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Service tax applicability on reimbursement of interest expen

Nishant_kharva (Student CA Final ) (25 Points)

17 June 2015

Whether Service Tax is applicable on Reimbursement of Expenses? I have a client who has become a servicing agent of its subsidiary & is incurring Interest expenses on its behalf i.e. it has availed a term loan on & is financing the activities of its subsidiary's customers & later on the the subsidiary reimburses the holding. So whether there will be service tax applicability on this reimbursement?

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4 Replies

Rashi Bajaj (CA) (752 Points)
Replied 17 June 2015

Service Tax is not leviable on Reimbursment of expenses or expenses incurred as pure agent*.

From the facts given by you, the client is paying interest on the subsidiarie's behalf. i.e. he is only being an agent. Therefore service tax is not leviable.

*The Act states as under:

The expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;

(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Explanation1.–For the purposes of sub- rule (2), “pure agent” means a person who–

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;

(c) does not use such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services.

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Nishant_kharva (Student CA Final ) (25 Points)
Replied 17 June 2015

The client here is an NBFC & its subsidary is a housing bank so its incurrring interest expenses on the term loan which is later being reimbursed. However, they even have a agreement between them as to reimbursing the expense but no where in the agreement its meintioned as to what regards commision is to be charged on the services? So does it satisfy the pure agent criteria?

Thanks for the reply.!

sivakumar (Asst Manager - F&A) (324 Points)
Replied 18 June 2015

Please consider new Finance Bill 2015 amendment in Service Tax. All reimbursement expenses are taxable from 14-5-2015.

Rashi Bajaj (CA) (752 Points)
Replied 18 June 2015

The amendment reads as follows:

In section 67 of the 1994 Act, in the Explanation, for clause (a), the following clause shall be substituted, namely:—

‘(a) “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.’.

But I am still not sure if this covers the definition of "Pure agent". The reason being, that clause has not yet been deleted.

In my opinion, "reimbursement of expenses" has been taken within the perview of "consideration" because many times service providers include the expenditure required to render the service(and not as pure agent, i.e. on behalf of client) under the term "reimbursement" to avoid tax liability. More clarification is still required.