Reimbursable expenses excluded from service tax value; Rule 5(1) held ultra vires for pre-14.05.2015 period

CESTAT Chennai held that reimbursable expenses such as insurance, bond/godown rent, fumigation, survey and miscellaneous charges recovered by the assessee from its clients could not be included in the assessable value for levy of service tax for the period prior to 14.05.2015. Relying on the SC-affirmed ruling in Intercontinental Consultants, the Tribunal held Rule 5(1) of the Service Tax (Determination of Value of Service) Rules, 2006 to be ultra vires to the extent it mandated inclusion of such expenses. The impugned demand was set aside and the assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether reimbursable expenses incurred and recovered by a Custom House Agent (such as insurance, bond/godown rent, fumigation, survey, miscellaneous charges) for the period 2004-2005 to 2008-2009 are includible in the taxable value of CHA services by invoking Rule 5(1) of the Service Tax (Determination of Value of Service) Rules, 2006.

1.2 Consequentially, whether the impugned appellate order confirming the service tax demand on such reimbursable expenses is sustainable.

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2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Inclusion of reimbursable expenses in taxable value of CHA services under Rule 5(1) for the period prior to 14.05.2015

Legal framework (as discussed by the Tribunal)

2.1 The Tribunal noted that the demand was based on Rule 5(1) of the Service Tax (Determination of Value of Service) 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.

2.2 The Tribunal relied on the judgment of the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., which affirmed the Delhi High Court decision striking down Rule 5(1) as ultra vires Sections 66 and 67 of the Finance Act, 1994, for including reimbursable expenses in the taxable value.

2.3 The Supreme Court, as extracted by the Tribunal, held that:

(a) Section 66 is the charging section, levying service tax on the "value of taxable services" at the prescribed rate.

(b) Section 67 requires valuation based on the "gross amount charged" for providing "such taxable services", meaning only the consideration paid as quid pro quo for the taxable service.

(c) Rule 5(1), to the extent it mandated inclusion of reimbursable expenses in the valuation, travelled beyond the mandate of Section 67 and was therefore ultra vires.

(d) By Finance Act, 2015, with effect from 14.05.2015, Section 67 was amended to include reimbursable expenditure or cost incurred by the service provider and charged in the course of providing taxable service, and this substantive change is prospective.

Interpretation and reasoning

2.4 The Tribunal observed that the issue of levy of service tax on reimbursable expenses by invoking Rule 5(1) for the period up to 14.05.2015 is "no more res integra" in view of the above Supreme Court decision.

2.5 Following its own recent decision in A.S. Cargo Movers (P) Ltd. and other decisions (Balram Shipping Services; Sri Runadasan Freight Services; Seher), which applied Intercontinental Consultants, the Tribunal held that reimbursable expenses received by the service provider in addition to service charges cannot form part of the taxable value for periods prior to 14.05.2015.

2.6 The Tribunal noted that, in line with the Supreme Court's reasoning, service tax is payable only on the value of services actually provided, and reimbursable expenses not constituting consideration for "such taxable service" cannot be included in the valuation.

Conclusions

2.7 For the period 2004-2005 to 2008-2009, reimbursable expenses collected by the appellant CHA on actual basis from clients cannot be included in the taxable value of CHA services by relying on Rule 5(1), as that rule stood struck down as ultra vires for such purpose.

2.8 The demand of service tax on such reimbursable expenses for the said period is unsustainable on merits.

2.9 In view of the finding that the issue on merits is settled in favour of the appellant, the Tribunal expressly declined to examine contentions on limitation.

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Issue 2: Sustainability of the impugned appellate order

Interpretation and reasoning

3.1 Since the very basis of the impugned demand-Rule 5(1) as a source for including reimbursable expenses in taxable value for the relevant period-stands negated by the binding Supreme Court judgment and subsequent Tribunal decisions, the Tribunal held that the impugned appellate order could not be sustained.

Conclusions

3.2 The impugned Order-in-Appeal confirming the levy of service tax on reimbursable expenses is set aside.

3.3 The appeal is allowed with consequential relief(s), if any, in accordance with law.

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