Don’t use Cash for these Transactions

The Indian Government has issued cap on cash transactions on and penalty for transactions under sections –

13A -Exemption to political parties, 40A(3)- Disallowance for cash expenditure, 43(1)- Determination of actual cost of asset, 35AD- Investment linked deduction for capital expenditure, 80D- Health Insurance premium, 80G – Donations to certain funds and charitable institutions, 80GGA- Donations for scientific research and rural development, 80GGB – Donations by companies to political parties, 80GGC – Donations by any person to political parties, 269SS- Prohibition on acceptance of cash loans, deposits, etc., 269ST- Prohibition on receiving cash, 269T – Prohibition on repayment of loans or deposits in cash.

S. NoSectionCap on Cash TransactionPenalty for cash
113A -Exemption to
political parties
Receipt of cash donation
above Rs 2,000
No exemption
240A(3)- Disallowance
for cash expenditure
Payment of any
expenditure above Rs.

Payments for plying,
hiring or leasing of goods
carriage above Rs 35,000
No deduction
343(1)- Determination
of actual cost of asset
Payment above 10,000 for
purchase of asset
Such payment won't be
included in actual cost of
asset (viz, No depreciation)
435AD- Investment
linked deduction for
capital expenditure
Payment above Rs 10,000
for any capital
No deduction
580D- Health Insurance
No cash payment allowedNo deduction
680G - Donations to
certain funds and
charitable institutions
Donations above Rs.
No deduction
780GGA- Donations for
scientific research and rural development
Cash donation above Rs.
No deduction
880GGB - Donations by
companies to political
No cash payment allowedNo deduction
980GGC - Donations by
any person to political
No cash payment allowedNo deduction
10269SS- Prohibition on
acceptance of cash
loans, deposits, etc.
Rs. 20,000 or more100% of amount received
11269ST- Prohibition on
receiving cash
Rs. 2,00,000 or more100% of amount received
12269T - Prohibition on
repayment of loans or
deposits in cash
Rs. 20,000 or more100% of amount paid

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Central Excise & Service Tax Assessee Migration to GSTN

The following link contains Central Excise & Service Tax Assessee Migration to GSTN

Complete Detail : Click Here

  • Strategy for Migration of Central Excise and Service Tax Assessee.
  • GSTN Enrollment Process.
  • Update Email ID and Mobile Number.
  • Obtaining Credentials for GSTN Enrollment from ACES
  • Note on Login Credentials

Complete Detail : Click Here

CBEC issued Master Circular on Show Cause Notice, Adjudication and Recovery

Read Complete CircularClick Here

These circulars address references from trade and field formations and provide clarity and uniformity on the issues raised. CBEC Board undertakes exercise of consolidating these circulars from time to time so as to ensure clarity and ease of reference.

This master circular on the subject of show cause notices, adjudication proceedings and recovery is an effort to compile relevant legal and statutory provisions, circulars of the past and to rescind circulars which have lost relevance. Annexure-I to the circular provides Annexure-I to the circular provides list of the eighty nine circulars which stand rescinded. Three circulars listed in Annexure-II have not been rescinded as they contain comprehensive instructions on the subject they address.

2. The master circular is divided into four parts. Part I deals with Show Cause Notice related issues, Part II deals with issues related to Adjudication proceedings, Part III deals with closure of proceedings and recovery of duty and Part IV deals with miscellaneous issues.
3. The provisions of the Master Circular shall have overriding effect on the CBEC‟s Excise Manual of Supplementary Instructions to the extent they are in conflict.
4. Difficulty, if any, in the implementation of this Circular may be brought to the notice of the Board.

Read Complete CircularClick Here

Levy of Service Tax on Restaurant Services

Levy of Service Tax on Restaurant services has been one of the most controversial topics in Service Tax.   Time and again the same has been challenged by assesses as being not exigible to Service Tax.  Moreover, even the valuation of restaurant services has also been a matter of dispute between the government and subjects.  In this article we shall discuss the levy and various controversies as arisen in past basis the various court rulings on restaurant services.

Before we examine the current provision, we must examine in brief the constitutional provision and history of levy of Service Tax on restaurant services.  Prior to introduction of Article 366(29A) in the constitution, sale of food in restaurant was not exigible to Service Tax.  The understanding was upheld in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. [[1972] 29 STC 474] wherein Apex Court has held that the transaction between hotelier and the visitor to the hotel is one essentially of service and the hotelier serves meals in the performance and as part of the amenities incidental to the service and that such supply of meals by the hotel to the residents is not sale of food.  It is pertinent to mention that at that time, no Service Tax was there on restaurant services and thus, dispute was limited to levy of Sales Tax. Accordingly, Article 366(29A) introduced the following provision deeming such supply of food as sale:

“(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

The levy of VAT on food and drinks supplied for human consumption in case of hotels / restaurant was brought by introduction of this sub clause.  Thus, while there is an introduction of deeming fiction of levy of Service Tax on supply of food, however, the same can be as a part of service and thus, existence of service in such supply is well accepted by the Article.  In East India Hotels Ltd. v UOI [(2001) 121 STC 46 (SC)], it was held that the moment food is supplied to the customer, a sale is effected, and it is not material as to whether whole of the food is consumed by the customer or not.  Thus, this supply contains both elements viz. of sale of goods and provision of services and the two respective statutes have devised Rules to levy tax on their respective share in the activity.

To understand the concept better, we can also refer to the decision of Delhi high Court in the case of The Federation of Hotels Restaurants Association of India And Ors v UOI [2007-TIOL-345-HC-DEL-SWMA], wherein the question examined was whether it was impermissible for the Petitioners to charge their customers/guests any price above the maximum retail price (MRP) mentioned on mineral-water packaged and bottled by third parties.  Hon’ble High Court held that answer in negative and held as under:

“That charging prices for mineral water in excess of MRP printed on the packaging, during the service of customers in hotels and restaurants does not violate any of the provisions of the SWM Act as this does not constitute a sale or transfer of these commodities by the hotelier or Restaurateur to its customers. The customer does not enter a hotel or a restaurant to make a simple purchase of these commodities. It may well be that a client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would clearly travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption. Can there by any justifiable reason for the Court or Commission to interdict the sale of bottled mineral water other than at a certain price, and ignore the relatively exorbitant charge for a cup of tea or coffee.”

Thus, as on date, both Service Tax and VAT are levied by Centre and states respectively on sale / service of food in restaurants.  Even in case of Bharat Sanchar Nigam Limited vs. Union of India [2006(2)STR161(SC)], Hon’ble Apex Court held that except in cases of works contracts or catering contracts [exact words in article 366(29A) being – ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’], composite transactions cannot be split into contracts of sale and contracts of service.

Restaurant service was first made taxable with effect from May 1, 2011, when the then Hon’ble Finance Minister introduced the new category by explaining its scope vide Circular No. F.No. 334/3/2011-TRU, dated 28-2-2011 (Extracts) as under:

“Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.”

Thus, what was being exigible to Service Tax was the service provided in restaurant by way of space, ambience, air conditioning, service etc.  Accordingly, the scope of services was to envisage the services provided in terms of servicing and providing good ambience to customers during their consumption of food and not every provision or supply of food.  The Circular further clarified that the levy was intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Also, it was clarified that the amount paid by the customer ex-gratia e.g. as tip to any member of the staff doesn’t constitute consideration paid to the restaurant and shall remain outside this levy.

Further, an exemption @ 70% of the gross value i.e. the total price charged by the restaurant was given by amending the notification No. 1/2006-S.T., dated 1-3-2006 vide notification No. 34/2011-S.T., dated April 25, 2011. The exemption was available provided no Cenvat credit is availed either of inputs or input services. It was further clarified that the exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge.

The application of Service Tax on such services continued under the negative list also, and as on date only factory canteen and non air-conditioned restaurants are exempted from levy of Service Tax.  Further, the in place of erstwhile abatement, effective July 1, 2012, vide notification no. 24/2012-ST, Service Tax (Determination of Value) Rules, 2012 were amended and 40% of the billed value, for supply of food or drinks in a restaurant, was provided as value of services there and made liable to service tax.

The levy on restaurant services was challenged by the assessee in Kerala Classified Hotels And Resorts Association & Others Vs UOI & Others [2013 (31) S.T.R. 257 (Ker.)], wherein Hon’ble Court struck the levy of Service Tax on restaurant services is beyond the legislative competence of the Parliament as the sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule.  The Hon’ble Court held that it can be seen from Article 366(29-A)(f) that service is also included in the sale of goods. Accordingly, if the constitution permits sale of goods during service as taxable necessarily Entry 54 has to be read, giving the meaning of sale of goods as stated in the Constitution. The Court thus held that if read in that fashion, necessarily service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed.

However, to the contrary, Bombay High Court upheld the levy in the case of Indian Hotels And Restaurant Association & Others v UOI [2014-TIOL-498-HC-MUM-Service Tax], wherein Hon’ble High Court held as under:

“The fact that the tax on sale of goods involved in the said service can be levied, does not mean that the service tax cannot be levied on the service aspect of catering. With respect, this means that when a restaurant renders to any person a service, the tax on sale of goods involved in the said service can be levied. That does not mean that a service tax cannot be levied on the act of serving food at a restaurant. That is the tax in this case imposed by the Parliament. There could be a sale during the course of rendering of service at a restaurant and therefore, a sales tax could be imposed by the State Legislature. So long as there is no prohibition against imposition of service tax on the services rendered, then it must be held that the Parliament is competent to impose a service tax in question.”

Due reference to the decision of Kerala High Court was made by the Court and it disagreed with the decision of single member judge and upheld the levy relying on the decision of Apex Court in the case of Tamil Nadu Kalyana Mandapam Association v/s Union of India [2004-TIOL-36-SC-Service Tax].  In the said case, hon’ble Apex Court held in Para 45 that the concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering.

Further, Hon’ble Uttrakhand High Court in the case of Valley Hotel & Resorts v CCT [2014-TIOL-600-HC-UKHAND-VAT] while has not examined the levy of Service Tax on such services but has examined the extent to which VAT and Service Tax can be levied.  The Court held that VAT cannot be levied on the portion on which Service Tax has been prescribed by competent authority of Service Tax.  Hon’ble Court observed that authority competent to impose service tax has also assumed competence to declare what is service and the State has not challenged the same.  Therefore, it was held that where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

Thus, basis the above discussion, it can be said that though the odds are in favour of levy of Service Tax on restaurant service, the non levy of VAT on service portion can bring some relief to the tax payer.  Taxpayer is not frustrated by levy of taxes, but their multiplicity and multiplicity of the authorities having jurisdiction over his business. Thus, a simple regime with both VAT and Service Tax levied in justified and non overlapping manner can  bring end to the controversy of levy of Service Tax / VAT on restaurant services.


Availability of Cenvat Credit in Case of Non Payment by Service Provider

The decision of Apex Court in the case of Kay Kay Industries

[Civil Appeal No. 7031 of 2009] dated August 26, 2013 is a path breaking judgement as it brings the much sought after relief and belief in the free Tax Credit mechanism, whereby, a genuine assesse cannot be penalized for the fault of his seller manufacturer for non deposit of Excise Duty.  The issue in the present matter was that during MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered by the invoices.  however, allowing such Credit to the purchaser, Hon’ble Supreme Court observed as follows:


The proviso postulates and requires “reasonable care” and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed.”

The judgement has thus, restored the Credit availability to a genuine assesse.  Prior to this also, similar stand was taken by courts in making available Credits of Tax to bonafide purchasers of goods or services.  In the case of Gheru Lal Bal Chand Vs State of Haryana and Another, the issue involved was again with regard to the denial of Input Tax Credit by the Assessing Authority on the ground that the dealers from whom the petitioners have purchased goods, have not deposited full tax in the State Treasury.  The hon’ble Court held that  no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.  The Court further held that in the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. It was observed that such erroneous responsibility cannot be fastened on the assessee to verify payment of tax into government treasury by selling dealer, else, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India.  It is pertinent to mention that in the case, that in present matter another important mention was made whereby It was contended that no liability could be fastened on the petitioner on account of non-deposit of input tax received by the selling dealer from the purchasing dealer as the term “paid” is to be interpreted to mean “ought to have been paid” as held by the Supreme Court in Sanjana, Assistant Collector of Central Excise, Bombay and others v. The Elphinstone Spinning and Weaving Mills Co. Ltd., AIR 1971 Supreme Court 2039.

Interestingly, a trade Circular [Circular No. 8T of 2012] has been issued by Maharashtra VAT on the same subject wherein they have referred to decision of Hon’ble Bombay High Court in the case of Mahalakshmi ginning and Oil Industries [W.P. No. 33 of 2012], wherein decision in the case of Gheru Lal (supra) has been distinguished.  The Circular ahs clarified the position of department in relation to Input Tax Credit as under:

  • No Input Tax Credit Claim shall be allowed unless the corresponding tax is paid by the selling dealer in to the government treasury.
  • In the case of mismatch in the sales and purchases in electronic formmatching of Annexure J1 and J2 of Form 704, then to the extent of unmatched amount of tax, the ITC of the claimant dealer shall be denied.
  • ITC claim shall not be allowed if the purchases are effected from hawala dealer and even though such hawala dealer has paid the taxes partially or fully as these are not genuine transactions.

Thus, while the other two points seems logical and within the four corners of practicality, the first denial still requires the purchaser to transgress into the books of accounts of the seller to determine the payment of tax into government treasury which is almost impossible in normal business transactions.  However, government has listed a number of provisions which the government shall be undertaking to surface the defaulter dealers so that transactions with them are not undertaken by any dealer and should be verified cautiously even if undertaken with such dealers.

Clarification on Restaurant Services

In an important clarification vide Circular No. 173/8/2013 – Service Tax dated October 7, 2013, government has clarified the following queries in respect of exemption provided towards restaurant services vide Notification No. 25/2012 –ST.

S.No.QueryClarification as providedMGS comment
1In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.The clarification has been important on two perspective:
a.      It clarifies that kitchen cannot be treated as restaurant. Thus, even if kitchen is same, or food from the kitchen feeding a restaurant is provided for other purpose, the same would not equate to being provided by the restaurant.
b.     It further clarifies that the exemption is available to restaurant and not its source per se.
2In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?Yes. Services provided by specified restaurant in other areas of the hotel are liable to service tax.The clarification provides that servicing of food in extended portions of restaurant would also be considered at par with servicing inside the restaurant.
3Whether service tax is leviable on goods sold on MRP basis across the counter as part of the Bill/invoice.If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion.The clarification is in line with excise as preparation of such would amount to manufacture and be exigible to excise . This could be applied to contest no demand on minibar products are they are required to be sold on MRP basis.

However, the much awaited clarification failed to enlighten assessees on the following issues:

  1. Sale of food made by Hotels and Restaurants under Take away / home delivery
  2. Food provided under room service. If not clarified, clarification no.2 can be extended by department for the said purpose to say that provision of food by taxable restaurant in room is also service in restaurant (extended service).  However, alternate argument provides that since there is no ambience or service of waiters and other amenities as is provided in restaurant is not available in room services, the equity lies in treating this as sale of food rather than service.

The issues are highly litigative and respite is required in terms of clarification to avoid unnecessary huge demands later on assessees.

Service tax on Entry to Amusement Parks held Constitutionally Valid – Revisiting Aspect Theory

Hon’ble High Court of Kerala vide WP(C).No.18328 of 2015 (M) in the case of M/S. KANJIRAPPILLY AMUSEMENT PARK AND HOTELS PVT. LTD. V UOI has delivered its judgement on the question as to Whether the removal of “admission and access to entertainment event and amusement facilities”

[sub-clause (j) of Section 66D of the Finance Act, 1994] from the Negative List of “Services” by an Amendment of 2012 and the consequent imposition of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II [any reference to Lists I, II or III is to the Lists under the Seventh Schedule of the Constitution].

It was argued that state has already enacted an act enacted under Entry 62 of List II which deals with “taxes on luxuries, including taxes on entertainments, amusements, betting and gambling” wherein specific entry levies entertainment tax on amusement park. This, being covered exclusively under state list, it cannot be brought under service tax which is levied under list III. It was also argued that , there can be no service element in the amusement enjoyed by the persons who get admitted to the facilities with the sole intention of amusement and entertainment.

On behalf of the government, it was argued that the levy was valid basis aspect theory. In other words, Overlapping regime arising out with distinguished powers cannot make a levy invalid. Even if there is an amount of overlapping when the power is exercised by two legislatures, if the overlapping is in law and is only an incidental trenching upon one, by the other, then it was held to be a valid levy.

It was observed by court that while what can provide entertainment to a person is a subjective concept, but when a facility is created to offer such entertainment, an element of service is introduced. Hon’ble Court departs nature of levy from measure of levy and observed that service tax on admission is only a measure of levy. The real nature of levy is on count of entertainment offered In a facility for a consideration by one person to another. It was further observed that an amusement park, are obliged to pay entertainment tax to the State, whether or not there are entrants to the park. The Union Parliament has provided for a tax on admission to the parks, making it clear that the levy is only when the service is availed of. With these observations, Hon’ble Court has upheld the levy of Service tax on admission and access to entertainment event and amusement facilities.

It is important to note that while upholding the levy, the judgement has relied upon aspect theory and has beautifully carved out the difference between nature of levy and measure of levy. However, it is also to be noted that the judgement views the two levies from two different perspectives – while it observes entertainment tax from the perspective of entertainment being enjoyed by a person, on the other hand, it also finds in existence the services of a man offering such amusement to the other person. While appreciating this argument, one must also understand that this dual aspect is an inherent part of every service. Service is received by a person to fulfil one of his desire and a service is only possible when the provider offers something which fulfils another person’s desire. For eg a student is enlightened On being taught, while a teacher offers services of teaching to a student. One can view this as two aspects or one can also view this as an act and result. Every service provided will surely have a result, or in other words, no result is possible without a service. Only (as court has observed in its judgement) services by mother nature or to oneself are not taxable since they lack consideration as also the other defined person is missing. Else all acts are service. While we can not deny such strong argument in support of multiple levies, however, It feels that It is time that we need to reinvent the wheel of aspect theory as somewhere while understanding the technical arguments, we are visited by the same question time and again – whether while drafting the constitution, our leaders had wanted such dual or even multiple taxation on their subjects. Somewhere, everyone of us might seek as answer as no. Taxation is a matter of gathering funds for running government to meet needs of al of its subjects, but never at the cost of subjects paying such multiple taxes coupled with multiple compliance. The discussion becomes more complicated in a country like ours where one can find variety and disparity. Disparity more in terms of classes. While the idea always remains to tax the upper segment to share resources with masses but somewhere in the present emerging consumption economy, such tax also acts as a infliction on weaker sections when they ever indulge in such consumptions. Also, costlier sources of entertainment also devoid masses from facilities of fun and joy which is in any case required for a healthy society. The depth of discussion forces me to conclude the topic with these final words – it should be requested from governments that multiple levies should be upheld with aspect theory with a small rider that those aspects must lead to fulfilment of multiple purpose, else it is better to have one tax at higher rate rather than two taxes cumulating to a higher rate but dredging India towards a complex tax regime and a nightmare for a taxpayer.

Whether Reimbursement Constitutes Consideration?

Section 67 of Finance Act, 1994 provides that value charged by Service provider for provision of his services shall only be taxable. The relevant proportion fo the Section reads as under:

[67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, —

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

Thus, Section 67 envisage only the amount charged by the service provider towards provision of services. Further, in order to determine the value of taxable services, Service Tax (Determination of Value) Rules, 2006 has been prescribed. Rule 5 of Service Tax (Determination of Value) Rules 2006 provides for situations where reimbursable expenditure are to be considered as part of consideration for levy of Service Tax. The relevant extracts of the said Rule are as follows:

RULE 5. Inclusion in or exclusion from value of certain expenditure or costs. — (1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.”

Thus, every costs incurred by Service provider in the course of providing output service shall be guided by the provisions of Rule 5. However, the only requisite for inclusion in value of taxable service is that such cost should be towards provision of such taxable service as required by Section 67 of Finance Act, 1994. Thus, in case any cost which is not incurred in provision of taxable service but merely paid in order to facilitate the service recipient on any other position, shall not form part of consideration as envisaged in Rule 5 above.

In Rolex Logistics Pvt. Ltd v. CST, Bangalore 2009 -TMI – CESTAT BANGLORE), it was held that reimbursement of expenses are not for services rendered but expenditure incurred on behalf of client by service provider. Gross amount for service rendered means only for services rendered. It also interpreted ‘reimbursement’ as payments made on behalf of service recipient by service provider in the course of rendering services. The gross receipt for the services rendered means only for the services rendered. The value for the purpose of charging service tax as in the gross amount received as consideration for provision of service.

The recent decision of Delhi High Court in the matter of Intercontinental Consultants and Technocrats Pvt. Ltd v UOI & Anr. [ W.P. (C) 6370/2008 ] has clarified the position further as it holds that 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 and accordingly has held Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 as ultraviolet the provisions of Section 66 and 67 of Finance Act, 1994 to the extent it includes reimbursement of expenses in the value of taxable services for the purposes of levy of service tax. In the present matter, the assessee was a consulting engineer and was not charging Service Tax on reimbursements like travel, hotel stay etc. and the appeal was against the demand of Service Tax on such reimbursements.

The decision elaborated on subordination of rules to the statute and that the subordinate legislation cannot override the provisions of the statute. The Honorable Court made an important observation that “The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”.

In the case of International Logistics [[2012] 22 301 (New Delhi – CESTAT)] it was held that expenses incurred to provide taxable services shall be part of assessable value if such expenses are inseparable and integrally connected with performance of taxable services.

Further, explanation (1) to rule 5(2) clearly specifies the criteria to decide whether the service provider acts as a pure agent or not in a given situation. In the case of agency function, the agent neither intends to hold nor holds any title to the goods or services and also never uses such goods or services so procured. It is also important to note that the service provider only receives the actual amount incurred to procure such goods or services.

For understanding the nature of allowable reimbursements, reference can be made to the CESTAT decision in the case of Mckinsey & Company Inc. Versus Commissioner Of C. Ex. & Cus., Mumbai [2007-TIOL-583-CESTAT-MUM] wherein it was held as follows.

“OPE means expenses which cannot be budgeted for and have to be incurred on the spot to meet immediate requirement and are therefore contingent in nature. These must be the expenses which are primarily to be incurred by the client and not the service provider. Therefore it has to be first established, that normally the services were required to be provided by the client and were rendered on behalf of the client as per his request and it will be then only that the expenses will be reimbursable. The distinction should be not on the basis of non infrastructure and not establishment services, but with respect to the liability of the client to incur such expenses. For e.g. if the service provider has to visit the project site, then he has to be provided some office place for which necessary furniture, computer, telephone and other facilities have to be given. These can be said to be expenses which are required to be incurred by the client but are incurred by the service provider on behalf of the client who is thereafter reimbursed these expenses and will therefore be eligible for abatement. On the other hand office expenses incurred in running the normal office of service provider cannot be said to be expenses incurred on behalf of the client.”

In case of Lepra Society V CCE [2011 (22) S.T.R. 645 (Tri. – Bang.)], the assessee being a non-governmental organization was engaging services of medical personnel on payment of specified amount. This specified amount is paid by the District TB Control Society. The assessee submitted that that the persons engaged by the appellant are on contractual basis and thus, the assessee was not liable to pay Service tax on the amounts paid to such medical personnel as he was incurring expenditure as a pure agent. The Hon’ble Tribunal stayed the recovery of Service tax from the assessee observing that the provisions of Rule 5(2) of Service Tax (Determination of Value) Rules, 2006 prima facie apply to the assessee’s case.

In the case of Naresh Kumar & Co. Pvt. Ltd. v CCE [2008 (11) S.T.R. 578 (Tri. – Kolkata)], the Honorable Tribunal held that if an expenditure is indispensable in provision of a service, such expenditure should essentially form part of cost of service itself and shall form part of value of taxable service. The detailed observations are as under:

“The Appellant in the course of hearing simply submitted that reimbursement of expenditure, bending and bundling charges and stock verification charges are not relatable to the taxable service for which those receipts shall not be value of taxable service and there shall be no taxation under the provisions of the Act. Except such a bald argument, there was neither any evidence adduced nor the Appellant proved its stand demonstrating before us how all these receipts were not relatable to the service of clearing and forwarding operations provided to TISCO and TRL. Therefore each and every aspect of such claim calls for detailed examination on the basis of evidence. Their nature, live link and nexus to the principal service of clearing and forwarding operations shall be decisive. The learned Adjudicating Authority has merely held that above receipts were in relation to clearing and forwarding operations without bringing out relatability thereof by any cogent reason. In absence of any intimate connection or relation of expenditure to the principal activity of clearing and forwarding operations, those receipts may not assume the character of value of taxable service or contribute to that. If an expenditure is indispensable and inevitably incurred to provide a service, such cost should essentially form part of cost of service itself and shall contribute to value of taxable service. Thus expenditure incurred being incidental or ancillary to perform an act, shall essentially make value addition to the service. Therefore claim of Appellant in respect of above three items need to be remanded for reexamination and finding with reason, granting fair opportunity of hearing to the Appellant. In view of remand, the citations made by the Appellant calls for consideration by the learned Adjudicating Authority.”

In the case of Scott Wilson Kirkpatrick (I) Pvt. Ltd. Versus CCE, Jaipur, [2007-TIOL-269-CESTAT-DEL] held that the reimbursement for office equipment purchased on behalf of contractee was reimbursement and not subjected to Service Tax. As per facts of the case, the equipment and appliances as well as vehicle etc. as purchased by the assessee, and reimbursement claimed from NHAI become the property of NHAI at the completion of the project. It means, NHAI is providing the facilities of the site office, office equipments, telephone, utilities etc. to the consultant, because the consultant is organizing these facilities at the first instance and is paying for them, the same is being claimed as reimbursement from NHAI.

Hon’ble CESTAT in the case of Rolex Logistics Pvt. Ltd. Vs. Commissioner Of Service Tax, Bangalore 2009-TIOL-270-CESTAT-BANG held as follows.

“What is a reimbursement? When a service provider provides service to a service receiver or a client, on behalf of his client he incurs various expenditure and these expenditure are all for different purposes. The Service Tax liability in terms of Section 67 is only on the gross amount received towards the services rendered. If the service provider in the course of rendering service has to make certain payments on behalf of the service receiver, they are known as reimbursements. The reimbursements are actually not towards the service rendered but they are only towards other expenditure incurred on behalf of the client by the service provider. Normally, the service provider incurs these expenditures in the interest of quicker service. Suppose the service provider has to first receive the money and then render the service, it would cause lot of delay.”

Is Rule 5(1) ultravires Section 66 and Section 67?

The matter has been decided in the appeal matter before Hon’ble Delhi High Court in W.P. (C) 6370/2008 of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India & ANR (2012-TIOL-966-HC-DEL-ST).

The Petitioner Company was engaged in providing consulting engineer services and receives payments not only for its service but also for reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of its services and not in respect of the expenses incurred by it, which were reimbursed by the clients. Department sought service tax on the expenses reimbursed by invoking the provisions of Rule 5(1) of the Service Tax (Determination of value) Rules 2006 which was challenged by the Company in the Writ Petition.

Hon’ble High Court rules in favour of assessee holding Rule 5(1) as ultravires holding that rules can never exceed or go beyond the section which provides for the charge or collection of the service tax. The Court held that the charge of service tax under section 66 (now 66B) is on the value of taxable services. It is only the value of such service are rendered by the assessee, which can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. 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 Court has made clear that any value which does not form part of gross value towards taxable services cannot be brought to tax under Finance Act, 1994.

Service Tax on Freight Forwarders

Freight Forwarders are persons who are expert in logistic arrangement and are engaged in the business of arranging transportation of goods from one place to another as required by the contractee.  Freight forwarders usually contract with one or multiple carriers to undertake such transportation and such carriers can be shipping lines, airlines, GTAs etc. Freight forwarders can provides their services for domestic as well as international shipments.

However, since the Freight forwarders were not themselves undertaking the carriage of goods, often, question was raised whether such freight forwarders were to be considered as principals enagaged to undertake carriage of goods or mere agents of carriers who would undertake actual carriage.  In case they undertake their activity as agents, only their commission would be subjected to Service tax in their hands,  however, in case they undertake risk and responsibility as carrier, then the entire consideration would be subjected to Service tax.

Vide Circular No. 197/7/2016 – Service Tax dated August 12, 2016, it has been clarified that freight forwarder who merely acts as an agent and bears no ownership towards transportation of goods would be called intermediary and their place of provision shall be determined by Rule 9 of Place of Provision Rules, 2012 as its location.  However, if the freight forwarder acts as a principal and undertakes risk for transportation of goods and also raises invoice for such transportation, they are not acting as agent but engage themselves for transportation of goods and shall be covered under Rule 10 of Place of Provision Rules, 2012.

Similar decision was upheld in the case of Greenwich Meridian Logistics (India) (P.) Ltd.

[[2016] 69 100 (Mumbai – CESTAT)], wherein Hon’ble Tribunal held as follows:

12. The appellant takes responsibility for safety of goods and issues a document of title which is a multi-modal bill of lading and commits to delivery at the consignee’s end. To ensure such safe delivery, appellant contracts with carriers, by land, sea or air, without diluting its contractual responsibility to the consignor. Such contracting does not involve a transaction between the shipper and the carrier and the shipper is not privy to the minutiae of such contract for carriage. The appellant often, even in the absence of shippers, contract for space or slots in vessels in anticipation of demand and as a distinct business activity. Such a contract forecloses the allotment of such space by the shipping line or steamer agent with the risk of non-usage of the procured space devolving on the appellant. By no stretch is this assumption of risk within the scope of agency function. Ergo, it is nothing but a principal-to-principal transaction and the freight charges are consideration for space procured from shipping line. Correspondingly, allotment of procured space to shippers at negotiated rates within the total consideration in a multi-modal transportation contract with a consignor is another distinct principal-to-principal transaction. We, therefore, find that freight is paid to the shipping line and freight is collected from client-shippers in two independent transactions.

Having discussed the latest clarification and case, it is pertinent to mention that a straight application of the above discussion without examining in depth the nature of business of freight forwarder can be terminal.  Before establishing him as an agent or principal, the services provided by him must be examined in terms of their engagement with customers, shipping lines, nature of invoices issued by them etc.

Applicability of ST on ESOP

Employee Stock Option Plan (“ESOP”) taxation has always been a topic of debate and demand in Income Tax.  However, with the incept of Negative list under Service Tax, certain aspects of this subject requires examination from the perspective of their eligibility under Service Tax.

Before we discuss the exigibility under Service Tax, we need to understand the benefit of ESOPs.  The value of perquisite is defined as the difference between the fair market value of ESOP on the date on which the option is exercised by the employee less the amount actually paid by the employee viz. exercise price.  The said understanding is illustrated as under:

Date of vesting                                                               April 1, 2014

Date of exercise                                                             August 1, 2014

Date of allotment                                                            August 15, 2014

Exercise rate per share                                                  Rs 125

Fair market value on the date of vesting               Rs 200

Fair Market value of the date of exercise              Rs 215


Benefit accrued on ESOP  =       (215 – 125)       =          Rs 90

ESOP thus, is an option available with beneficiary to  purchase stocks of a company at reduced rates and difference between the rate on which such shares are exercised and they actually are purchased by the beneficiary is the benefit for such shares.  Although such benefit is a deemed cost to the company, such availability is available as actual financial benefit to the beneficiary of such ESOPs.  Deemed cost in the hands is in the manner that such securities could have fetched money to the Company from open market. Thus loss of such deemed profit is recorded as costs to reflect true value of sale of shares.  Such ESOPs are made available to employees, employees of group companies, directors and other key management personnel.

At the outset, we shall first understand the nature of ESOPs and its exigibility to Service Tax.  ESOPs basically is a gap in the actual value of stocks and the price at which they are made available.  Thus, such difference forms deemed consideration for person who is benefitted from such ESOPs.  Thus, ESOPs per se shall not constitute service, since they are making available a financial instrument at lower price and such price difference is profit obtained by selling such stock in market at theor current value.  Thus, what is important is to examine as to against what such ESOPs were given to the beneficiary.  Thus, if such ESOPs are given to person providing a taxable services then the deemed consideration (available as explained above) shall consititute consideration for such services.  It is important to note that since the Service Tax is not charged separately in ESOP transaction, the benefit shall be treated as cum tax.  We shall now examine the various situations and where ESOPs shall form consideration as exigible to Service Tax.

  1. ESOP to own employees:

ESOPs when made to employee are part of cost to company and as a part of benefits accruing from provision of services as an employee.  It is an incentive for them to remain in employment with the Company. Services of an employee have been excluded from the very definition of Service and thus, any consideration for an activity which is not service shall not be exigible to Service Tax.

  1. ESOP to Directors (including independent directors):

Directors can render their services to the Company in two capacities – One as member of Board of Directors which govern the overall policy, strategy and functioning of a company and secondly under a place of profit as an employee of the company like whole time directors, Chairman and managing director etc.

While the former activities are not conversed under any exclusion or exemption, such services provided by directors are eligible to Service Tax and thus, the benefit as accruing to directors from such ESOPs shall constitute consideration for taxable services.

In their capacity as employee managing day to day functioning of the Company, they would be in a position equivalent to an employee and such provision in such capacity would be not exigble to Service Tax as explained above.

  1. ESOPs to employees of a group company:


ESOPs in the hands of the employee would be not taxable as explained above.  However the question which remains to be examined is the levy of the Service Tax on cross charge between the two group companies.  In this context it is pertinent to mention that cross charge inter se group companies for provision of services or making available facilities is exigible to Service Tax.  Parallely, any cross charge for making available goods would be exigible to VAT.  This cross charge in case of ESOP would be for making available securities of the parent company to subsidiary etc.  Thus, the consideration in terms of cross charge is for making available the stocks of parent company and thus, in other words it can be said that such value is for purchase of stocks from parent company.  Thus, since purchase of stocks is sconsidered as purchase of goods, such transaction has been kept outside the purview of Service Tax.  Thus, such cross charge, to my mind, is not exigible to Service Tax.

ESOPs are one of the many avenues which have been examined in terms of their exposure to Service Tax post negative list.  ESOPs and similar transaction remind us of the limitless possibilities of Service Tax regime which has expanded scope post July 1, 2012.  We trust that such issues would reach settlement before the advent of Goods and Services Tax.