2025 (5) TMI 263 - AT - Service Tax

Levy of service tax on reimbursable expenses - reimbursable expenses incurred by the appellant in the course of providing Customs House Agent (CHA) services and other related services form part of the taxable value under Section 67(1) of the Finance Act 1994 and Rule 5 of the Service Tax (Determination of Value) Rules 2006 - pure agent expenses under Rule 5(2) and its Explanation 1 or not - suppression of facts - Profit sharing and commissions/incentives qualify as consideration for Business Auxiliary Services - extended period of limitation - penalty. Levy of service tax on reimbursable expenses - HELD THAT - The issue on levy of service tax on reimbursable expenses is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd 2018 (3) TMI 357 - SUPREME COURT which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax. The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants Technocrats Pvt Ltd v UOI 2012 (12) TMI 150 - DELHI HIGH COURT wherein Rule 5(1) of the Service Tax Valuation Rules 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services in the value of such taxable services was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections - the impugned order in appeal upholding the demands of service tax as confirmed in the impugned orders in original on this count cannot sustain. Business Auxiliary Services - HELD THAT - The Department has proceeded to demand Service Tax only on the figures taken from the financial statements (profit and loss account) and not from the invoices raised by the appellant. No evidence has been let in that these are consideration received for services provided to a client. That the demand of service tax made merely based on income reported in the P L account without it being shown that such income amounts to consideration received for services provided has been held to be untenable. The decisions of the Tribunal in Greenwich Meridian Logistics (I) Pvt Ltd v CST Mumbai 2016 (4) TMI 547 - CESTAT MUMBAI in M/s. New Era Travel Cargo Agencies v The Commissioner of GST Central Excise 2024 (5) TMI 1520 - CESTAT CHENNAI (LB) in the case of M/s. International Clearing Shipping Agency v CST 2023 (11) TMI 104 - CESTAT CHENNAI are on these lines. The nomenclature under which the appellant books profit in its account cannot be the basis for slotting the appellant as providing a particular taxable service under section 65(105). Determination of taxability based on such entries and assessing it to tax on this count on an empirical basis is alien to the Finance Act 1994. The demand under Business Auxiliary Services made vide the impugned orders in original which has been upheld in its entirety by the impugned OIA cannot sustain. Extended period of limitation - penalties - HELD THAT - There is no evidence let in of any positive act of suppression or wilful misstatement with intent to evade payment of service tax on the part of the appellant and thus the ingredients required to invoke extended period of limitation has not been established by the Department - there are force in the contentions of the learned counsel for the appellant that the issues involved were of interpretational nature and therefore the allegation of malafides made to invoke the extended period of limitation and impose penalties are untenable. Conclusion - i) The appellant s exclusion of reimbursable expenses from taxable value is legally correct for the periods in question in light of the Supreme Court s authoritative ruling. ii) The demand on account of Business Auxiliary Services receipts is unsustainable due to lack of evidence linking such receipts to taxable services. iii) The extended period of limitation and penalties imposed are unjustified due to the absence of suppression or malafide intent. Appeal allowed.

Summary

The core legal questions considered by the Tribunal in this matter are:

1. Whether reimbursable expenses incurred by the appellant in the course of providing Customs House Agent (CHA) services and other related services form part of the taxable value under Section 67(1) of the Finance Act, 1994, and Rule 5 of the Service Tax (Determination of Value) Rules, 2006, or whether such expenses qualify for exclusion as "pure agent" expenses under Rule 5(2) and its Explanation 1.

2. Whether the appellant's failure to include reimbursable expenses in the taxable value and pay service tax thereon amounts to suppression or wilful misstatement attracting the extended period of limitation under Section 73(1) proviso and penalties under Sections 76 and 78 of the Act.

3. Whether certain receipts recorded under the head of "profit sharing" and commissions/incentives qualify as consideration for Business Auxiliary Services and are liable to service tax.

4. The validity and applicability of Rule 5(1) of the Valuation Rules, 2006, particularly in light of the Supreme Court's ruling on its vires and the interpretation of Sections 66 and 67 of the Finance Act.

Issue 1: Taxability of Reimbursable Expenses and Pure Agent Status

The relevant legal framework comprises Section 67(1) of the Finance Act, 1994, which defines the taxable value of services as the gross amount charged by the service provider for providing the service. Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, initially mandated inclusion of expenditures or costs incurred by the service provider in the taxable value. Rule 5(2) and Explanation 1 provide for exclusion of expenses incurred as a "pure agent" of the service recipient, subject to strict conditions.

The Department contended that the appellant did not satisfy the conditions to qualify as a pure agent and thus the reimbursable expenses must be included in the taxable value. The appellant argued that these expenses were merely pass-through costs reimbursed by clients and not consideration for services rendered, thus outside the scope of taxable value.

The Tribunal extensively relied on the Supreme Court's decision in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, which struck down Rule 5(1) as ultra vires Sections 66 and 67 of the Finance Act to the extent it mandated inclusion of reimbursable expenses in taxable value. The Court held that service tax is leviable only on the consideration paid as quid pro quo for the service actually rendered, and reimbursable expenses incurred on behalf of the client do not constitute such consideration.

The Supreme Court emphasized that the expression "gross amount charged" under Section 67 refers strictly to the amount charged for "such" taxable service, excluding amounts not calculated for providing the taxable service. The Court further noted that the legislative amendment in 2015 to include reimbursable expenses in taxable value was prospective, confirming that prior to this amendment, such expenses were not taxable.

Applying this precedent, the Tribunal found that the appellant's exclusion of reimbursable expenses from taxable value was justified. The appellant had accounted for these expenses as pass-through costs, supported by a Chartered Accountant's certificate and detailed billing records. The Department failed to establish that the appellant did not act as a pure agent or that these reimbursable expenses were consideration for taxable services.

The Tribunal rejected the Department's contention that the appellant's conduct amounted to suppression warranting extended limitation, noting the interpretational nature of the issue and absence of malafide intent.

Issue 2: Invocation of Extended Period of Limitation and Penalties

The Department invoked the extended period of limitation under Section 73(1) proviso, alleging suppression of facts and intent to evade service tax by not disclosing reimbursable expenses in returns. Penalties under Sections 76 and 78 were also imposed.

The Tribunal analyzed the statutory requirements for invoking extended limitation, which necessitate proof of fraud, collusion, wilful misstatement, or suppression with intent to evade duty. The appellant's conduct was found to be an honest interpretation of the law, supported by documentary evidence and no positive act of suppression.

The Tribunal held that the invocation of extended limitation and penalties was unjustified, given the absence of malafide and the settled legal position as per the Supreme Court ruling. The issues were purely legal and interpretational, precluding any finding of evasion or suppression.

Issue 3: Taxability of Receipts under Business Auxiliary Services

The Department sought to tax certain receipts recorded as "profit sharing" and commissions/incentives under Business Auxiliary Services. This demand was based on entries in the appellant's profit and loss account without correlating these receipts to any actual services rendered.

The Tribunal noted that mere accounting entries or nomenclature cannot determine the nature of service or taxability. The Department failed to produce invoices or evidence that these receipts were consideration for taxable services. The appellate authority upheld the demand without specific findings, which the Tribunal found unsustainable.

Precedents from the Tribunal were cited, holding that tax demands based solely on financial statement entries without evidence of actual services or consideration are untenable. The Tribunal accordingly set aside the demand under Business Auxiliary Services.

Issue 4: Validity of Rule 5(1) of the Valuation Rules

The Supreme Court's decision in Intercontinental Consultants was pivotal in declaring Rule 5(1) ultra vires to the extent it included reimbursable expenses in taxable value. The Court underscored the principle that subordinate legislation cannot override or extend the scope of the parent statute.

The Tribunal reiterated that rules framed under Section 67(4) must be subject to the provisions of Section 67(1) and cannot impose tax liability beyond the consideration for the actual taxable service rendered. The legislative amendment in 2015 was noted as a substantive change, prospective in nature, and not applicable retrospectively to the periods under dispute.

Conclusions

The Tribunal concluded that:

- The appellant's exclusion of reimbursable expenses from taxable value was legally correct for the periods in question, in light of the Supreme Court's authoritative ruling.

- The extended period of limitation and penalties imposed were unjustified due to the absence of suppression or malafide intent.

- The demand on account of Business Auxiliary Services receipts was unsustainable due to lack of evidence linking such receipts to taxable services.

- The impugned orders confirming the demands and penalties were set aside, and the appeals allowed with consequential relief.

Significant Holdings

The Tribunal preserved the Supreme Court's reasoning verbatim, including:

"... the valuation of taxable service cannot be anything more or less than the consideration paid as quid pro quo for rendering such a service."

"... rules cannot go beyond the statute... if there is any conflict between a statute and the subordinate legislation... the statute prevails..."

"... a current law should govern current activities... our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law..."

Core principles established include:

- Service tax valuation must be based on consideration for the actual taxable service rendered, excluding reimbursable expenses unless expressly included by statute.

- Subordinate legislation inconsistent with the parent statute is ultra vires and unenforceable.

- Extended limitation and penalties require proof of suppression or fraud, not mere interpretational disputes.

- Accounting entries alone cannot establish taxability without evidence of services rendered.