2025 (4) TMI 823 - AT - Service Tax

Calculation of service tax - inclusion of salary PF and other reimbursements in the taxable value under Section 67 of the Finance Act 1994 - Extended period of limitation - HELD THAT - The issue as to whether salary PF etc. are includable in taxable value in terms of 67 of the Finance Act 1994 is no more res- integra. The Bangalore Tribunal in the case of Kou-Chan Knowledge Convergence Pvt. Ltd. Vs. CST Bengaluru 2024 (9) TMI 1249 - CESTAT BANGALORE has gone into the details and has held that the administrative charges collected in providing Manpower Recruitment and Supply Agency Service is only to be part of the gross taxable value and all reimbursable expenses salary bonus etc. paid to the employee by the appellant and collected from their clients cannot be included within the scope of gross taxable value under Section 67(1)(i) of the Finance Act 1994 during the relevant period from October 2007 to March 2012. In the present case the amounts received by the appellant on account of salary PF etc. would not be exigible to Service Tax payment. They are required to pay Service Tax only on the net consideration received by them from their clients. Extended period of limitation - HELD THAT - Since the appellant has paid the Service Tax on their commission amount after excluding the salary and reimbursements and they were filing their ST-3 Returns no case has been made out towards suppression by the Revenue. Therefore the confirmed demand for the extended period is not legally sustainable on account of time bar. Conclusion - i) The reimbursements for salary and related expenses are not includable in the taxable value for service tax purposes. ii) The extended period for demand is not applicable in the absence of suppression. The impugned order is set aside and the appeal stands allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

• Whether the amounts received by the appellant on account of salary, PF, and other reimbursements are includable in the taxable value under Section 67 of the Finance Act, 1994 for the purpose of Service Tax.
• Whether the confirmed demand for the extended period is liable to be set aside on account of limitation.

ISSUE-WISE DETAILED ANALYSIS

1. Inclusion of Salary and Reimbursements in Taxable Value

• Relevant Legal Framework and Precedents: The legal framework revolves around Section 67 of the Finance Act, 1994, which defines the taxable value for service tax purposes. The precedent set by the Bangalore Tribunal in Kou-Chan Knowledge Convergence Pvt. Ltd. Vs. CST, Bengaluru and the Supreme Court's decision in UOI Vs. Intercontinental Consultants and Technocrats Ltd. are crucial. These cases established that reimbursements such as salary and PF are not includable in the taxable value.
• Court's Interpretation and Reasoning: The Tribunal followed the precedent that only the administrative charges collected for providing manpower services should be part of the gross taxable value. Reimbursements for salary and other employee-related expenses should not be included.
• Key Evidence and Findings: The appellant's agreements with clients and the practice of crediting salaries directly to employees' accounts were central to the argument that these amounts were reimbursements and not part of the taxable service value.
• Application of Law to Facts: The Tribunal applied the legal principles to the facts, determining that the amounts received for salary and reimbursements were not part of the gross taxable value under Section 67.
• Treatment of Competing Arguments: The Revenue argued that the appellant collected service tax on both salary and commission, and that reimbursements should be excluded only if there is no markup. The Tribunal found that the appellant's practice of excluding salary from taxable value was consistent with legal precedents.
• Conclusions: The Tribunal concluded that the amounts received as salary and reimbursements are not subject to service tax, and only the net consideration received for services should be taxed.

2. Limitation and Extended Period Demand

• Relevant Legal Framework: The issue of limitation pertains to whether the extended period for demand, typically invoked in cases of suppression of facts, is applicable. The appellant argued that there was no suppression as all transactions were recorded and returns filed.
• Court's Interpretation and Reasoning: The Tribunal found no evidence of suppression by the appellant, as they were registered, filed returns, and recorded all transactions. The Tribunal emphasized the appellant's bona fide belief regarding non-taxability of salary reimbursements.
• Key Evidence and Findings: The appellant's consistent filing of returns and the absence of any material facts being withheld were critical in determining the lack of suppression.
• Application of Law to Facts: The Tribunal applied the legal standard for invoking the extended period and found it inapplicable due to the absence of suppression.
• Treatment of Competing Arguments: The Revenue's assertion of suppression was not supported by evidence, leading the Tribunal to reject the extended period demand.
• Conclusions: The Tribunal held that the demand for the extended period was not sustainable due to time bar.

SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The administrative charges collected in providing Manpower Recruitment and Supply Agency Service, is only to be part of the gross taxable value and all reimbursable expenses, salary, bonus, etc. paid to the employee by the appellant and collected from their clients cannot be included within the scope of gross taxable value under Section 67(1)(i) of the Finance Act, 1994 during the relevant period."
• Core principles established: The judgment reinforces the principle that reimbursements for salary and related expenses are not includable in the taxable value for service tax purposes. It also affirms that the extended period for demand is not applicable in the absence of suppression.
• Final determinations on each issue: The Tribunal allowed the appeal on merits, setting aside the demand for service tax on salary reimbursements and ruling that the extended period demand was time-barred.