2025 (10) TMI 1036 - AT - Service Tax

Reimbursements received as pure agent not includable in assessable value under Section 67 of Finance Act, 1994

CESTAT KOLKATA - AT allowed the appeal, holding that reimbursements received by the appellant as a pure agent (stevedoring, freight, fender supply, spare ... Valuation - inclusion of certain third-party expenses incurred by the appellant on behalf of their principals in the assessable value for the purpose of arriving at the Service Tax liability - demand with interest and penalties - HELD THAT:- The Chartered Accountant has certified that the appellant has received such reimbursements only on actual basis. The appellant has received all these amounts on actual basis, as a 'pure agent'. Thus, there are merit in the submission made by the appellant that they have received the ‘other charges’ such as stevedoring charges, railway freight, supply of fender, supply of spare parts, survey charges, launch hire charges, etc., also as reimbursements from their clients on actual basis and thus have acted as a 'pure agent'. Accordingly, such reimbursable expenses collected 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. In the judgement of the Hon'ble Apex Court in UNION OF INDIA AND ANR. VERSUS M/S. INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. [2018 (3) TMI 357 - SUPREME COURT], it is observed that 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. Thus, the Service Tax demand of Rs.2,05,90,153/- 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 - As the impugned demand of Service Tax itself does not survive, the question of demanding interest thereon or imposing penalties does not arise. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether third-party reimbursable expenditures (out-of-pocket disbursements) incurred by a steamer agent on behalf of principals form part of the taxable value under Section 67 of the Finance Act, 1994 for periods prior to 14.05.2015. 2. Whether specific heads of expenditure (stevedoring charges, railway freight, supply of fenders, supply of spare parts, survey charges, launch hire charges and miscellaneous expenses) which were reimbursed on actuals can be treated as amounts received as a 'pure agent' and therefore excluded from assessable value under Section 67 (pre-14.05.2015). 3. Evidentiary standard/adequacy: whether submission of a Chartered Accountant's certificate and disbursement account extracts suffice to establish that the amounts were reimbursed strictly on actual basis and that the appellant acted as a pure agent. 4. Consequence of disallowing the tax demand: whether interest under Section 75 and penalties under Sections 77 and 78 of the Finance Act, 1994 survive if the primary demand for service tax is set aside. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of reimbursable third-party expenditures in taxable value under Section 67 (pre-14.05.2015) Legal framework: Section 67 of the Finance Act, 1994 prescribes valuation of taxable services as the 'gross amount charged by the service provider for such service.' Rule 5 of the Service Tax (Determination of Value) Rules, 2006 previously sought broader inclusion. Precedent Treatment: The Tribunal relied on the ratio of the Hon'ble Apex Court in Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd., holding that valuation under Section 67 must be confined to the gross amount charged 'for such service' and that reimbursable third-party disbursements are outside that mandate. The Tribunal also noted subsequent corroborative pronouncements by this Tribunal and the Madras High Court applying the same principle. Interpretation and reasoning: The Tribunal adopts the plain-meaning interpretation that only amounts calculated as quid pro quo 'for such taxable service' are includable in valuation. Amounts calculated to meet third-party costs and reimbursed on actuals are not consideration for the service itself and therefore fall beyond Section 67's pre-amendment scope. The legislative response (Finance Act, 2015 amendment to Section 67) was held to confirm that previously such reimbursables were not taxable; but that amendment is substantive and prospective (effective 14.05.2015) and cannot operate retrospectively. Ratio vs. Obiter: The conclusion that reimbursable third-party expenses do not form part of taxable value under Section 67 for periods prior to 14.05.2015 is treated as ratio, directly applying and following the Apex Court's binding principle. Observations about Rule 5 being ultra vires Section 67 are consistent with and follow from the cited precedents (ratio in those precedents). Conclusions: For periods prior to 14.05.2015, reimbursable third-party expenditures are not includable in the assessable value under Section 67; the impugned addition of such amounts to tax base is unsustainable and must be set aside. Issue 2 - Characterisation as 'pure agent' for specified heads of expenditure Legal framework: The 'pure agent' concept functions as the factual/legal basis to treat reimbursed disbursements as outside the consideration for service. Under the valuation principle in Section 67 (pre-14.05.2015), amounts received strictly as reimbursement by a pure agent are not part of the gross amount charged for the taxable service. Precedent Treatment: The Tribunal applied the Intercontinental ratio and its own earlier decisions (cited) which held that where an assessee acts as pure agent and recovers amounts on actual basis, such recoveries are not includable in taxable value for the pre-14.05.2015 period. Interpretation and reasoning: The Tribunal examined documentary material (CA certificate, disbursement account extracts) and found that the specified heads (stevedoring, railway freight, fender supply, spare parts, survey, launch hire, misc.) were reimbursed strictly on actuals. The reasoning is that where the agent merely pays third parties and recovers identical amounts from principals without mark-up or profit and in discharge of principals' liabilities, those amounts are not consideration for the agent's service. Ratio vs. Obiter: The finding that the listed heads were received as reimbursements and thereby excluded from assessable value is a dispositive, ratio-level factual and legal conclusion insofar as it applies to the present record; the general rule that pure-agent reimbursements are excluded (per Intercontinental) is ratio. Conclusions: The specified reimbursable heads, being received on actuals and borne as pure agent disbursements, are not includable in taxable value under Section 67 for the relevant pre-14.05.2015 period; the tax additions relating to these heads are disallowed. Issue 3 - Evidentiary adequacy of CA certificate and disbursement records to establish pure-agent status Legal framework: Factual determination of whether an assessee acted as pure agent depends on documentary proof showing identity of principal, payment to third parties, pass-through of amounts without mark-up, and reconciliation procedures. There is no rigid single form of evidence mandated; courts/tribunals evaluate totality of records. Precedent Treatment: The Tribunal and courts have accepted accountant's certificates and contemporaneous disbursement accounts as material evidence when they consistently demonstrate reimbursement on actuals and are corroborated by records. Interpretation and reasoning: The Tribunal found the CA's certification and disbursement account extracts established that the appellant received the amounts strictly as reimbursements and reconciled them voyage-wise. The Tribunal concluded that these records were sufficient to show pure-agent conduct in respect of the challenged heads and to rebut the revenue's assertion that the amounts were consideration for taxable services. Ratio vs. Obiter: The Tribunal's acceptance of the submitted records as adequate proof in this case is a case-specific ratio; general principles about types of acceptable evidence are explanatory but consistent with precedent. Conclusions: The CA certificate together with disbursement account extracts were adequate to establish that the appellant acted as a pure agent in respect of the challenged reimbursements; accordingly the additions based on those amounts are not sustainable. Issue 4 - Survival of interest and penalties where primary tax demand is set aside Legal framework: Interest under Section 75 and penalties under Sections 77 and 78 arise from a confirmed service tax liability; their applicability depends on existence and correctness of the underlying tax demand. Precedent Treatment: It is settled that interest and penalties cannot be sustained where the foundational tax demand itself does not survive. Interpretation and reasoning: Since the Tribunal set aside the tax demand by holding that reimbursable amounts are not includable in taxable value for the relevant period, there is no subsisting tax liability on which interest or penalties can be lawfully imposed. Ratio vs. Obiter: The proposition that interest and penalties fall away when the primary demand is quashed is a direct, dispositive application of statutory logic and is treated as ratio in this context. Conclusions: Interest under Section 75 and penalties under Sections 77 and 78 cannot be sustained once the service-tax demand is set aside; those consequential demands are therefore also set aside. Disposition (consequential legal result) Applying the foregoing legal framework and precedents, the Tribunal set aside the confirmed demand of service tax (including cess) of Rs.2,05,90,153/- by excluding the reimbursable disbursements from assessable value for the pre-14.05.2015 period, and consequently quashed the interest and penalties imposed in relation thereto.