2025 (10) TMI 455 - AT - Service Tax

Reimbursements for forms, stamps, xerox and customs exam not taxable; Rule 5(1) struck down, Rule 5(2) ineffective

M/s. Sri Rama Vilas Service Limited Versus Commissioner of GST and Central Excise, Chennai

CESTAT CHENNAI (AT) allowed the appeal. Reimbursed expenses for forms, stamps, xerox and customs examination paid on behalf of clients were held not ... Pure agent services or not - expenses relating to Forms, Stamps, Xerox, and Customs Examination Charges incurred by the Appellant on behalf of the client - taxability - Business Auxiliary Service or not - amount received on the services rendered by the Appellant in letting of Cranes and Forklifts - levy of penalties. Whether or not the expenses viz., relating to Forms, Stamps, Xerox, and Customs Examination Charges incurred by the Appellant on behalf of their client fall within the scope of 'Pure Agent'? - HELD THAT:- It is pertinent to note that the Commissioner (Appeals-I) has stated that in relation to 'Pure Agent' services, exemption for reimbursable expenses is provided subject to certain conditions as laid down in Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. On perusal of the provisions of rule 5(2), it starts with the words, 'Subject to the provisions of sub- Rule (1)', which in the present case assumes importance, in as much as the Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, has been struck down by the Hon'ble Delhi High Court in the case of Intercontinental Consultants & Technocrats (P.) Ltd. v. Union of India [2012 (12) TMI 150 - DELHI HIGH COURT] - In view of the settled legal position, wherein Rule 5(1) itself is held to be ultra vires, reliance on Rule 5(2) cannot come to the rescue of the demands raised. Thus, it is clear that during the impugned period, Rule 5 of Service Tax (Determination of Value) Rules, 2006 having been struck down by the Delhi High Court, which also came to be affirmed by the Supreme Court, the demands of service tax in relation to the issue of includability of such charges, in the present case by the Department, must fail. This view is further fortified by the decision of this Tribunal in the case of M/s. Sindhu Cargo Services Pvt. Ltd. Versus Commissioner of CGST & Service Tax, Chennai [2025 (5) TMI 263 - CESTAT CHENNAI]. Whether or not the amount received on the services rendered by the Appellant in letting of Cranes and Forklifts fall under the category of 'Business Auxiliary Service' and liable to service tax? - HELD THAT:- The supply of cranes, forklifts which were used to shift big machineries/materials from one place to another as well as from one point to another within the same premises, would also not be classifiable under the category of 'Business Support Services'. Accordingly, the demand in this regard is also set-aside. Whether or not the penalties imposed are sustainable? - HELD THAT:- Once the demands on both scores have been set-aside the question of interest and penalties would not arise. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether expenses reimbursed to the service provider for Forms & Stamp Charges, Xerox, Customs Examination Charges and local conveyance can be excluded from taxable value as 'Pure Agent' reimbursements under the Service Tax (Determination of Value) Rules. 2. Whether amounts received for providing cranes, forklifts and similar material-handling equipment are taxable as 'Business Support Services' or fall outside that category (and therefore are not taxable as service under the law applicable to the disputed period). 3. Whether penalties and interest imposed consequential to the demands in issues (1) and (2) are sustainable where the underlying demands are set aside. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Excludability of reimbursed expenses as 'Pure Agent' Legal framework: Service tax valuation relied on Rule 5 of the Service Tax (Determination of Value) Rules, 2006 as then in force, which purported to include in value all expenditure or costs incurred by the service provider (sub-rule (1)) and to exclude certain expenditures where the service provider acted as a 'pure agent' (sub-rule (2)), subject to the conditions and explanation thereto. Section 66 and Section 67 of the Finance Act set out charge and valuation; subordinate rules must conform to those charging provisions. The Legislature subsequently amended Section 67 (effective from May 14, 2015) to include reimbursable expenditure within 'consideration'. Precedent treatment: The Tribunal relied on the judgment of the Delhi High Court (subsequently affirmed by the Supreme Court) holding Rule 5(1) ultra vires to the extent it included non-consideration items in valuation, because Rule 5(1) conflicted with Sections 66/67 which require valuation to be of the consideration for the taxable service. The Supreme Court's affirmation noted that the later legislative amendment to Section 67 effected a substantive change prospective from May 14, 2015. Interpretation and reasoning: The Court reasoned that because Rule 5(1) was declared ultra vires, Rule 5(2)'s exclusion of 'pure agent' expenses (which is expressly made 'subject to sub-rule (1)') could not operate to justify inclusion or exclusion of reimbursed expenses during the dispute period. In other words, the machinery that sought to expand valuation beyond the quid pro quo (Rule 5(1)) was struck down; consequently the Department could not rely on the companion provision (Rule 5(2)) to deny exclusion where the fundamental inclusionary premise had been invalidated. The Court further observed that the legislative amendment to Section 67 post-dates the dispute period and is prospective; it does not validate the earlier inclusionary rule for that period. Ratio vs. Obiter: Ratio - Rule 5(1) is ultra vires insofar as it treats expenditures/costs incurred by the service provider in the course of providing taxable service as consideration; therefore, during the relevant period the Department cannot include reimbursed expenses in the taxable value by relying on Rule 5(1) or on Rule 5(2) read subject to it. Obiter - observations concerning the precise application of the 'pure agent' conditions to specific factual permutations of invoices or authorisations (since the ruling rests on invalidity of Rule 5(1) rather than on detailed fact-based testing of each condition in Rule 5(2)). Conclusion: Demands based on inclusion of Forms & Stamp Charges, Xerox, Customs Examination Charges and similar reimbursements in the taxable value are unsustainable for the dispute period; such demands are set aside. Consequential interest and penalty based solely on those demands fall away. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Classification of hire of cranes, forklifts and material handling equipment Legal framework: Characterisation of a service as 'Business Support Services' (taxable as service) versus classification as 'supply of tangible goods' (different treatment and temporal applicability) is a question of classification/chargeability under the Finance Act. Taxability may depend on when a specific entry bringing supply of tangible goods into the service net became effective. Precedent treatment: The Tribunal relied on its own earlier decisions and a reasoning adopted by other benches and High Courts that introduction of a new taxable entry for 'supply of tangible goods' does not operate retrospectively to render previously non-taxable activities taxable. Where a distinct entry covering the activity is introduced only from a later date, the activity before that date cannot be re-characterised as taxable under an earlier, non-analogous entry. Authorities also affirm that the burden to prove an alternate classification rests on the Revenue. Interpretation and reasoning: The Court analysed that provision of cranes and forklifts for shifting materials within premises constituted supply of tangible goods/material-handling equipment rather than an ancillary 'Business Support Service' during the period in dispute. The Court observed that the entry specifically covering 'supply of tangible goods' came into force later; prior to that date such services were not properly characterised as business support. The Department, bearing the burden of classification, did not sufficiently discharge that burden to justify taxing the activity under the 'Business Support Services' head for the period concerned. Reliance on precedents holding that creation of a new entry is not a carve-out of an earlier entry informed this reasoning. Ratio vs. Obiter: Ratio - Services of hiring/providing cranes and forklifts for material handling during the disputed period are not taxable as 'Business Support Services' where a specific statutory entry for supply of tangible goods was introduced only later; the Revenue must discharge its burden of proving an alternate classification to tax such services for that period. Obiter - detailed comparisons of functional features distinguishing hire of equipment from pure service (e.g., spare crew arrangements, drivers) are explanatory rather than essential to the holding. Conclusion: Demands treating hire/supply of cranes, forklifts and similar material-handling equipment as taxable 'Business Support Services' for the disputed period are unsustainable and are set aside. The Department's failure to prove an alternate classification compels dismissal of the demand for that period. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Sustainability of penalties and interest Legal framework: Penalties and interest are consequential to lawful demands of service tax; if the underlying tax demand is extinguished, the basis for imposition of statutory interest/penalties collapses unless independently sustainable. Precedent treatment: Established principle that interest and penalties cannot survive where the foundational tax liability is annulled; authorities cited by the Tribunal support that position. Interpretation and reasoning: Because demands under both major issues (reimbursed expenses and classification of equipment hire) were set aside, the imposition of penalties under the relevant sections cannot be sustained. No separate factual or legal basis was found to uphold penalties independently of the demands. Ratio vs. Obiter: Ratio - Penalties and interest imposed as consequences of the impugned demands are unsustainable where those demands are set aside. Obiter - remarks on prospective legislative changes affecting valuation (e.g., amendment to Section 67) are not operative to validate earlier penalties for the dispute period. Conclusion: Penalties and interest imposed along with the set-aside demands are quashed; consequential relief follows. CROSS-REFERENCES AND APPLICATION 1. The conclusion on Issue 1 is founded on the invalidity of Rule 5(1) and the consequent inability to rely on Rule 5(2) during the dispute period; see the analysis under Issue 1. 2. The conclusion on Issue 2 is supported by tribunal and high court reasoning that creation of a later distinct taxable entry for supply of tangible goods cannot be used to tax earlier periods under a different entry; see the analysis under Issue 2. 3. The conclusions on Issues 1 and 2 render penalties and interest unsustainable as set out under Issue 3; the burden of proof for alternate classification rests on the Revenue and was not discharged.