2025 (9) TMI 259 - AT - Service Tax

Reimbursed statutory and third-party expenses on actuals are pure agent receipts not taxable under Section 67 before 14.05.2015

CESTAT held that reimbursed statutory and third-party expenses recovered strictly on actuals without markup were acted as 'pure agent' receipts and are ... Calculation of service tax - pure agent services - non-inclusion of reimbursed expenses under Rule 5(1)/(2) of the Service Tax (Determination of Value) Rules, 2006 in the assessable value - Difference between ST-3 and Debtors’ Summary on the alleged short reporting of receipts vis-à-vis Debtors ledger - Difference between ST-3 and Bank Credits on the alleged discrepancy vis-à-vis 14 bank accounts. Calculation of service tax - pure agent services - non-inclusion of reimbursed expenses under Rule 5(1)/(2) of the Service Tax (Determination of Value) Rules, 2006 in the assessable value - HELD THAT:- The appellant has provided stevedoring and allied port services at Kolkata Port and Haldia Dock. It is also noted that acting under express authorisation of shipping lines, steamer agents, and importers/exporters, the appellant incurred statutory and third-party expenses on behalf of the Principals, which were reimbursed strictly on actual basis without any mark-up. It is also seen that the reconciliation statements furnished by the appellant in respect of such recovery on actual basis of reimbursed expenses incurred on behalf of clients have been certified and accompanied by a Certificate dated 08.06.2016 by the Statutory Auditor/Chartered Accountant, namely, M/s. Kabiraj & Co., certifying the same to be true, a copy of which has also been placed on record. The documentary evidences including Chartered Accountant's certificates, reconciliation statements, and supporting invoices, clearly demonstrate that the expenses were reimbursed on actuals and without any mark-up. Furthermore, the payment made by the appellant on behalf of its clients has been separately indicated in the invoice issued by the appellant to its clients - it is found that all these amounts have been received by the appellant on actual basis, as a 'pure agent'. Hence, there are merit in the submission made by the appellant that they have received the reimbursements from their clients on actual basis and thus have acted as a 'pure agent'. Such reimbursable expenses collected by the appellant in the capacity of a 'pure agent' are not includable in the assessable value as provided under Section 67 of the Finance Act, 1994, prior to 14th May, 2015, as has been held by the Hon’ble Apex Court in the case of Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. [2018 (3) TMI 357 - SUPREME COURT]. While interpreting the scope and application of Section 67 of the Finance Act, 1994, both in its unamended form prior to 01.05.2006 and after its amendment w.e.f. 01.05.2006, the Hon’ble Apex Court has categorically held that the valuation of taxable services shall be confined to the “gross amount charged by the service provider for such service” and that any inclusion of reimbursable expenses, out-of-pocket expenses or third party disbursements which are not part of the core consideration for the service rendered, travels beyond the mandate of Section 67 ibid - For all periods prior to 14.05.2015, reimbursable expenses remain outside the purview of taxable value under Section 67. Accordingly, the said charges reimbursed by them are not includable in the assessable value for the purpose of computation of their Service Tax liability - the Service Tax demand of Rs.58,96,594/- confirmed in the impugned order by including all the above said reimbursements in the assessable value, is not sustainable and hence, the same is set aside. Difference between ST-3 and Debtors’ Summary on the alleged short reporting of receipts vis-à-vis Debtors ledger - HELD THAT:- In the present case, we find that the Debtors contain non-taxable items such as Credit notes, exempt activities (e.g., agri handling), barge operations covered by exemption, State VAT, and pure-agent recoveries etc. In this regard, the Chartered Accountant’s Certificate submitted by the appellant is perused wherein the figures have been reconciled and excess payment has been found in two years and a minor shortfall in payment in one year, which the appellant have already paid along with interest. It is observed that the Chartered Accountant is a professional who has issued the Certificate after verifying the records of the appellant and reconciled the figures. As there is no contrary evidence against the above said observations in the Chartered Accountant's certificate, there are no reason to reject the same - the demand of service tax of Rs.60,61,591/- confirmed in the impugned order, on the basis of difference between ST-3 and Debtors’ Summary – i.e., alleged short reporting of receipts vis-à-vis Debtors ledger, is not sustainable and hence, the same is set aside. Difference between ST-3 and Bank Credits on the alleged discrepancy vis-à-vis 14 bank accounts - HELD THAT:- This demand has been raised and confirmed on the basis of difference observed between ST-3 and Bank Credits. In this regard, we find that the aggregate bank inflows include various non-taxable receipts such as, Fixed Deposit maturities, tax refunds, contra/intra-bank, reversals, capital receipts, dividends, insurance claims, loans, non-service receipts, etc. There is no service tax liability on any of these receipts - it is also found that the appellant has submitted a full reconciliation along with CA Certificate, which explains each credit across 14 accounts certified by a professional Chartered Accountant. It is observed that the Chartered Accountant is a professional, who has issued the Certificate after verifying the records of the appellant and reconciled the figures. As there is no contrary evidence against the above said observations in the Chartered Accountant's certificate, there are no reason to reject the same - the Service Tax demand of Rs.39,90,998/- confirmed in the impugned order on the basis of difference between ST-3 and Bank Credits is not sustainable and hence, the same is set aside. Interest and penalties - HELD THAT:- As the service tax demands against the appellant itself are not sustainable, the question of demanding interest or imposing penalties does not arise. The demands of service tax, along with interest and penalties set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reimbursements of statutory and third-party expenses received by the service provider as 'pure agent' are includable in the assessable value for service tax (valuation under Section 67 prior to 14.05.2015) when recovered on actuals without mark-up and separately indicated in invoices. 2. Whether a service tax demand can be sustained solely on the basis of differences between ST-3 returns and Debtors' ledger (alleged short reporting of receipts) without specific identification of taxable services, recipients and corresponding consideration. 3. Whether a service tax demand can be sustained solely on the basis of aggregate bank credits (bank inflows) absent linkage of particular credits to receipt of consideration for taxable services. 4. Consequential: If primary demands are unsustainable, whether interest and penalties confirmed thereon survive. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of reimbursements (Pure Agent issue) Legal framework: Valuation for service tax under Section 67 of the Finance Act (unamended up to 14.05.2015) requires valuation to be the 'gross amount charged by the service provider for such service'. Rule 5 of the Service Tax (Determination of Value) Rules sought broader inclusion of reimbursable expenses but must be read in consonance with Section 67. Legislative amendment in 2015 explicitly expanded 'consideration' to include reimbursable expenditure prospectively. Precedent treatment: The Tribunal applied binding higher court jurisprudence interpreting Section 67 to confine taxable value to the consideration for the service and holding that reimbursable/ out-of-pocket third-party disbursements not constituting quid pro quo for the taxable service are excluded for periods prior to the 2015 amendment. The Tribunal also relied on consistent High Court and Tribunal authorities that declare Rule 5 ultra vires Section 67 to the same effect. Interpretation and reasoning: The Tribunal examined documentary evidence-a statutory auditor/CA certificate, reconciliation statements, vendor bills and invoices showing (a) expenses incurred on behalf of principals, (b) recoveries made strictly on actuals without mark-up, and (c) separate indication of such reimbursements in invoices-and accepted that the appellant acted under express authorisation as a pure agent. Applying the statutory language and the higher court's reasoning that valuation must be limited to amounts charged for 'such' taxable service, the Tribunal concluded reimbursable expenses are outside taxable value for periods before the substantive 2015 amendment. Ratio vs. Obiter: The holding that reimbursable expenses reimbursed on actuals and separately indicated are not includable in assessable value for periods prior to the 2015 amendment is ratio decidendi as applied to the facts; references to legislative intent and prospective effect of amendment are part of the binding ratio from higher court authority. Conclusion: Demand confirmed by including reimbursements in assessable value was unsustainable and set aside for the periods in issue. Issue 2 - Demand based on difference between ST-3 returns and Debtors' ledger Legal framework: Levy requires identification of a taxable service, the recipient, and consideration received. Accounting discrepancies, accrual versus receipt timing, and presence of non-taxable items in ledgers affect any inference of unreported taxable receipts. Precedent treatment: The Tribunal followed consistent judicial authority holding that demands cannot be sustained merely on comparisons between returns and accounting documents (Profit & Loss, Debtors ledger) without correlation to taxable services; tribunals and courts have quashed demands premised solely on such differentials. Interpretation and reasoning: The Tribunal noted the Debtors ledger contained non-taxable and exempt items (credit notes, exempt activities, VAT, pure-agent recoveries, barge operations) and accepted the appellant's CA reconciliation which showed overall reconciliation and only a de minimis shortfall already remedied with interest. No contrary evidence from the Department was found to rebut the professional reconciliation. Given absence of specific departmental linkage of the differences to taxable services, the Tribunal held the basis of the demand speculative and insufficient. Ratio vs. Obiter: The core holding-that ST-3 vs ledger differentials without item-wise linkage to taxable services do not sustain a demand-is ratio applicable to similar fact patterns; citation of authorities illustrates established legal principle rather than ancillary observation. Conclusion: Demand based on ST-3/Debtors differentials was unsustainable and set aside. Issue 3 - Demand based on aggregate bank credits (Bank-credits issue) Legal framework: Service tax liability accrues on receipt of consideration for taxable services; therefore raw bank inflows require specific linkage to consideration for taxable services before forming the basis of a demand. Non-service receipts (FD maturities, refunds, loans, dividends, insurance claims, contra entries, capital receipts) are not taxable. Precedent treatment: The Tribunal relied on authorities that reject demands built solely on bank account aggregates, ITR/Form 26AS figures or other accounting summaries where the department fails to establish the nature of receipts or connect them to taxable services. Interpretation and reasoning: The appellant produced a comprehensive CA-certified reconciliation across 14 bank accounts explaining each credit and identifying non-taxable items. There was no departmental rebuttal or contrary documentary evidence. The Tribunal observed settled law that raw bank data without nexus to taxable receipts is insufficient to found a demand; accordingly it accepted the reconciliations and rejected the departmental approach of treating aggregate credits as presumed service consideration. Ratio vs. Obiter: The conclusion that bank credits per se do not give rise to service tax demands absent specific linkage is a ratio applicable to future analogous assessments; attendant discussion of types of non-taxable credits is explanatory. Conclusion: Demand premised on difference between ST-3 and bank credits was unsustainable and set aside. Issue 4 - Interest and penalties consequent to unsustainable primary demands Legal framework: Interest and penalty arise from confirmed taxable liabilities; if the primary tax demand is invalid, ancillary interest and penalty claims fall away. Precedent treatment: The Tribunal followed the logical corollary in prior decisions that where tax demands are quashed, associated interest and penalty cannot be sustained. Interpretation and reasoning: Since all primary tax demands under the three contested heads were set aside on merits, the Tribunal held there was no basis for interest or penalty. Ratio vs. Obiter: The ruling that interest and penalty cannot subsist absent a valid tax demand is ratio in relation to the orders set aside. Conclusion: Interest and penalties confirmed in the impugned order were set aside as consequential relief.