2026 (2) TMI 782 - AT - Service Tax

Reimbursement of costs not being consideration: such reimbursements are not taxable as management, maintenance or repair services.

The article addresses whether reimbursements from overseas principals for salaries, transport, warranty parts and third-party repair charges constitute ... Demands for service tax are only based on the reimbursements shown in their books of accounts - Management, maintenance or repair service - service means any activity carried out by a person for another for consideration - reimbursable expenses not includible in taxable value - suppression and extended period of limitation - HELD THAT:- No dispute that the amounts received by the appellant are reimbursable expenses incurred by them. It is also an admitted fact that no invoices/bills were raised towards warranty service to their customers in India. The Commissioner’s assumption that “Therefore, it is evident that the 'intention of parties in the present case was to provide the warranty service to the end customers who had purchased Machines/IT products from IBM India”, is totally misplaced since the service tax cannot be levied unless there is a consideration received for the service being rendered and not by deriving intention of the parties based on the Agreement. We find that whether it is prior to 01.07.2012 or after 01.07.2012, there has to be a service rendered by the appellant for which consideration has to be received. From the discussions and perusal of the Distribution Agreement, we do not find any service being rendered by the appellant to IBM Singapore, for which the payments have been received instead we find that the show-cause notices itself admit that these are reimbursable expenses relating to salaries, transport, etc., and the reimbursable expenses cannot be levied to service tax is settled by the Hon’ble Supreme Court’s decision in the case of Intercontinental Consultant and Technocrats Pvt. Ltd. [2018 (3) TMI 357 - SUPREME COURT]. Thus, we do not find any reason to sustain the demands for both the periods. Suppression and extended period of limitation - HELD THAT:- We find that the second show-cause notice cannot invoke suppression as it is a settled principle of law as laid down in the case of Nizam Sugar Factory vs. CCE, [2006 (4) TMI 127 - SUPREME COURT] It is also to be noted that since no consideration was received from the customers during the warranty period, the question of reflecting any of these services in their ST-3 returns does not arise. Moreover, whenever third-party services were rendered, service tax has been paid by such vendors and therefore, they cannot be the source of the ST-3 returns filed by the appellant. Accordingly, we do not find any suppression of facts, which can be justified. Therefore, we are not inclined to sustain the above impugned orders neither on merit nor on limitation, hence, the impugned orders are set aside. Appeals are allowed with consequential relief. Issues: (i) Whether amounts received as reimbursements from overseas entities for costs of parts, labour and other expenses are taxable as management, maintenance or repair (warranty) services; (ii) Whether the extended period of limitation based on suppression of facts is invocable in respect of those demands.Issue (i): Whether reimbursements received from overseas manufacturers for costs incurred in replacing parts and paying third-party repair charges amount to taxable 'management, maintenance or repair' service for which consideration was received.Analysis: The amounts in dispute are described in the records and show-cause notices as reimbursements for salaries, transport, warranty parts and third-party repair charges. No invoices or bills were raised by the assessee to end customers for warranty services and no separate consideration was received from end customers during the warranty period. Distribution Agreement clauses reflect reimbursement of actual financial loss incurred in repairs and third-party charges, and the customer agreement shows warranty obligations borne by the reseller. The statutory definitions require a service rendered for consideration. Reimbursable expenses that merely compensate actual costs and where third-party vendors have discharged service tax do not constitute consideration for a service rendered by the assessee to its customers.Conclusion: Reimbursements of costs and third-party repair charges are not taxable as management, maintenance or repair (warranty) services; decision on merits is in favour of the assessee.Issue (ii): Whether the extended period of limitation based on suppression of facts can be invoked to sustain the demands.Analysis: The department's knowledge of the relevant facts from financial statements and the nature of the receipts as reimbursements negates suppression. No consideration from end customers was received that would require reporting in service returns (ST-3), and where third-party vendors discharged service tax, those payments cannot be the basis for suppression by the assessee. Established authority bars invoking extended limitation where facts are not suppressed.Conclusion: Extended period of limitation based on suppression cannot be invoked; decision is in favour of the assessee.Final Conclusion: The demands are unsustainable both on merits and on limitation and the impugned orders are set aside; the appeals are allowed with consequential relief.Ratio Decidendi: Reimbursable expenses that merely compensate actual costs and where no separate consideration is received from customers do not constitute taxable service under the management, maintenance or repair category; suppression-based extension of limitation is not available where the nature of receipts was disclosed and no consideration was received.