2025 (11) TMI 1024 - AT - Service Tax

Service tax not leviable on reimbursed expenses; Rule 5(1) cannot expand valuation beyond Sections 66 and 67

M/s. A.S. Cargo Movers (P) Ltd Versus Commissioner of GST and Central Excise, Chennai

CESTAT allowed the appeal, holding that service tax cannot be levied on reimbursable expenditures recovered by a service provider for taxable services. ... Levy of service tax - reimbursable expenditure incurred towards provision of taxable services of clearing and forwarding services provided by the appellant - HELD 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 in appeal cannot be sustained. Given findings on merits that the issue is settled in the appellant’s favour, the contentions on limitation are not examined. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reimbursable expenses/charges collected by a service provider from clients constitute consideration includible in the taxable value of the taxable service under Section 66/67 and related valuation rules. 2. Whether Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, to the extent it includes reimbursable expenditures/costs in the gross amount charged for valuation of taxable services, is intra vires the charging and valuation provisions of the statute. 3. Whether the extended period of limitation can be invoked where reimbursable receipts were not declared in returns (issue raised but not decided on merits due to disposal on substantive point). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy on Reimbursable Expenses: Legal framework Section 66 (charging provision) levies service tax at a percentage of the value of taxable services; Section 67 (valuation) identifies the gross amount charged for providing such taxable services as the base for valuation. Rule-making power under Section 67(4) is subject to Section 67(1). The Valuation Rules (Rule 5(1)) attempted to treat expenditure or cost incurred by the service provider in the course of providing taxable service as consideration and includible in taxable value. Issue 1 - Precedent Treatment The highest court has considered the precise question and upheld the view that reimbursement receipts are not part of the gross amount charged 'for such service' unless statute so provides; subordinate rules cannot extend valuation beyond what Sections 66/67 permit. That decision was followed by the Tribunal in subsequent appeals addressing similar facts. Issue 1 - Interpretation and reasoning The Court construes 'value of taxable services' and 'gross amount charged' as referring strictly to consideration charged for providing the taxable service itself - the quid pro quo for the service rendered. Amounts calculated or received for purposes other than compensation for the service (i.e., true reimbursements of expenditure incurred on behalf of the client) are not 'for such service' and hence fall outside the statutory valuation base. The Court emphasizes that rules cannot expand statutory scope; valuation rules may prescribe manner but must remain within the ambit of subsection (1). Issue 1 - Ratio vs. Obiter The holding that reimbursable expenditures, when bona fide reimbursements and not consideration for the service, are not includible in taxable value constitutes ratio decidendi relied upon by the Tribunal. Observations on the nature of 'gross amount charged' and the limiting import of 'for such service' are integral to the ratio. The Tribunal treats earlier lower-court characterization of facts as applied to the present appellant as binding on outcome. Issue 1 - Conclusion Reimbursable expenses collected from clients, being amounts not charged 'for such taxable service', are not includible in the taxable value under Sections 66/67 as existing prior to the 2015 statutory amendment; accordingly, service tax is not leviable on such reimbursements for the relevant period. Issue 2 - Validity of Rule 5(1) of the Valuation Rules: Legal framework Rule 5(1) sought to include expenditure or cost incurred by the service provider in the course of providing taxable service within the value of taxable services. Rule-making power under Section 67(4) is expressly subject to Section 67(1), which mandates valuation to be of the gross amount charged for providing the taxable service. Issue 2 - Precedent Treatment The apex court invalidated Rule 5(1) to the extent it expanded valuation beyond consideration 'for such service', finding it ultra vires Sections 66/67. The Tribunal follows that precedent and a subsequent pattern of Tribunal decisions applying the same principle. Issue 2 - Interpretation and reasoning The Court applies settled principles that subordinate legislation cannot conflict with or enlarge the scope of the parent statute. It reasons that Rule 5(1) went beyond the mandate of Section 67 by treating reimbursable expenses as part of gross consideration even though such amounts are not calculated for providing the taxable service. The legislature's later amendment to Section 67 (2015) to include reimbursable expenditure is treated as a substantive, prospective change confirming that prior to amendment Rule 5(1) lacked statutory backing. Issue 2 - Ratio vs. Obiter The declaration that Rule 5(1) exceeds statutory authority and is ultra vires insofar as it treats reimbursements as taxable forms part of the binding ratio. Observations on legislative intent and retrospective/prospective effect of the 2015 amendment are reasoning necessary to the holding and therefore form part of the ratio rather than mere obiter. Issue 2 - Conclusion Rule 5(1) cannot be applied to include reimbursed expenditures in taxable value for periods before the statutory amendment; the rule is ultra vires to that extent and cannot sustain demands for service tax on such reimbursements for the period in question. Issue 3 - Extended Period of Limitation: Legal framework Extended limitation can be invoked where suppression or wilful misstatement with intent to evade duty is established; statutory rules and case law require evidence of suppression or concealment to attract extended period. Issue 3 - Precedent Treatment Authorities establish that invocation of extended limitation requires a threshold finding of suppression or deliberate non-disclosure. The appellant relied on such precedents to challenge the extended period invocation. Issue 3 - Interpretation and reasoning Although raised, the Tribunal did not decide the limitation issue on its merits because it disposed of the appeal on the substantive question of liability - finding the levy unsustainable in law for the relevant period. Given the dispositive ratio on valuation and rule validity, the Tribunal expressly refrained from examining contentions on limitation. Issue 3 - Ratio vs. Obiter The non-decision on limitation is not a judicial determination and therefore is obiter in relation to limitation jurisprudence; no new proposition on limitation is laid down. Issue 3 - Conclusion Extended period invocation was not adjudicated because the substantive invalidity of the rule-based valuation meant no tax liability arose for the reimbursed amounts in the period under review; consequently, the Tribunal did not uphold the extended limitation on the facts before it. Cross-reference and overall conclusion The Tribunal, applying the supreme court's authoritative interpretation that valuation must be limited to gross amount charged 'for such service' and that subordinate rules cannot extend valuation beyond statute, set aside the impugned order demanding service tax on reimbursed expenses for the period prior to the 2015 amendment. Because the substantive issue disposed the appeal in favour of the appellant, ancillary contentions on extended limitation were not examined. The decision follows binding precedent and consequent tribunal authorities that applied the same principle.