2025 (5) TMI 407 - AT - Service Tax

Includability of expenditure incurred towards air travel of the service provider who provided Management Consultancy Service to the Appellant and other companies - invocation of extended period of limitation - HELD THAT - It can be seen from Rule 7 of Service Tax (Determination of Value) Rules 2006 that for the purpose of discharge of Service Tax for the service provided from outside India the value is equal to the actual consideration charged for the services provided or to be provided. Theres is no dispute in this appeal that the Appellant has discharged appropriate service tax for the consideration paid to Prof. Y. Washio Japan for his Management Consultancy Service rendered. Even if the air travel expenditure is borne by the service provider and being reimbursable expenditure the value of which is not includible for computation of the service tax paid. Extended period of limitation - HELD THAT - Even if the air travel expenditure is treated as consideration for receipt of Management Consultancy Service then whatever the tax payable or paid is eligible for the Appellant to take as CENVAT credit. As the issue is revenue neutral there is no justification for invoking the extended period. The impugned order cannot sustain - appeal allowed.

Summary

The core legal issue considered in the appeal is whether the expenditure incurred by the appellant on air travel for the foreign service provider, who rendered management consultancy services, forms part of the taxable value of the services received under the reverse charge mechanism and is therefore liable to service tax under the Finance Act, 1994.

In addressing this issue, the Tribunal examined the relevant provisions of the Finance Act, 1994, particularly Section 66A which imposes service tax liability on services received from outside India under the reverse charge mechanism. The Tribunal also analyzed Rule 7 of the Service Tax (Determination of Value) Rules, 2006, which prescribes that the value of taxable service received from outside India shall be the actual consideration charged for the services provided or to be provided.

The appellant had obtained management consultancy services from a foreign national and had discharged service tax on the consideration paid to the service provider. However, the dispute arose because the appellant also incurred air travel expenses for the foreign consultant's travel from Japan to India, which were paid to travel agents and subsequently reimbursed by the appellant to other service recipients. The department contended that these air travel expenses should be included in the taxable value as they constituted consideration for the service provided and thus liable to service tax under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

The appellant argued that the air travel expenses were paid directly to travel agents and not to the service provider, and thus could not be considered part of the consideration for the service. The appellant relied on Rule 7 of the Service Tax (Determination of Value) Rules, 2006, which mandates that the taxable value under Section 66A is the actual consideration charged by the service provider. The appellant further contended that since service tax was duly paid on the actual consideration charged by the service provider, the air travel expenses should not be included in the taxable value. Additionally, even if these expenses were included, the appellant claimed entitlement to CENVAT credit for the tax paid, making the issue revenue neutral and negating the justification for invoking the extended period of limitation.

The Tribunal reviewed the submissions and the relevant legal framework and noted that Rule 7 explicitly states that the value of taxable service received from outside India shall be the actual consideration charged for the services provided. The Tribunal found no dispute that the appellant had paid service tax on the consideration charged by the foreign consultant. The Tribunal observed that the air travel expenses were paid to third-party travel agents and reimbursed among service recipients, and thus did not constitute consideration paid to the service provider.

In support of this interpretation, the Tribunal relied on precedents from coordinate benches, including decisions where reimbursable expenses such as travel costs paid to third parties were held not to be includible in the taxable value of services under the reverse charge mechanism. The Tribunal specifically cited the decision in Kalpataru Power Transmission Ltd., where it was held that reimbursable expenses incurred by an agent and claimed on actuals could not be considered part of the taxable value under business auxiliary services, especially where no commission was paid and the expenses were genuine reimbursements. The Tribunal also referred to the judgment of the Hon'ble High Court of Delhi in Intercontinental Consultants & Technocrafts Pvt. Ltd., which struck down Rule 5(1) to the extent it mandated inclusion of reimbursable expenses in taxable value.

The Tribunal further reasoned that even if the air travel expenses were to be considered as part of the taxable value, the appellant was entitled to take credit of the service tax paid on such expenses, rendering the demand revenue neutral and negating the basis for invoking the extended period of limitation under the Finance Act.

The department's contention that travel expenses form an integral part of the service and thus should be included in the taxable value was rejected on the basis that such expenses were not paid or payable to the service provider and were separately borne and reimbursed among the service recipients.

Consequently, the Tribunal concluded that the air travel expenses incurred by the appellant for the foreign consultant's travel could not be included in the taxable value of the management consultancy services under Rule 7 of the Service Tax (Determination of Value) Rules, 2006. The Tribunal set aside the impugned orders confirming the demand of service tax on the air travel expenses and the penalties imposed, allowing the appeals of the appellant.

Significant holdings include the following verbatim excerpt from the Tribunal's reasoning:

"It can be seen from the above reproduced Rule that for the purpose of discharge of Service Tax for the service provided from outside India, the value is equal to the actual consideration charged for the services provided or to be provided. There is no dispute in this appeal that the Appellant has discharged appropriate service tax for the consideration paid to Prof. Y. Washio, Japan for his Management Consultancy Service rendered. Even if the air travel expenditure is borne by the service provider and being reimbursable expenditure, the value of which is not includible for computation of the service tax paid."

Further, the Tribunal emphasized the applicability of Rule 7(1) and the principle that reimbursable expenses paid to third parties and not to the service provider do not form part of the taxable value under reverse charge:

"Since the alleged amount was not paid for services but paid for travelling expense, accommodation charges etc. clearly said expenses cannot be considered as value of taxable service. Hence, demand of service tax not sustainable on said expenses."

In conclusion, the Tribunal established the core principle that under reverse charge mechanism for services received from outside India, the taxable value is confined to the actual consideration charged by the service provider, excluding reimbursable expenses paid to third parties such as travel agents. The Tribunal also underscored that where service tax is duly paid on the actual consideration, inclusion of such reimbursable expenses is not warranted, and invoking extended period of limitation is unjustified in the absence of revenue loss.