Service tax liability on reimbursement cost

Query regarding - Service Tax liability on Reimbursement Cost

Background of the case -

1) Parent Company is located in China

2) Parent Company sends its Project Specialist to help the 100% subsidiary company to build a Factory

3) Subsidiary company pays for "Service Project cost" at agreed rate to Holding Company after charging Service Tax under Reverse Charge Mechanism

4) Incidental Hotel Charges, Air Fare Charges and other charges were paid by Holding China Company - and these were reimbursed by Indian Subsidiary Company by payment to Holding Company.

Query - (1) Whether Service Tax is payable on the Item no. 4 i.e. Reimbursement of Hotel Charges, Air Fare etc?

(2) Can the Indian Company get Credit under Excise for payment of Service tax under point 3 and point 4 (if at all Service Tax is payable on point no. 4)

Thanks in advance.

Dear Rishikesh,

As per Rules 5(2) of Service Tax (Determination of Value) Rules, 2006, 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.

If you can fit your expenses incurred by you as reimbursement in to the above definition, then there will be no leavvy of Serivce Tax on such reimbursement.

Again You can always take CenVAT Credit paid under Reverse Charge Mechanism.