2026 (1) TMI 580 - AT - Service Tax

Reimbursements to foreign representative office not 'consideration' for taxable business support services; reverse-charge levy quashed on appeal

Dominant issue: whether reimbursements paid to a foreign representative office constitute 'consideration' for taxable business support services under ... Levy of service tax under Reverse Charge Mechanism - Business Support Services - amount of expenses reimbursed to the foreign representative office by the appellant from foreign representative office - HELD THAT:- Considering the nature of the functioning between the two, it is apparent that the representative office is nothing but a back-end office of the appellant running under the identity of the appellant itself and it was the appellant, who incurred all the expenses of the representative office. Since the expenditure incurred by the representative office are reimbursed by the appellant, the same cannot be considered to be the value of services rendered by the representative office. The learned Counsel has drawn a distinction to say that there is no agreed consideration charged by the representative office for carrying out their alleged activities and it is only claiming the reimbursement of various expenses incurred by it. Thus, there is no separate specified ‘consideration’ charged for providing the services in question. The decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt. Ltd. Vs. Union of India [2012 (12) TMI 150 - DELHI HIGH COURT] struck down the provisions of Rule 5(1) of 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 as ultra vires Section 66 and 67 of the Act. On the factual aspect, it has been categorically noticed in the case of Kusum Healthcare Pvt. Ltd. Vs. CCE, Alwar [2023 (3) TMI 173 - CESTAT NEW DELHI] that the amount was directly paid by the appellant and even the invoices were raised upon the appellant and not the representative offices, does not amount to be taxable. There are no reason to sustain the impugned order, which is hereby set aside - appeal allowed. Issues: Whether service tax under the Reverse Charge Mechanism is leviable on expenses reimbursed by an Indian company to its overseas representative office for business support activities (i.e., whether such reimbursements constitute import of Business Support Services taxable under the Finance Act, 1994).Analysis: The dispute concerns whether the overseas representative office and the Indian head office are separate taxable persons for the purpose of levy of service tax and whether reimbursements for expenditures incur the element of 'consideration' required for a taxable service. The legal framework includes the definitions and charging provisions of the Finance Act, 1994, the Import Rules (Taxation of Service Provided from Outside India and Received in India Rules, 2006) including Rule 3(iii), and the valuation principles addressed by Rule 5(1) of the Service Tax Valuation Rules as examined by higher courts. Prior decisions establish that permanent establishments abroad are treated for identification of provision/consumption of service but that one cannot provide a taxable service to oneself; transactions internal to the same legal entity amount to service to self and lack the two-person and consideration prerequisites for a service. Where expenditures are merely reimbursed and invoices/payments are in the name of the head office, such amounts do not constitute separate agreed consideration for taxable services. Additionally, where services (if any) are performed wholly outside India, they fall outside taxable scope under Section 64 of the Act. The Tribunal relied on consistent precedents applying these principles to analogous facts and on the legal effect of judicial rulings invalidating valuation provisions that would otherwise include reimbursed costs as consideration.Conclusion: The impugned demand for service tax under Reverse Charge Mechanism on reimbursed expenses to the overseas representative office is not sustainable; the transaction is treated as service to self and/or relates to services performed outside India and therefore no service tax is leviable. Conclusion in favour of the assessee.