Service Tax liability on reimbursible expenses, Service Tax

[samiuddin ansari]

Hello...Good morning sir,

Recently, on being paid visit by Audit team in my friend's unit engaged in rendering taxable services as clearing and forwarding agency, they have raised observations in respect of expenses incurred by him on behalf of their clients/customers and reimbursed the same from them by raising invoices (showing in invoice but counted in taxable value) as well as debit notes. The audit team stated that such reimbursed amount would also form part of the gross taxable income w.e.f 14.05.2015 as amended by Finance Act, 2015 in terms of Section 67 of the Finance Act, 1994.In other words, such expenses would not form part of gross taxable value, but after amendment all the reimbursed expenses would be added in gross taxable value. Here, I solicits your valuable suggestion as to whether I should disagree with the objection as audit period covers between 1.04.2014 to 33.03.2017 or deposit the amount as pointed out. And also provide necessary circular, instruction etc. issued by the Board.

 

Posts / Replies

[KASTURI SETHI]

Dear Querist, First of all agreement executed between principal and C& F Agent has to be perused. Every reimbursable expenditure is not includible into consideration for the purpose of payment of ST. You are to enter into the area of " --------, except in such circumstances, and subject to such conditions, as may be prescribed; " in the definition of consideration provided in Explanation (a) (ii) in Section 67. Also penetrate into the meaning and essence of the phrases like pure agent, agent, intermediary, C& F Agent, Commission Agent, "For and on behalf of " etc. The issue is worth fighting and I am of the view that you must fight and possibility of winning the case cannot be ruled out. You should not be in a hurry to deposit ST. If you intend to deposit, you must deposit under protest. By this way you can save interest and penalty. Must challenge the issue in the court of law. It is clear that you will have to face litigation in order to get your right. It is not the intent of law to include every type of reimbursable expenditure.

 

[YAGAY andSUN]

No Service Tax on reimbursements prior to May 14, 2015 held by SC:

The issue of taxability of out-of-pocket expenses has always been a matter of litigation. Before April, 2006 there was no specific provision to this effect. However, from April 19, 2006 onwards, with the introduction of the Service Tax (Determination of Value) Rules, 2006, (“the Valuation Rules”) Service tax is applicable on gross consideration including all expenses barring the expenses incurred as pure agent. The matter of taxability of such expenses, which is reimbursed by the service recipient, came before various Courts from time to time.With the landmark judgment in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India [2013 (29) S.T.R. 9 (Del.)]  = 2012 (12) TMI 150 - DELHI HIGH COURT (“Intercontinental Case”), the Hon’ble High Court of Delhi declared Rule 5(1) of the Service Tax Valuation Rules as ultra vires of erstwhile Section 66 and Section 67 of the Finance Act, 1994 (“the Finance Act”). The Hon’ble High Court of Delhi, while allowing the Writ Petition, observed that Rule 5(1) of the Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging Service tax is ultra vires erstwhile Section 66 and Section 67 of the Finance Act and travels much beyond the scope of those sections. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him. Thus, the Intercontinental Case had laid down clearly that a Rule can never exceed or go beyond the Section which provides for the chargeability of Service tax, thus Rule 5(1) of the Valuation Rules was held ultra vires erstwhile Section 66 and Section 67 of the Finance Act. At the same time, it had also laid down that Service tax is not exigible on reimbursements of expenses claimed on actual basis by service provider. However, being aggrieved by the decision of the Hon’ble High Court of Delhi in the Intercontinental Case, the Department filed a Petition for special leave to appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court granted leave to appeal and petition was converted into civil appeal in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [(2014) 49 taxmann.com 520 (SC)].  = 2015 (2) TMI 593 - SUPREME COURT OF INDIA Now, with another landmark judgment, the Hon’ble Supreme Court of India in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [TS-72-SC-2018-ST] = 2018 (3) TMI 357 - SUPREME COURT OF INDIA, has upheld the decision of the Hon’ble Delhi High Court in Intercontinental case while dismissing the Revenue’s appeal. Further, while noting the amendment to Section 67 vide the Finance Act, 2015, whereby clause (a) which deals with ‘consideration’ was suitably amended to include reimbursable expenditure or cost, The Hon’ble Supreme Court has categorically held that only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost willform part of valuation of taxable services for charging of Service tax. Important excerpts from the judgment of the Hon’ble Supreme Court:

We are summarising the important excerpts from the judgment of the Hon’ble Supreme Court, for your easy digest:

Then chargeable Section 66 of the Finance Act, specifically mentions that the Service tax will be @ 12% of the ‘value of taxable services’. Thus, Service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the Service tax payable Plain meaning which is to be attached to Section 67 of the Finance Act dealing with valuation of taxable services, unamended, i.e., prior to May 01, 2006 or after its amendment, with effect from, May 01, 2006,that for valuation of taxable services for charging Service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’. Once this interpretation is to be given to Section 67 of the Finance Act, it hardly needs to be emphasised that Rule 5 of the Valuation Rules went much beyond the mandate of Section 67. High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of taxable service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service. Sub-section (4) of Section 67 of the Finance Act empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1) viz., the Service tax is to be paid only on the services actually provided by the service provider. It is trite that rules cannot go beyond the statute – BabajiKondajiGarad Vs. Nasik Merchants Co-operative Bank Ltd. [(1984) 2 SCC 50] = 1983 (10) TMI 270 - SUPREME COURT OF INDIA, CIT Vs. S. ChenniappaMudaliar [(1969) 74 ITR 41] =  1969 (2) TMI 10 - SUPREME COURT It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Andhra Pradesh Vs. Taj Mahal Hotel, [(1971) 82 ITR 44] = 1971 (8) TMI 2 - SUPREME COURT. Realising that Section 67 of the Finance Act, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with ‘consideration’ is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging Service tax. Accordingly, the Revenue’s appeal was dismissed for being devoid of merits. Our Comments:

Undoubtedly, this is one of its kind judgments which will resolve numerous pre-GST litigations pending before lower authorities on taxability of reimbursements in Service tax for the period prior to May 14, 2015, giving relief to mass taxpayers across the Country. It would not be out of place to mention here that in GST regime, contours of Section 15 of the CGST Act, 2017, dealing with value of taxable supply has been kept wide enough to include any amount charged for anything done by the supplier in respect of supply of goods/services. Section 15(2) of the CGST Act, 2017, covering amounts to be included in value of supply, inter alia, covers the following vide clause (b) and (c):

Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both; Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services Further, the definition of ‘consideration’ under Section 2(31) of the CGST Act, 2017, is also indeed broad to, inter alia, cover any payments, whether in money or otherwise, in respect to, in response to, or for the inducement of the supply of goods/services. Thus, it may be concluded that starting from May 14, 2015 in pre-GST era and continuing in GST regime, reimbursements are subject to tax unless incurred as a pure agent.

[KASTURI SETHI]

I fully agree with M/s.Yagay and Sun, Sir. I am all praise his drafting, knowledge on the issue and the way of expression.

[Ganeshan Kalyani]

Reimbursement is taxable w.e.f.14.05.2015 and therefore no service tax payable prior to this date.

[DR.MARIAPPAN GOVINDARAJAN]

I endorse the views of Shri Ganeshan Kalyani.

[samiuddin ansari]

Good Evening dear experts,

Thanks for giving me the detailed understanding. However, one point is very important in the 2nd response given by expert and that if the service providers acts as a pure agent then and only reimbursed amount will not be counted in the total taxable value for charging service tax. Now, again after going through the explanation 1 (a) of Rule 5(2) of Service Tax (determination of value) Rules, 2006 which gives the meaning of pure agent it states that pure agent means a person who enters in to a contractual agreement with the recipient of service to as his pure agent to incur expenditure or cots in the course of providing taxable service. And my friends firm, does not enter into such agreement or contract with his clients/customer provisions and simply reimburse the actual expenditure. So, whether such agreement or contract is necessary or not. Pl. through some light on this aspect.

[KASTURI SETHI]

Dear Querist,. I have never seen any C & F Agent without written agreement/contract. C & F Agent is the best example of pure agent. Other examples are CHA, Travel Agent etc. Your friend's firm works for and on behalf of the principal. Your friend is intermediary. A person who works for and on behalf of another person, is agent, intermediary, commission agent and does not account for total sale proceeds in his account. That person is concerned with the amount of commission only and not any other amount in his books of accounts. If the pure agent/agent charges any amount other than commission from his principal, that person will not be called pure agent and he will forfeit his rights as pure agent. Pl.note that written agreement is an absolutely must. It is requirement of law. No other amount is to be charged. Literal meaning of C & F Agent itself indicates that carrying and forwarding agent. Nothing to be charged more than that. Now it is up to you see whether your friend's firm conforms to the above two conditions or not.

[Shyam Kedia]

Dear Sir,

I have one query on Predeposit for appealing against the service tax order. We have paid the taxes as per the prder. now the department has levied Penalty @ 100% of tax payable. We are going on appeal agaist the penalty order. To go on appeal, we need to pay 7.5% of penalty as pre-deposit. So my question is how to pay pre deposit in case of penalty..ie under which code...and also under which chalan we need to pay the pre-deposit..Whether GAR 7 or challan for GST payment...Pls throw light on this issue...Thanks.

[KASTURI SETHI]

ACES HOME site is still open. Penalty accounting code is according to nature of service provided. Deposit through e-challan GAR-7 or whatever challan system of ACES creates. If you find any problem, let me know the name of service provided by you. Pl.ensure that pre-deposit penalty is deposited against proper accounting code no. If wrong accounting code is mentioned by mistake, there will be problem in getting refund , if the case is decided in your favour. So pl.be careful.

[Shyam Kedia]

Dear Sir, Thanks for your reply on this. The service provided by us is "Banking Services". We were liable to pay tax under RCM basis on legal services received by us. In order to avoid diffuculty, we have paid service tax on RCM. Now the department is asking to pay penalty also. We are contesting against that. So we were confused on this. Pls let us know under which head we need to pay the pre deposit?

[KASTURI SETHI]

You are to pay penalty for Legal Consultancy Services . Accounting Code for deposit of penalty is 00441469. Under RCM you are treated as deemed service provider.These old accounting codes were restored vide Board's Circular No.Circular No. 165/16/2012-S.T., dated 20-11-2012 for statistical purpose. These are still valid for deposit of Service Tax, penalty etc. This circular contains all accounting codes against each service. We are here concerned with pre-deposit of penalty only and hence correct for deposit of penalty is given above..