margin in the gross value.
3. Application of revenue neutrality in defense against extended period and penalty imposition.
4. Validity of Orders of the Commissioner (Appeals) in Appeals ST/31267/2018 & ST/30296/2022.

Analysis:
1. The Appellant was engaged in importing Information Technology Software Services (ITSS) and reselling them under a Reseller Agreement. The Department observed non-payment of appropriate Service Tax on the import of services. A demand was made, which was partly relieved by the Commissioner (Appeals) in Appeal ST/31267/2018. The matter was remanded back for modification of demanded amount and consideration of penalty imposition.

2. In Appeal ST/30296/2022, a demand was proposed for a different period, which was confirmed by the Commissioner (Appeals). Both Appeals were examined together regarding the inclusion of reimbursable expenses and operating profit margin in the gross value for Service Tax. The Commissioner (Appeals) concluded that the Appellants' method of determining the gross value was incorrect based on the Reseller Agreement.

3. The issue of revenue neutrality was raised by the Appellants to defend against extended period and penalty imposition. However, the Commissioner (Appeals) found no evidence to support this claim. The judgments cited by the Appellants were considered, but the Commissioner directed the Adjudicating Authority to reevaluate this aspect in de novo proceedings.

4. The Orders of the Commissioner (Appeals) in both Appeals were upheld, especially regarding the inclusion of operating/marketing expenses in the gross value for Service Tax. The invocation of extended period and penalty imposition was left for determination by the Adjudicating Authority in further proceedings. Both Appeals were ultimately dismissed on 03.07.2024.

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