SERVICE TAX ON SEPERATE INOVICE REAISED FOR REAL REIMBURSEMENT OF EXPENDITURE

[abbas mukhi]

SIR,

WE ARE ON SOME OCCASIONS INCURRING EXPENDITURE ON BEHALF OF OUR CLIENT, LIKE BOOKING OF ROOMS IN HOTELS, BOOKING TAXI.

AFTER THAT WE ARE CLAIMING ACTUAL EXPENDITURE INCURRED BY US WITHOUT ANY PROFIT WITH ELEMENT THROUGH SEPARATE INVOICE RAISED (WITH SUPPORTING OF ACTUAL EXPENDITURE)

I WANT TO WHETHER SERVICE TAX IS APPLICABLE CONSIDERING THE RULES AND PROVISIONS OF THE SERVICE TAX ACT ON SUCH INVOICES.

THANKS....

[Mahir S]

Sir,

It is important to note that service taxes are payable on the consideration charged by the service provider from the service recipient.

Consequently, should no consideration be received by the service provider or should the service be provided free of cost, no service tax is leviable.

Hence, in your case, no need to pay Service tax for actual reimbursement of expenses.

[KASTURI SETHI]

Sh.Abbas Mukhi,

Pl. go through the definition of 'Service' as per Section 65 B(44) of the Finance Act which is appended below:-

(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

If there is no consideration, the activity does not conform to the definition of service. Hence no Service Tax applicable.

[Rajagopalan Ranganathan]

Sir,

Rule 5 of Service Tax (Determination of Value) Rules, 2006 lays down inclusion or exclusion of certain expenditure or costs from value of service provided. Under this rule there are 4 illustrations which is reproduced below: -

Illustration 1.-X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent

Illustration 2.- In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

Illustration 3.- A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.

Illustration 4.-Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.

You can determine your liability for payment of service tax by going through this illustrations.

[Ganeshan Kalyani]

Difficulty is a part of life. Similarly confusion is part of Law. If a novice reads the provision he will run pillar to post. One provision at one side is right in its position and another provision on another side is right in its side. Continually reading of both the provision creates so much of confusion that one will pluck all the hair from his head and jump in anger. So is the law of India. It is a like Tide in the sea, never be stable to draw a conclusion. At last one has to take a stand in his mind to frame an answer to the problem. And stick to it by giving all the supporting favouring his/her reply. This is reason I guess the Tax persons are called Experts who sail in the Tide of law very strongly and with lots of efforts. Hence I give standing ovation to Experts who contribution to TMI by the casting their answer/opinion by digging their knowledge treasury to querist totally free of cost. Thanks

[YAGAY andSUN]

Dear Abbas,

Though rule 5 of Service Tax Valuation did provide for inclusion of reimbursement of expenses, there were disputes about inclusion of reimbursement of expenses in value of service tax. There was adverse decision of Delhi High Court Intercontinental Consultants and Technocrats P Ltd. v. UOI (2012) 28 taxmann.com 213 = 38 STT 75 = 59 VST 487 (Del HC DB) = 2012 (12) TMI 150 - DELHI HIGH COURT, where it was held that service tax is payable ‘for such service’. The reimbursable expenses are not charges for ‘such service’ and hence are not includible in value.
To get over that decision, it is provided that ‘consideration’ shall include any reimbursable expenditure or cost incurred by the service provider and charged, in course of providing or agreeing to provide service, except in case of prescribed circumstances – proposed Explanation (a) to section 67 of Finance Act, 1994.
It must be remembered that section 67(1)(i) of Finance Act, 1994, value of service is ‘gross amount charged by service provider for such service provided or to be provided’. ‘Such service’ obviously means ‘taxable service’.
Thus, amount charged or recovered which are not for taxable service is not includible in ‘value’, e.g. (a) Air ticket charges recovered by air travel agent and recovered from customer and paid over to airlines (b) Advertisement charges recovered and paid to the TV company which is telecasting the advertisement (c) Transport charges, loading/unloading charges, port charges etc. paid by Customs Broker on behalf of customer and then recovered.
These amounts recovered are not for ‘taxable services’.
Any expenditure incurred by service provider on behalf of service receiver (for administrative convenience) and recovered from service receiver cannot be part of value of ‘taxable service’.
Under negative list of services, there is no specific definition of any ‘taxable service’. Thus, scope of any taxable service is on basis of mutual agreement. Any amount not covered in the scope of taxable service should not be part of value of taxable service.
Thus, the concept of ‘pure agent’ cannot go, though some litigation is possible.

Regards,

YAGAY and SUN

(Management, Business and Indirect Tax Consultants)

[Rajagopalan Ranganathan]

Sir,

With due respects to the views expressed by M/s. YAGAY AND SON the Parliament has amended the definition of "consideration" under Section 67 of Finance Act,1994 to obviate the decision of Delhi High Court in the case ofIntercontinental Consultants and Technocrats P Ltd. v. UOI = 2012 (12) TMI 150 - DELHI HIGH COURT. At present definition of "consideration" under Section 67 is -

“consideration” includes-

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) 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;

(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.]

[Mahir S]

Yes Sir, it is a fact that the definition of Consideration has been amended as correctly explained above.

At present, any activity undertaken if it is not there in the negative list would become taxable. The next question arises that whether the activity of incurring such expenditure on behalf of the service receiver itself is considered as service?

This question would give rise to two results:

1. “Where in the Reimbursements have not been shown as a separate amount in Invoice “or “if the separate amount shown in the reimbursement is not the actual amount incurred” then it would tantamount to service as it gains the nature of “ service charge”,

2. “Wherein the reimbursements amount (actual incurred) have been separately shown in the Invoice, and the service provider has proper documentary evidence to support the fact that the amounts incurred are reimbursement of expenses” then it would not be treated as a service charge but mere obligation of other met by service provider.

Conclusion:

If Proper documentary evidence and records (all invoices) are maintained for expenses incurred in behalf of Service recipient, then the service Tax may not be charged.

Also refer to the following coloured lines cited in the definition of Consideration under section 67 :-

(ii) 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;

In view of above, in the present case, since only occasional expenses not relating to the services provided were made and separate invoices were raised for actual reimbursement, therefore it appears service tax is not chargeable.

[Ganeshan Kalyani]

Agreed with Mahir ji reply.

[KASTURI SETHI]

I fully agree with Sh.Mahir S. I also agree with M/s.YAGAY AND SUN that the concept of 'Pure Agent' is not relevant here.It has something different connotation.

[KASTURI SETHI]

Such situation is out of scope of 'Service' as defined under Section 65 B(44), not to speak of 'taxable service.

[KASTURI SETHI]

Such type of reimbursement is only transaction in money without any service. On this ground also it falls in the exclusion clause of the definition of 'service' i.e. Section 65 B (44) (a) (ii) of the Finance Act.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Pl. refer to your views dated 8.2.16 expressed in this column. You have expressed your views from the core of your heart. Rather, your heart is speaking. In this materialistic world, if you serve free of charge, it is really for the welfare of others, if visitors of this do not take otherwise. But we are not to care for the world if some people take it negatively. Some questioners even do not reply back.We, the Experts, have satisfaction of serving others via TMI. I appreciate your drafting also. Really enjoyable. Simple words convey the message to the core.

[Ganeshan Kalyani]

Remuneration is not only by money but by way of appreciation also. In fact Appreciation is like a fuel when filled in mind accelerates the willingness in person to contribute consistently. And I must credit you for the appreciation you shower on us. 'Appreciation' is the very costliest thing in today world. You are doing incredible job by appreciating us. Thanks.

[Mahir S]

Thanks Ganeshan ji and Kasturi ji.

[Mahir S]

Thanks Ganeshan ji and Kasturi ji...

AI Summary

Reimbursable expenditure inclusion may make reimbursements part of taxable consideration unless documented actual recharges exempt. Recovery of expenditures incurred on a client's behalf may be treated as part of the taxable consideration when incurred to enable provision of a taxable service; valuation guidance and illustrations treat travel, hotel and similar costs procured on the provider's account as includible in the gross amount charged. Legislative amendment broadened the definition of consideration to include reimbursable expenditure charged in the course of providing a taxable service subject to exceptions, while genuine pass through reimbursements separately invoiced and supported by bills are factually distinct and may fall outside taxable value.