Required clerification on Reimbursement of expenses & cenvat credit thereon

[RAM SHARMA]

Dear Experts,

The Hon’ble President has given assent to the Finance Bill, 2015 on Thursday, May 14, 2015. Accordingly, the Finance Bill, 2015

Now as per Section 67: Amendment in definition of the term ‘Consideration’to include:

a) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed like Pure Agent.;

1) According to this rule,

Whether service tax payable on all reimbursable expenses is applicable including taxable services paid by service provider (CHA) on our behalf like govt. fee & custom duty etc.

2) Secondly,We are giving all reimbursable expenses to our consignment agent like freight and handling charges etc up to the end user. We are also giving commission on sale to our consignment agent and availing cenvat credit on such commission.

Whether we are eligible service tax credit on freight and handling charges which is reimburse by the company to own consignment agent.

With Regards

[CSSANJAY MALHOTRA]

Reimbursements towards Govt. Fees and Custom Duty Payments are not chargeable to Service Tax as these are Statutory Payments which do not form part of Service Definition.

Input Services defined in Rule 2L of CCR 2004 are eligible for CENVAT Credit. Any amount reimbursed in connection with the said services too are eligible for CENVAT Credit.

[Akash Deep]

Dear Ram

Term reimbursement, as per supreme court in case Tata Iron and Steel Co. Ltd. V Union of India, MANU/SC/0745/2000 term reimbursement has been interpreted as under:

“16. In common acceptation the word 'reimburse’ mean and imply 'to pay back or refund': As a matter of fact it denotes restoration of something paid in excess: as regards the respondent Union of India it cannot but mean to indemnify having regard to the common grammatical meaning of the word 'reimbursement'.Reimbursement has to mean and imply restoration of an equivalent for something paid or expended. Reimbursement pre-supposes previous payment.”

On the basis of above meaning of term “reimbursement” it can be said that reimbursement can never be treated as consideration as reimbursement is not paid in respect to the services provided by Service provider but towards other expenses which have no connection with service being provided. Further, as held in case of M/s Bhayana Builders Pvt. Ltd. consideration is to paid for the benefit of service provider and retained by the services provider, however, reimbursement is paid as an restoration of something expended and if not paid would result in loss. In other words, while receiving reimbursement, service provider never got benefited of his skill and labor used in provisions of service but only got compensated for his expenses which he has incurred not in relation to provision of service.

Moreover, as held in case of Intercontinental Consultants & Technocrats Private Ltd., only that amount would be treated as consideration which has been incurred for provision of services. It may be noted that words “such services” existing in section 67(1)(i) has not been deleted. Being so, the view uphold in this case, that there has to be a nexus between service provided and amount paid. If amount has not been paid against provisions of service, but concerning to any other cause of reason, such amount can never be treated as consideration against services in question.

It appears that provision quoted by you is ultra vires to section 67 itself, hence liable to be quashed.

Any amount which does not qualify as consideration the question of inclusion of the same in taxable value of service does not arise.

AI Summary

Reimbursable expenses as consideration may attract service tax, provoking tension with case law on reimbursement nexus. The Finance Bill, 2015 amendment would include reimbursable expenditures charged by a service provider within the definition of consideration for service tax, subject to prescribed exceptions like pure agent. Queries arose whether statutory payments reimbursed to providers and reimbursements for freight, handling and commissions to consignment agents attract service tax and whether CENVAT credit is admissible. Respondents took opposing stands: one treating statutory payments as non-taxable and allowing CENVAT on reimbursements tied to input services under Rule 2L, and another citing case law that reimbursement is not consideration absent a nexus with the service.