Re-imbursement of Expanses - deduction of amount received which are not directely relatable to the service rendered - Explanation 3 to Section 67

For the purpose of service tax, re-imbursement of expenses is considered a gray area since beginning. For the purpose legislature has amended the provisions of Chapter V of Finance Act, 1994 (Service Tax) from time to time.

In this sequence, an explanation no. 3 to the section 67A was introduced with effect from 13.5.2005, which was read as:

"For removal of doubts it is hereby declared that the gross amount charged for the taxable charge service shall include any amount received towards the taxable service, before, during or after the prevision of such service."

In view of above inclusion, the question arouse that what is scope and extent of the explanation 3.

A show cause notice was issued to the appellant demanding service tax amounting to Rs. 2,61,35,485/- (plus interest and penalty) and confirmed by the adjudicating authority. Appellant has preferred an appeal before the CESTAT.

In this matter appellant has argued that introducing a new levy and this should be effective only with prospective effect and it cannot have retrospective effect..

He further argued that "other incomes" do not represent the amount received for the services rendered. He pointed out that these amounts are to be refunded to the clients by the appellants and therefore, they cannot be charged to Service Tax.

In this CESTAT has held that,

"In our view, Service Tax can be charged only on the amount received for the services rendered. If the appellants had received amounts in connection with various expenditure incurred on behalf of their clients which are not directly relatable to the service rendered, then no Service Tax can be levied on them."

However, to the decide the matter in view of documentary evidence and principle decided as above, the matter was remanded back to adjudicating authority. 

(For full text of judgment - Visit 2008 -TMI - 3451 - CESTAT, SOUTH ZONAL BENCH, BANGALORE)