2025 (11) TMI 199 - AT - Service Tax

Levy of service tax on reimbursable expenses falls with Rule 5(1) struck down under Sections 66/67; taxable value excluded (1)

M/s. Balram Shipping Services Versus Commissioner of GST and Central Excise, Chennai

CESTAT CHENNAI - AT held that levy of service tax on reimbursable expenses is no longer res integra in light of the SC decision affirming the DEL HC, ... Levy of service tax on reimbursable expenses - pure agent or not - fulfilment of conditions specified in Rule 5(2) of the Valuation Rules read with explanation 1 of the Valuation rules or not - HELD THAT:- It is found that the issue on levy of service tax on reimbursable expenses 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. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts collected by a registered Customs House Agent as reimbursement of third-party charges (Harbour/CFS dues, IAAI charges, loading/unloading, surveyor fees, freight/steamer agent charges, insurance charges) constitute 'consideration' forming part of the taxable value of the service under Section 67 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006. 2. Whether the service provider qualified as a 'pure agent' under Rule 5(2) and explanation 1 to Rule 5(2) so as to exclude reimbursable expenses from the taxable value. 3. Validity and applicability of Rule 5(1) of the Valuation Rules insofar as it seeks to include reimbursable expenses in taxable value - specifically whether Rule 5(1) goes beyond the legislative mandate of Sections 66/67 and is therefore ultra vires. 4. Effect of the subsequent legislative amendment to Section 67 (by Finance Act, 2015, effective May 14, 2015) that expressly includes reimbursable expenditure within 'consideration' - whether that amendment has retrospective effect on periods prior to the amendment. 5. Whether the impugned appellate order remitting the matter for verification of chartered accountant certificates was sustainable in light of settled legal position on reimbursable expenses. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of reimbursable third-party charges in taxable value Legal framework: Section 66 levies service tax on value of taxable services; Section 67 prescribes that where provision of service is for consideration in money, taxable value is the gross amount charged for providing such service. Rule 5(1) (Valuation Rules, 2006) sought to include expenditures or costs incurred by the service provider in the course of providing taxable service in the taxable value. Precedent treatment: The Supreme Court in the referred decision examined Rule 5 and upheld the view of the High Court that valuation must be confined to the gross amount charged 'for such service' and that Rule 5 went beyond the mandate of Section 67. That High Court view was affirmed. Interpretation and reasoning: The Court reasoned that 'such service' in Section 67 means amounts calculated as quid pro quo for rendering the taxable service; amounts not calculated for providing the taxable service cannot be part of the valuation. Rule 5(1) attempted to broaden valuation to include reimbursable expenses not part of the consideration for the taxable service and therefore exceeded statutory mandate. Rules cannot override or expand the statute; subordinate legislation that conflicts with the Act yields to the statute. Ratio vs. Obiter: Ratio - valuation for service tax is limited to the gross amount charged for the taxable service; reimbursable expenses, not being consideration for the service, do not form part of taxable value under pre-May 14, 2015 law. Obiter - general observations on rule-making and legislative competence to amend valuation regime. Conclusions: For periods prior to the statutory amendment, reimbursable third-party charges collected on actuals without markup are not includible in taxable value under Section 67 as interpreted by the Supreme Court. Issue 2 - Qualification as 'pure agent' under Rule 5(2) Legal framework: Rule 5(2) (and explanation 1) provides that expenditure or costs incurred by the service provider as a 'pure agent' of the service recipient can be excluded from taxable value, subject to conditions. Precedent treatment: The adjudicating authority had accepted chartered accountant certificates and found the appellant acted as a pure agent; appellate authority remitted for verification. The Court relied on higher-court pronouncements that reimbursable expenses, by their nature, could be excluded when bona fide pure agent relationship is established. Interpretation and reasoning: While Rule 5(2) sets out conditions for exclusion as pure agent, where Rule 5(1) is invalid for extending valuation, the core issue becomes whether reimbursable amounts were actually mere pass-throughs billed on net-to-net without markup. The adjudicating authority's factual finding - supported by chartered accountant certificates and absence of markup - indicated pass-through nature. Given the legal conclusion that Rule 5(1) could not be invoked to include such amounts, factual acceptance of pure agent character supports exclusion. Ratio vs. Obiter: Ratio - factual findings that reimbursable amounts were billed without markup and acted as pass-throughs support non-inclusion in taxable value under the statutory interpretation; Obiter - specifics of meeting each condition in Rule 5(2) where Rule 5(1) is struck down do not alter the principal statutory limitation. Conclusions: Where reimbursable charges are bona fide pass-throughs billed on actuals without markup, the amounts are not leviable as part of taxable value for the relevant pre-amendment period; the adjudicating authority's finding in that regard was legally sustainable. Issue 3 - Validity of Rule 5(1) vis-à-vis Sections 66/67 Legal framework: Subordinate legislation must conform to the enabling statute; Section 67(4) allows rules to prescribe manner of valuation but is subject to Section 67(1). Precedent treatment: The Supreme Court held that Rule 5(1) went beyond the scope of Sections 66/67 and was therefore ultra vires insofar as it sought to include reimbursable expenses in valuation. Interpretation and reasoning: The Court emphasized well-settled principles that rules cannot override or enlarge statutory provisions. The purposive reading of Section 67 confines valuation to amounts charged for the taxable service itself; Rule 5(1) attempted to import into valuation amounts that were not consideration for the taxable service and so conflicted with the statute. Ratio vs. Obiter: Ratio - Rule 5(1) is ultra vires to the extent it includes reimbursable expenses in taxable value under the pre-amendment statutory framework. Conclusions: Rule 5(1) cannot be applied to include reimbursable expenses in taxable value for periods before the statutory amendment; reliance on that Rule to demand tax on such amounts is unsustainable. Issue 4 - Effect of legislative amendment to Section 67 (Finance Act, 2015) Legal framework: Finance Act, 2015 amended Section 67 to expressly include reimbursable expenditure or cost charged in the course of providing a taxable service within 'consideration'. Precedent treatment: The Court noted that the Legislature expressly corrected the scope of Section 67 prospectively by amendment. Interpretation and reasoning: The amendment constitutes a substantive change in the statutory definition of 'consideration' and thus has prospective effect; established rules of statutory interpretation disfavor retrospective operation unless clearly intended. Therefore, the amendment cannot be applied to periods prior to May 14, 2015. Ratio vs. Obiter: Ratio - the legislative amendment applies prospectively and does not validate prior demands based on Rule 5(1) for earlier periods. Conclusions: The post-2015 statutory position permits inclusion of reimbursable expenses, but that change does not affect the legal position for the earlier assessment periods under consideration. Issue 5 - Remand for verification of chartered accountant certificates and appellate remit Legal framework: Appellate authority set aside adjudicating order and remitted for verification, citing need to examine correctness of chartered accountant certificates. Precedent treatment: The Court relied on binding authority establishing that reimbursable expenses billed on net-to-net without markup do not constitute taxable consideration under pre-amendment law. Interpretation and reasoning: Given the settled legal position that reimbursable expenses are not taxable for the relevant period and the adjudicating authority had accepted evidence (including chartered accountant certificates) establishing pass-through nature, further remand for verification was unnecessary. The appellate authority's remit founded on applying a now-disapproved Rule 5(1) and doubt about certificates could not sustain reversal when the statute constrains valuation to amounts charged for the service. Ratio vs. Obiter: Ratio - appellate remit based on the need to verify certificates and to apply Rule 5(1) was unsupportable; the adjudicating authority's conclusion dropping proceedings was to be restored. Obiter - observations on standards for verifying professional certificates. Conclusions: The appellate order remitting the matter was set aside; the original adjudicatory finding dropping the demands on reimbursable expenses billed without markup was reinstated and the appeals allowed with consequential relief.