Reimbursement of actual exp.

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Anirban Mitra (Querist)
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11 May 2009 Let, there are 2 firms-A & B. B is collecting some Professional fees from a third party. While the service is provided to that (3rd) party jointly by A & B. Since the 3rd party is paying the bill amount to B only, A is raising bill on B against its own portion of fees. It was previously agreed that 60% of total professional fees collected from the 3rd party will be payable to A inclusive of reimbursement of expenses if any. For the time being A has made some Expenses on behalf of B (such as boarding, lodging,etc.)and the reimbursement of the same is included in that 60% amount.
My questions are-
i) is the agreement forming any "pure Agent"-principal relationship, if yes-How?
ii)If no, should A collect Service tax on the gross amount(i.e.60%)or amount after deducting the actual reimbursement? Please refer applicable Sec./Rule/Notification/Cases if any.

Madhukar N Hiregange

Madhukar N Hiregange (Expert)
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11 May 2009 As I understnad only B is dealing with the third party to whom he would charge the service tax on the gross amount charged.

A in this case is provding the service to B ( assisting him in completing his work) but has no understadnig with the client. Therefore A should charge the ST to A who can avail the credit of the same and pay the balance ot the government.
However if A is not covered under ST then A need not charge the ST to B.

Anirban Mitra

Anirban Mitra (Querist)
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12 May 2009 But A should charge on what amount?

Asha Kanta Sharma online

Asha Kanta Sharma online

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20 July 2025 Great question about reimbursement of actual expenses and service tax implications between two firms (A and B) involved in joint services. Let me clarify your points step-by-step:

Scenario Recap:
Firms A and B jointly provide services to a third party.
Third party pays B directly.
A and B agreed that A’s share is 60% of total professional fees collected (this includes reimbursement of any expenses A incurs on behalf of B).
A has made some expenses (boarding, lodging) for B and included reimbursement in its 60% bill to B.
Your questions:
i) Does this agreement create a "pure agent"-principal relationship?

Pure Agent concept:
A "pure agent" acts on behalf of another (principal) and incurs expenses reimbursed without markup or profit, and where the principal controls and authorizes the expenses.
Here, since A is providing services to B (not directly to the 3rd party), and expenses are reimbursed as part of a lump sum 60% share,
It does not clearly establish a pure agent-principal relationship, because the expenses are bundled into the fee, not reimbursed separately.
For "pure agent" treatment, expenses should be separately identified, authorized, and reimbursed without markup.
ii) Should A charge Service Tax on gross 60% or after deducting reimbursement?

Since the reimbursement is included in the 60% share, and no separate accounting of expenses exists,
Service Tax should be charged on the entire 60% amount, as the expenses are not treated as pure reimbursement but part of the service consideration.
Applicable principles:
Service Tax is payable on the 'consideration' received for services rendered.
If reimbursement qualifies as pure agent reimbursement (separately identified), it can be excluded from taxable value.
Since expenses are included in lump sum without clear separation, entire amount is taxable.

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