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2025 (6) TMI 266 - AT - Service TaxCalculation of service tax - reimbursements of various expenses claimed by the appellant from the service recipient - conditions prescribed under Rule 5 of Service Tax (Determination of Value) Rules 2000 have not been satisfied - pure agent services or not - HELD THAT - The conditions of the impugned order is in view of Rule 5 of the Service Tax (Determination of Value) Rules 2000. It is found that the Hon ble Supreme Court has struck down the said Rule in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. 2018 (3) TMI 357 - SUPREME COURT . Such reimbursements are not taxable service as by no way of imagination they can be linked to any conservation for such service rendered. The impugned order is set aside and the appeal is allowed.
The core legal questions considered by the Tribunal in this appeal revolve around the correct valuation of taxable services under the Service Tax regime, specifically:
Issue-wise Detailed Analysis 1. Taxability of Reimbursements for Transport, Weighment, and Freight Charges Legal Framework and Precedents: The valuation of taxable services is governed by Section 67 of the Finance Act, 1994, which requires service tax to be levied on the "gross amount charged" for taxable services. Rule 5 of the Service Tax (Determination of Value) Rules, 2000 attempted to include reimbursed expenses as part of the taxable value. However, the Hon'ble Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. struck down Rule 5 as ultra vires Section 67, holding that only the consideration for the actual taxable service rendered can form part of the taxable value. Court's Interpretation and Reasoning: The Commissioner had confirmed service tax on reimbursements related to transport and weighment charges on the ground that the expenses incurred by the appellant were higher than the amounts received from customers, and no documents were furnished to prove pure agent status. The Commissioner treated such reimbursements as income, thus taxable. The Tribunal, however, relied on the Supreme Court ruling which clarified that reimbursements made to a pure agent are not consideration for taxable service and cannot be included in the gross amount charged. The Tribunal held that the reimbursements were not for any service rendered by the appellant but were amounts passed on as a pure agent, thus not taxable. Key Evidence and Findings: The appellant claimed that they only arranged transport and freight, paid the transporters, and recovered the same from customers. No profit element existed. The Commissioner noted a discrepancy in expenses and receipts but the appellant did not produce documents to conclusively prove pure agent status. Application of Law to Facts: Despite the Commissioner's findings, the Tribunal applied the Supreme Court's authoritative interpretation of Section 67 and Rule 5, holding that the reimbursements cannot be taxed as service income. The absence of profit or loss element and the nature of reimbursements as pass-through amounts meant no taxable service consideration was involved. Treatment of Competing Arguments: The Revenue argued that the reimbursements formed part of gross amount charged and hence taxable. The appellant contended that Rule 5 was ultra vires and reimbursements were not service income. The Tribunal favored the appellant relying on the binding Supreme Court precedent. Conclusion: Reimbursements for transport, weighment, and freight charges received by the appellant as a pure agent are not taxable under service tax law. 2. Taxability of Brokerage Income, Drawback Commission, and Exchange Rate Fluctuation Income Legal Framework and Precedents: Business Auxiliary Service (BAS) and Business Support Services are taxable service categories under the Finance Act. The nature of income determines the classification and taxability. Court's Interpretation and Reasoning: The Commissioner held that brokerage and drawback commission were income earned for services rendered and hence taxable under BAS. The appellant claimed brokerage was an incentive from shipping lines reducing freight charges, and drawback commission was a pass-through amount for filing services, not BAS. Key Evidence and Findings: The Commissioner noted absence of evidence that drawback commission amount was passed on to customers. The appellant's certificate did not clarify disbursement of the commission. The appellant admitted acting as filing agents but claimed the amounts were not income. Application of Law to Facts: The Tribunal accepted that brokerage income as an incentive reducing freight cannot be treated as BAS income. However, for drawback commission, since the appellant charged commission for filing services and did not prove it was fully passed on, it was taxable as BAS income. Treatment of Competing Arguments: The appellant argued these amounts were not income from service but reimbursements or incentives. The Revenue emphasized the absence of documentary proof to support appellant's claims. The Tribunal partially upheld the Revenue's view on drawback commission but accepted the appellant's argument on brokerage. Conclusion: Brokerage income as freight reduction incentive is not taxable BAS income. Drawback commission, unless fully passed on and evidenced, constitutes taxable BAS income. Exchange rate fluctuation income was held not to be income from service and thus not taxable. 3. Tax Demand under Goods Transport Agency (GTA) Service Legal Framework and Precedents: GTA service tax is leviable on the service provider or under reverse charge on the service recipient. The pure agent principle exempts reimbursements where the agent merely passes on charges without markup. Court's Interpretation and Reasoning: The Commissioner confirmed service tax on reimbursements for GTA services on the basis that the appellant was a "body corporate" paying freight and hence liable. The appellant contended that they only paid transporters and recovered the same from customers as reimbursements and did not provide GTA service themselves. Key Evidence and Findings: The appellant's role was limited to arranging transport and passing on freight charges. The Commissioner rejected the argument of double taxation, holding that clearing and forwarding service and GTA service are distinct and both taxable. Application of Law to Facts: The Tribunal, following the Supreme Court's ruling on Rule 5 and valuation, held that reimbursements received by the appellant are not consideration for taxable GTA service rendered by them. The tax liability under reverse charge lies on the customers who availed GTA services. Treatment of Competing Arguments: Revenue emphasized the separate taxability of GTA service and clearing & forwarding service. The appellant relied on pure agent principle and Supreme Court precedent. The Tribunal sided with the appellant. Conclusion: Service tax demand on reimbursements under GTA service from the appellant is unsustainable as they did not provide GTA service but acted as pure agents. 4. Validity and Application of Rule 5 of Service Tax (Determination of Value) Rules, 2000 Legal Framework and Precedents: Rule 5 sought to include reimbursed expenses as part of taxable value. The Supreme Court in Intercontinental Consultants and Technocrats Pvt. Ltd. declared Rule 5 ultra vires Section 67 of the Finance Act, 1994. Court's Interpretation and Reasoning: The Tribunal extensively quoted the Supreme Court's reasoning that the value of taxable service must be the gross amount charged for the service itself, and cannot include amounts not paid for the service rendered. Key Evidence and Findings: The appellant's contention that demands based on Rule 5 cannot be sustained was upheld. The Commissioner's reliance on Rule 5 was invalidated by the Supreme Court ruling. Application of Law to Facts: Since Rule 5 was struck down, the inclusion of reimbursements as taxable value was not permissible. The Tribunal applied this principle to set aside the service tax demands based on reimbursements. Treatment of Competing Arguments: Revenue relied on Rule 5 and Commissioner's findings. The appellant relied on Supreme Court precedent. The Tribunal followed the binding precedent. Conclusion: Rule 5 cannot be used to include reimbursed expenses in taxable value; demands based on it are invalid. Significant Holdings "Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed... As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such 'taxable service'. That according to us is the plain meaning which is to be attached to Section 67... Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67." "In view of the above, we find that the reimbursements received by the appellant from their customers is not in respect of any service rendered by them but it is the reimbursements given to them as a pure agent and therefore in view of the decision of the Hon'ble Supreme Court, we are of the considered opinion that such reimbursements are not taxable service as by no way of imagination they can be linked to any consideration for such service rendered." Core principles established include:
Final determinations:
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