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:
(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 [ 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.