Reimbursement of Expenses- Taxability

[Dr. Sanjiv Agarwal]

Often, there is a confusion that whether service tax is payable on the actual reimbursement of expenses from the service receiver or not. This creates problem in valuation of services.

W.e.f. 18.4.2006, section 67 of the Finance Act, 1994 dealing with valuation of taxable services was substituted. The rules were also prescribed w.e.f. 19.4.2006 ,ie, Service Tax (Determination of Value ) Rules 2006.

Section 67 has been fully substituted by the Finance Act, 2006. Unlike the present system of valuation of taxable services based on gross amount charged subject to some exclusions and inclusions, the new valuation norms provide for a three tier valuation mechanism and for the first time in service tax legislation, provisions for valuation of non-monetary consideration is being provided for. The valuation of services can now be done three fold as under -

(i)	Where the provision of service money	Gross amount charged by the is for consideration in service provider for such services provided or to br provided
(ii)	Where the provision of service is not wholly or money (i.e partly in cash, partly in kind)	Amount of money with addition for a consideration of service tax, equivalent to the partly consisting of.,  consideration
(iii)	Where the provision of service is for a consideration which is not ascertainable	Amount as may be determined in prescribed manner

Rule 5  deals with circumstances where certain costs or expenses could be excluded from or added to value of taxable services. It has been provided that all expenses and costs incurred by the service provider for providing the taxable services during the course of such service shall be included as part of value of taxable services. In such cases, there will be no exemption or abatement from service tax in respect of such costs or expenses. For example, cost of consumables, office expenses, telephone expenses, rentals etc. However, where the service provider incurs expenses and cost as a agent of service receiver, i.e., for or on behalf of the service receiver (as a pure agent of the client), such costs or expenses shall be excluded from the value of taxable services. For claiming such costs or expenses to be out of scope of value of service, the service receiver should act as a pure agent or agent of the service receiver.

Who is a Pure Agent

A pure agent or agent shall be a person who satisfies the following conditions —

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

(b)   neither intends not holds any title to the goods or services so provided as an agent of the client;

(c)   never uses such goods or services provided; and

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

CBEC has clarified vide letter No 31/41 2006 dated 19.4.2006 as follows-

The service provider in the course of providing any taxable service may incur certain expenditure or cost as a pure agent of the client. The service provider seeks to exclude such expenditure or cost incurred by him as a pure agent of his client (generally known as reimbursable expenditure) from the value of the taxable services.

There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value. However, if the service provider acts as an undisclosed agent i.e. acting in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as reimbursable expenditure. Whether the expenditure or cost incurred by the service provider in his capacity as a pure agent of the client or incurred on his own account is a question of fact and law and is to be determined carefully.

Indication of different elements of the transaction in the invoice or bill could often be misleading. One has to carefully examine the exact legal nature of the transactions and other material facts before taking a view as to whether or not the expenditure sought to be excluded from the value is reimbursable expenditure. Not only the form , but also the substance of the transaction should be duly taken into account.

Rule 5 pertains to reimbursable expenditure incurred by the service provider as a pure agent of his client. Explanation (1) to rule 5(2) clearly specifies the criteria to decide whether the service provider acts as a pure agent or not in a given situation. In the case of agency function, the agent neither intends to hold nor holds any title to the goods or services and also never uses such goods or services so procured. It is also important to note that the service provider only receives the actual amount incurred to procure such goods or services.

The service provider who seeks to claim exclusion of certain value from the taxable value should also fulfill all the conditions specified in rule 5(2).

In Rolex Logistics Pvt. Ltd v. CST, Bangalore 2009 -TMI - 32160 - CESTAT BANGLORE), it was held that reimbursement of expresses are not for services rendered but expenditure incurred on behalf of client by service provider. Gross amount for service rendered means only for services rendered. It also interpreted 'reimbursement' as payments made on behalf of service recipient by service provider in the course of rendering services. The gross receipt for the services rendered means only for the services rendered.

The value for the purpose of charging service tax as in the gross amount received as consideration for provision of service. All expenses or costs incurred by service provider in the course of providing taxable service should form integral part of

It may be noted that with the issuance of Master Circular in August 2007, all earlier Circulars stood withdrawn. The legal position as it stands today is that the value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenses or costs included by the service provider in the course of providing taxable service should from integral part of value of service. This shall, however, by subject to Rule 5 of valuation rules.

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