2026 (3) TMI 1069 - AT - Service Tax

Reimbursed Expenses excluded from Taxable Value; valuation rule deemed inapplicable to genuine CHA reimbursements, favouring the assessee.

Rule 5(1) of the Service Tax (Determination of Value) Rules cannot be used to fold genuine reimbursed expenses into the taxable value of Customs House ... Valuation of Customs House Agent (‘CHA’) service with reference to Section 67 of the Finance Act - reimbursable expenses - failed to consider the CBEC Circular No. 119/13/2009-ST dated 21.12.2009 regarding service tax valuation issues pertaining to CHA service - Whether the expenses recovered by the Respondent from their clients are liable to be included in the gross value charged for provision of service by invoking the provisions of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. Inclusion of expenses reimbursed by a CHA in the gross value of taxable service under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. - HELD THAT:- The Tribunal held that the controversy is no longer res integra in view of the Hon'ble Supreme Court in Union of India v. Intercontinental Consultants & Technocrats Pvt Ltd [2018 (3) TMI 357 - SUPREME COURT], which declared Rule 5(1) ultra vires Section 67 because it attempted to include reimbursable expenditures within the valuation of 'such' taxable services. Applying that ratio, reimbursable expenses recovered by the service provider cannot be included in the taxable value of CHA services prior to the statutory amendment effecting such inclusion. [Paras 6, 8] Rule 5(1) cannot be invoked to include reimbursable expenses in the gross value for service tax; such expenses are not includible under Section 67 as interpreted by the Supreme Court. Effect of CBEC Circular No.119/13/2009 ST on valuation of CHA services and reimbursement charges. - HELD THAT: - The Tribunal relied on the Board's circular which sets out conditions under which charges over and above CHA service are to be excluded from taxable value (including requirement of actual reimbursement without mark up, separate invoicing/entries, and proof of nexus). The circular was held to support exclusion of reimbursable charges where its conditions are met and to govern disputes arising from 19 April 2006 onwards. [Paras 7] The CBEC circular supports exclusion of certain reimbursable charges from the gross value of CHA services where its specified conditions are satisfied. The Tribunal accepted the Adjudicating Authority's factual finding that the respondent received consideration in convertible foreign exchange for services rendered outside India and that such overseas income was not subjected to service tax. Consequently, expenses recovered on an actual basis in respect of those export/overseas services cannot be taxed as part of CHA services in India. [Paras 10, 11] Expenses recovered in connection with overseas billing for services rendered outside India are not liable to service tax under CHA. Final Conclusion: The Tribunal upheld the Commissioner's Orders in Original dismissing the service tax demands: reimbursable expenses cannot be included in the taxable value under Rule 5(1) in light of the Apex Court's decision, the Board's Circular No.119 supports exclusion where its conditions are met, and overseas billing expenses for services rendered outside India are not taxable under CHA; the Revenue's appeals are dismissed. Issues: Whether expenses recovered by a customs house agent from clients (reimbursable expenses/overseas/local expenses) are required to be included in the gross value charged for CHA services by invoking Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.Analysis: Legal framework includes Section 66 and Section 67 of the Finance Act, 1994 (valuation and charging provisions), Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 and CBEC Circular No. 119/13/2009-ST. The Hon'ble Supreme Court in Union of India v. Intercontinental Consultants & Technocrats Pvt Ltd has held that Rule 5(1) insofar as it seeks to include reimbursable expenses within the value of taxable services is ultra vires Section 67, and that valuation must be limited to the gross amount charged as consideration 'for such service'. The CBEC circular contemporaneously clarifies conditions where reimbursements may be excluded (e.g., actual reimbursement without markup, nexus to activity, separate invoicing). The adjudicating authority made fact findings that the amounts in question were reimbursements tied to overseas billing and that the primary overseas services were not taxable; it also held that many recovered expenses (air/sea freight, port/airport charges, local transportation) fall outside the core CHA activities taxable under the CHA definition. The combined legal authority and the Adjudicating Authority's findings support exclusion of genuine reimbursements from taxable value for the periods in question.Conclusion: Rule 5(1) cannot be applied to include the reimbursable expenses in the taxable value for CHA services for the periods under consideration; therefore the impugned demands are not sustainable and the result is in favour of the assessee.