Inclusion of reimbursable expenses in the value of taxable services:
It is quite common that service providers incur certain expenditure in the course of providing taxable services. These would be reimbursed by the service receiver. The issue that arises here is whether the expenditure incurred by the service provider is includible in value of taxable services or not is haunting both the industry and consultants and lot of cases are pending on this issue at various forums. Recently the Delhi High Court has come up with a decision that the provision of the service tax valuation rules regarding the imposition of service tax on reimbursable expenditure ultra vires the Act. So this article aims at addressing when an expenditure is said to be reimbursable expenditure and what are the essential requirements for claiming deduction of this expenditure.
Section 67 vis-à-vis Rule 5(1) of Service Tax (Determination of Value) Rules, 2006:
Recently the Delhi High Court in the case of Intercontinental Technocrats & Consultants Pvt Ltd vs UOI, has held that section 67quantifies the value of the taxable service after levy is satisfied. It provides that the value of taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him in case where the consideration for such service is received in money.
In this case the petitioner has rendered consulting engineers services to NHAI and it has claimed travel expenditure incurred as reimbursable expenditure. The Court held that the charge of service tax under Section 66 is only on the value of taxable services. The taxable services are listed in Section 65(105) under the previous law. It is only the value of such service that is to say, the value of the service rendered by the petitioner to NHAI, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. Held that the provisions of Rule 5(1) of the Service Tax(Determination of Value)Rules, 2006 are clearly ultravires section 67 and these are bad in law.
This decision of Delhi High Court is a welcoming one since section 67 clear spells out the intention to consider only that expenditure which is actually charged by service provider in order to provide such service. Now the question that arises is on the finality of this judgment. It is sure that Revenue is going to prefer an appeal over this before Supreme Court or it way even take a step in such a way to retrospectively amend section 67 to nullify the effect of this judgment because of the reason that it has collected tax on such reimbursements previously from most of the service providers and CENVAT Credit has been availed by the service receivers.
Beware of Myth Around Reimbursable Expenditure:
Leaving aside the finality of this judgment, service provider needs to be extremely cautious in applying this decision. Before applying the rationale of this judgment, one should be very certain as to the nature of the expenditure because the Delhi High Court never discussed on what is reimbursable expenditure. So this would become very subjective and prone to litigation in view of the following decisions.
In the case of Naresh Kumar & Co vsCCEx, 2008(11)STR 578, wherein the Kolkata High Court has held that expenditure which is indispensable or inevitable to provide a service, such costs cannot be considered as reimbursable expenditure and the same will essentially forms part of the cost of the service.
Further in the case of Rolex Logistics Pvt Ltd vsCCEx, 2009(13)STR147, has held that service tax liability in terms of section 67 is only on the gross amounts received towards the service rendered. If the service provider in the course of rendering service has to make such payment on behalf of service receiver, they are known as reimbursements.
The Bangalore Tribunal in the case of Shri Bhagawathy Traders vs CCE, Coachin, 2011(24) STR 290 (Tri-LB) which dealt with the issue of taxability of reimbursable expenses before Service Tax (Determination of Value) Rules, 2006 were introduced held that the concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of goods and recovers the said amount from the buyer of the goods.Similar is the situation in the transaction between a service provider and service recipient. Only when the service recipient has an obligation, legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise.
Thus on analysis of the above judgments, the following principles may emerge;
· Only expenditure which is not indispensable/inevitable to provide a service can be considered to be reimbursable expenditure. Thus expenses incurred by the service provider which is not essential for his promised services can only be called as reimbursable expenditure. Again this is very subjective and depends on the terms of the contract and facts of the case. Further the view of the Department at subsequent stages may be revenue bias and is highly prone to litigation.
· There should be an obligation on service receiver to incur this expenditure and is incurred by the service provider on his behalf. This intention should clearly spell out from the contract entered into between the service provider and service receiver.
The following are some of the judgments given in the recent past for further practical understanding as to when cana particular expenditure are to be considered as reimbursable nature.
1) Reimbursement of salary and statutory payments to staff deployed by a manpower agency: These are not of the nature of reimbursable expenditure because of the reason that the employees are in payroll of manpower supply agency and their recruitment is essential/inevitable to provide the service. (Security Agencies Association vs Union of India, 2012 (28) STR 3 (Ker.))
2) CMC charges by CHA: These are the charges collected by the computer centre for filing the billing of entry and shipping bills electronically. Held that these are essential services forming part of the main service of CHA. They cannot be considered as reimbursable expenses. (Pioneer Services vsCCEx, 2012(27) S.T.R. 285 (Tri-Chennai))
3) Godown taken on rent: While providing Clearing & Forwarding Services, service provider has taken godown on rent. If there is an agreement between service receiver and landlord, then the same qualifies as reimbursable expenditure. (ShriBhagawathy Traders vs CCE, Coachin, 2011(24)STR290(Tri-LB)
On the basis of the above discussion, it is very clear that Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 for inclusion of reimbursable expenditure and in fact even the concept of ‘pure agent’ containing hard to comply conditions for claiming exclusion do not deserve to remain in force in terms of the present legal position. But the matter has not yet attained finality just by the Delhi High Court Judgment inview of the reason that Revenue may prefer appeal before Supreme Court or even may resort to retrospective amendment.However one can look forward to claim that reimbursable expenditure is not includible in value of taxable services when there is a clear contractual or statutory obligation to incur the expenditure by the service receiver and this is incurred by the service provider. This intent should be clearly spelled out in the service contract otherwise difficult to justify the claim before Revenue authorities and Appellate authorities. So beware of this myth.
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