Whether reimbursement of expenses are includible in the value of taxable service or not?

[Surender Gupta]

Reimbursement of Expenses - Inclusion in the value of taxable services

This is a very big question and in the absence of any clear provision in the law different service tax payers follows different methods. Some of them are charging the service tax on the full amount and some are charging service tax only on there professional fees portion only.

Due to different method is followed and planning involved while drafting the agreement and raising the bill on the customers / clients, the government is loosing a substantial amount of service tax in the name of reimbursement of expenses.

Therefore to remove the controversy and to raise the revenue apart from introducing new services and extending the scope of existing services the legislature has proposed to amend the section 67 of the Finance Act and frame new set of valuation rules for proper valuation of taxable service.

Some example

- Clearing and forwarding agent / customs house agent are used to charge service tax on the portion of professional fees (also called service charges). But they are not charging any service tax on the cost of transportation paid by them and other various charges claimed from the client even though they do not attach the proof of actual payment / expenses paid to transport operator or otherwise.

- Various professionals incurs expenditure on travel and hotel for effective and efficient executing of work allotted to them. Some time this expense is claimed on actual basis and some time on lump-sum basis.

- An interior decorator during providing his services uses some material and charge the cost of that material from the customers.

In the draft valuation rules, 2006 to claim the benefit of reimbursement of expenses a service provider has to satisfy 8 conditions and must incur the expenditure in the capacity of pure agent or an agent. These 8 conditions are as follows:

Rule 7(2): -

The expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfills the following conditions with respect to such expenditure or costs, namely

(i) the service provider acts as an agent of the recipient of service when he makes payment to the 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 as an agent of the recipient of service;

(iii) the recipient of service and not the service provider who is only an agent of the recipient of service , is responsible for making payment to the third party;

(iv) the recipient of service authorises the service provider to make the payment on his behalf;

(v)  the recipient of service knows that the goods and services paid for by the service provider will be provided by a third party;

(vi) the service provider's payment on the service recipient's behalf is indicated separately when he invoices the recipient of service;

(vii) the service provider recovers only the actual amount he has paid to the third party; and

(viii) the goods or services for which the service provider pays for are clearly additional to the services he  provides to the recipient of service on his own account.

And to become pure agent or an agent 4 conditions have been prescribed: -

(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 nor 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.

To explain the situation of the above provisions four illustration has been given in the draft rules which are summarized as under: -

1 Real Estate Agent [Illustration - 1]

X contracts with y, a real estate agent to sell his house and thereupon Y gives an advertisement in Newspaper.

Now question is amount paid by X to Y is includible in the value of taxable services provided by X to his client or not.

The answer is yes.

2  Traveling / postage / telephone expenses [Illustration - 2]

Whether the cost incurred by service provider such as traveling expenses, postage, telephone etc. is includible in the value of taxable service.

The answer is yes.

3 Architect [Illustration - 3]

The following expenses incurred by an architect for building a house - air travel tickets, hotel accommodation, etc., to enable him effectively to perform the provisions of services.

All such expenses are includible.

4 Rent-a-cab [Illustration - 4]

Company X provides chauffeurs for overseas visitors. The chauffeur is given a lump sum amount during the tour to cover his food and overnight accommodation and any other incidental expenses such as parking fees.

Company X charges this amount from the recipient of service.

It is includible.

Note:

1 You may see the complete draft valuation rules, 2006 by clicking "Rule" and then "Service Tax" on the top.

2 You can sent your feed back to the draft rules to: - tru.finmin@gmail.com