2025 (4) TMI 449 - AT - Service Tax

Service provider not liable for service tax on reimbursable expenses collected from clients through debit notes

CESTAT Chennai held that service provider was not liable to pay service tax on reimbursable expenses collected from clients through debit notes. Following ... Liability to pay service tax on reimbursable expenses collected from clients through debit notes - Rule 5(1) of the Valuation Rules - 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. Conclusion - The appellant is not liable to pay service tax on the reimbursable expenses for the period in question, as the inclusion of such expenses is not supported by the statutory framework at the time. The impugned order in appeal upholding the demand confirmed by the adjudicating authority along with applicable interest and imposition of equivalent penalty cannot sustain - Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this judgment was whether the appellant was liable to pay service tax on reimbursable expenses collected from clients through debit notes, under the Service Tax Valuation Rules, 2006, specifically Rule 5(1), which was challenged as ultra vires to Sections 66 and 67 of the Finance Act, 1994.2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The appellant was charged under Section 73(1) of the Finance Act, 1994, for non-payment of service tax on reimbursable expenses. Rule 5(1) of the Service Tax Valuation Rules, 2006, was initially used to justify the inclusion of such expenses in the taxable value. However, this rule was struck down as ultra vires by the Delhi High Court in the Intercontinental Consultants and Technocrats Pvt Ltd case, a decision later affirmed by the Supreme Court.Court's interpretation and reasoning:The Tribunal examined the applicability of Rule 5(1) in light of the Supreme Court's decision, which held that reimbursable expenses should not form part of the taxable value under Section 67 of the Act. The Court emphasized that service tax should be levied only on the consideration received for the actual services rendered, excluding any reimbursable expenses unless specifically included by a legislative amendment.Key evidence and findings:The appellant provided evidence that the expenses were reimbursed on actuals and were not part of the consideration for the services rendered. The appellant argued that these expenses were not liable to service tax as they did not constitute payment for services.Application of law to facts:The Tribunal applied the Supreme Court's interpretation of Sections 66 and 67, which clarified that the valuation of taxable services should include only the gross amount charged for the services rendered. The reimbursable expenses, therefore, could not be included in the taxable value as per the unamended Section 67.Treatment of competing arguments:The Department contended that the appellant should have included reimbursable expenses in the taxable value as per Rule 5(1). However, the Tribunal rejected this argument, citing the Supreme Court's ruling that the rule was ultra vires and that the legislative amendment to Section 67 in 2015 was not retrospective.Conclusions:The Tribunal concluded that the demand for service tax on reimbursable expenses was unsustainable, given the Supreme Court's decision and the prospective nature of the 2015 amendment to Section 67.3. SIGNIFICANT HOLDINGSThe Tribunal's significant holding was that the inclusion of reimbursable expenses in the taxable value under Rule 5(1) was ultra vires to Sections 66 and 67 of the Finance Act, 1994, as affirmed by the Supreme Court. The ruling emphasized that service tax should only be levied on the actual consideration for services rendered, not on reimbursable expenses, unless explicitly included by a legislative amendment.Core principles established:The judgment reinforced the principle that subordinate legislation cannot exceed the scope of the statute it derives from. The valuation of taxable services must strictly adhere to the statutory provisions, and any rule conflicting with the main enactment must yield to the statute.Final determinations on each issue:The Tribunal set aside the impugned order in appeal, allowing the appellant's appeal with consequential relief. The ruling confirmed that the appellant was not liable to pay service tax on the reimbursable expenses for the period in question, as the inclusion of such expenses was not supported by the statutory framework at the time.