Inter compane expenses reimbursement
Querist : Anonymous
In the demarketed area of the new company B the original company A runs a factory. All the Salary, Wages, and other expenses of A's factory are initially paid by B and then reimbursed by A against a Debit note.
Does the above reimbursement attract Service Tax liability ??
Querist : Anonymous
Just to add that the employees and infrastructure used by Company A belongs to Company B and A reimburses the expenses.
Regards
Querist : Anonymous
Querist : Anonymous
Querist : Anonymous
In the instant case, since the company B deploys its employees and infrastructure for manufacturing the products of company A, I feel the expenses are to be added during valuation of Service Tax.
Please provide your comments and suggestions.
Querist : Anonymous
Advise required if the understanding is okay or not.
### **Service Tax on Reimbursement of Inter-Company Expenses**
1. **Rule 5 of the Service Tax Valuation Rules:**
- **Rule 5(2)** of the Service Tax (Determination of Value) Rules, 2006 (as amended) specifies that:
- **Expenses paid by the service provider to a third party** for providing a taxable service, if reimbursed by the recipient, are not to be included in the value of taxable service.
- **Contingent expenses**, such as expenses incurred by the service provider for which reimbursement is sought from the recipient, are not included in the service value.
2. **Application to Inter-Company Transactions:**
- **Expenses Paid to Third Parties:**
- If Company B pays expenses to third parties (like utilities, fuel, etc.), and these expenses are reimbursed by Company A, these reimbursements would typically not attract service tax, provided they are reimbursed as per actuals and are not marked-up.
- **Expenses Paid to Own Employees:**
- **Salaries and wages** paid to employees of Company B, where Company A only reimburses the actual amount, are generally considered as part of internal management and should not attract service tax.
- **Planned/Budgeted Expenses:**
- If the expenses are planned and budgeted, and then Company B charges these to Company A, this is considered part of the service cost and should be included in the service tax valuation if it is a taxable service.
3. **Practical Application:**
- **Salary and Wages:**
- Salaries and wages paid to Company B’s employees for the benefit of Company A’s factory would typically not be subject to service tax as they are internal expenses of Company B. The reimbursement should reflect actual costs without additional service tax implications.
- **Utilities and Other Costs:**
- If Company B incurs costs such as electricity or fuel which are directly linked to the operation of Company A’s factory, and these costs are reimbursed, such reimbursements might not attract service tax provided they are passed on at actuals.
- **Service Tax Liability:**
- If the expenses are contingent and not planned or budgeted, and are reimbursed as-is, service tax is generally not applicable. However, if there is any markup or if the reimbursement involves charges beyond actuals, that portion may be subject to service tax.
### **Summary:**
- **Reimbursement of actual, contingent expenses** paid to third parties does not generally attract service tax if they are passed on at actuals without mark-up.
- **Salaries and wages** paid to own employees of Company B do not attract service tax.
- **Planned or budgeted expenses**, if charged to Company A and not passed on as-is, may include service tax in their valuation.
### **Recommendation:**
- **Documentation and Compliance:**
- Maintain clear documentation of all reimbursed expenses, including details on how they were calculated and whether they are third-party expenses or internal.
- Ensure that all inter-company transactions are well-documented and align with service tax regulations.
- **Consultation with a Tax Professional:**
- Given the complexity of service tax regulations and inter-company transactions, consult with a tax professional or advisor to ensure compliance and proper treatment of such transactions.
By following these guidelines, you can better manage service tax implications on inter-company reimbursements and ensure accurate reporting and compliance.
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