2025 (3) TMI 506 - AT - Service Tax

Service tax cannot be levied on reimbursable expenses incurred by service providers, Rule 5(1) declared ultra vires

M/s. Aditya Birla Money Limited and M/s. Aditya Birla Commodities Broking Limited Versus Commissioner of CGST & Central Excise, Chennai

CESTAT Chennai ruled in favor of the appellant regarding service tax valuation on reimbursable expenditure. The tribunal held that reimbursable expenses ... Valuation of service tax - non-inclusion of reimbursable expenditure or costs incurred by the service provider while providing taxable service, in the value of such taxable services, for the purpose of charging service tax - Extended period of limitation. HELD THAT:- The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, [2018 (3) TMI 357 - SUPREME COURT] which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client, apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax. The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI, [2012 (12) TMI 150 - DELHI HIGH COURT], wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections. Extended period of limitation - HELD THAT:- There are force in the contentions of the learned consultant for the appellant that the issue involved was of interpretational nature pertaining to the Valuation Rules and no evidence of malafides has been adduced that would attract the extended period of limitation or warrant imposition of penalties. Conclusion - The reimbursable expenses incurred in providing services should not be included in the taxable value unless explicitly mandated by statutory provisions, which was only applicable post-May 14, 2015. The impugned orders in appeal are set aside and the appeals are allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the reimbursable expenses or costs incurred by the service provider and paid to third parties, such as stock exchanges, should be included in the taxable value of services for the purpose of charging service tax under Section 67 of the Finance Act, 1994.Whether Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which mandates the inclusion of such costs in the taxable value, is valid and applicable.Whether the show cause notice issued in Appeal ST/41594/2016 was time-barred due to the absence of fraud, collusion, or willful misstatement by the appellant.Whether the appellants qualify as 'pure agents' under Rule 5(2) of the Valuation Rules, thereby exempting them from including reimbursable expenses in the taxable value.ISSUE-WISE DETAILED ANALYSIS1. Inclusion of Reimbursable Expenses in Taxable ValueRelevant Legal Framework and Precedents: The primary legal framework involves Section 67 of the Finance Act, 1994, which defines the taxable value of services, and Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. The precedent set by the Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd is crucial, where Rule 5(1) was struck down as ultra vires.Court's Interpretation and Reasoning: The Court relied on the Supreme Court's decision, which held that Rule 5(1) went beyond the mandate of Section 67, as it included reimbursable expenses in the taxable value, contrary to the statutory provisions.Key Evidence and Findings: The appellants collected transaction charges from clients, which were paid to third parties like NSDL, CDSL, NCDEX, and MCX. These charges were not included in the taxable value, based on the understanding that they were reimbursable expenses.Application of Law to Facts: The Court applied the Supreme Court's interpretation, affirming that reimbursable expenses prior to May 14, 2015, should not be included in the taxable value, aligning with the statutory provisions of Section 67.Treatment of Competing Arguments: The Department argued for inclusion based on Rule 5(1), but the Court found this untenable due to the Supreme Court's ruling. The appellants' argument that only service charges form the taxable value was upheld.Conclusions: The Court concluded that the demands for service tax on reimbursable expenses were unsustainable, as Rule 5(1) was invalidated by the Supreme Court.2. Time-Barred Show Cause NoticeRelevant Legal Framework and Precedents: The proviso to Section 73(1) of the Finance Act, 1994, allows for an extended period for issuing show cause notices in cases of fraud, collusion, or willful misstatement.Court's Interpretation and Reasoning: The Court found no evidence of malafide intent or misstatement by the appellant that would justify invoking the extended period of limitation.Key Evidence and Findings: The Department failed to demonstrate any fraudulent activity or intent to evade tax by the appellant.Application of Law to Facts: The Court applied the legal standard for invoking the extended period and found it inapplicable due to the absence of qualifying conditions.Treatment of Competing Arguments: The appellant argued that the issue was interpretational, not fraudulent. The Court agreed, noting the lack of evidence for malafide intent.Conclusions: The show cause notice was deemed time-barred, and the demands based on it were unsustainable.3. Qualification as 'Pure Agent'Relevant Legal Framework and Precedents: Rule 5(2) of the Valuation Rules defines conditions under which a service provider can be considered a 'pure agent,' exempting certain expenses from the taxable value.Court's Interpretation and Reasoning: The Court found that the appellants did not meet the conditions to qualify as 'pure agents,' as the expenses were not incurred on behalf of the client.Key Evidence and Findings: The appellants retained a portion of the transaction charges, indicating they were not acting solely as agents.Application of Law to Facts: The Court applied the criteria for 'pure agent' status and found the appellants did not satisfy them.Treatment of Competing Arguments: The appellants' claim to 'pure agent' status was rejected based on the nature of the transactions.Conclusions: The appellants were not considered 'pure agents,' but this did not affect the outcome due to the invalidation of Rule 5(1).SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The Court reiterated the Supreme Court's position: 'We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider 'for such service' and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.'Core Principles Established: The Court reaffirmed that reimbursable expenses incurred in providing services should not be included in the taxable value unless explicitly mandated by statutory provisions, which was only applicable post-May 14, 2015.Final Determinations on Each Issue: The Court set aside the impugned orders in appeal, allowing the appeals with consequential relief. The demands for service tax, interest, and penalties were deemed unsustainable.