Reimbursable expenses excluded from service tax value; penalty under Section 78 may be restricted where tax and interest are paid.

Reimbursable diesel and consumables paid on an actual basis under the contract do not form part of the assessable value for service tax because they are not consideration for the service. The commentary also notes that penalty under Section 78 of the Finance Act, 1994 may be justified in principle where tax-related defaults are found, but can be restricted where tax and interest have been paid and the circumstances warrant partial relief, including limitation of the penalty to 25% in the stated facts.

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Issues: (i) Whether reimbursed diesel charges formed part of the assessable value for service tax; (ii) Whether penalty under Section 78 of the Finance Act, 1994 was exigible in full or liable to be restricted.

Issue (i): Whether reimbursed diesel charges formed part of the assessable value for service tax.

Analysis: The agreement specifically provided that diesel and consumables would be reimbursed on actual basis. Such reimbursable expenditure did not constitute consideration for the service and, therefore, could not be included in the taxable value. The exclusion was supported by the principle that reimbursable /expenses are not part of assessable value for service tax purposes.

Conclusion: The diesel reimbursement could not be fastened to the appellant's taxable value and the demand on this count was unsustainable.

Issue (ii): Whether penalty under Section 78 of the Finance Act, 1994 was exigible in full or liable to be restricted.

Analysis: The appellant was a registered assessee, had recovered service tax from customers, and had discharged tax and interest only after repeated departmental correspondence. The Tribunal found that the circumstances justified invocation of penalty, but the interests of justice warranted limiting the penalty to 25% where tax and interest had already been paid and the assessee had deposited 25% of the penalty.

Conclusion: Penalty under Section 78 was upheld in principle but restricted to 25% of the amount specified in the Order-in-Original.

Final Conclusion: The appeal succeeded to the extent of exclusion of reimbursed diesel charges from the taxable value and restriction of the penalty under Section 78 to 25%.

Ratio Decidendi: Reimbursable expenses paid on actual basis under the contract do not form part of the assessable value for service tax, and penalty under Section 78 may be moderated where tax and interest have been paid and the circumstances justify partial relief.

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