In a normal course of service industry, a service provider charges an amount for providing the services along with service tax which is paid by the service receiver. Such service tax is calculated and paid according to the service tax provisions contained in the Finance Act 1994, as amended thereafter. It is hereby required to note that, the value of services provided also includes the value of actual expenses incurred like Railway freight, photocopy expenses etc., while providing the main service.
What does term “Reimbursement of expenses” mean?
The term has been explained by Hon’ble CESTAT in case of SRI BHAGAVATHY TRADERS vs. COMMISSIONER OF CENTRAL EXCISE, COCHIN [2011 (24) S.T.R. 290 (Tri. - LB)], wherein scope of term ‘Reimbursement’ in the context of service has been analysed in following terms:“Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. For example, when rent for premises is sought to be claimed as reimbursement, it has to be seen whether there is an agreement between the landlord of the premises and the service recipient and, therefore, the service recipient is under obligation for paying the rent to the landlord and that the service provider has paid the said amount on behalf of the recipient. The claim for reimbursement of salary to staff, similarly has to be considered as to whether the staff were actually employed by the service recipient at agreed wages and the service recipient was under obligation to pay the salary and it was out of expediency, the provider paid the same and sought reimbursement from the service recipient. The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc. amounts to a claim by the service provider that they can render such services in vacuum. What are costs for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses.”
Whether reimbursement of expenses under ST levy as per Statue
Now, the issue discussed herewith that, is the law really makes the reimbursement of expenses out of preview of service tax in spite of introduction of Rule 5(1). In order to make some opinion on the same, provisions of section 67 prior needs to be analyzed.
Section 67 was introduced vide Finance Act 1994, where it was provided that, the service tax shall be levied on the gross amount charged by the service provider for providing taxable service. Section 67 was later amended in the year 2006 vide notification no. 12/2006, where rules (Service tax (determination of value) rules) were introduced for determining the value of service, the same has been discussed in the following paras. The importance of bringing in discussion, the provision contained in section 67 prior to amendment made in 2006, is to analyze the intention of the government regarding the valuation of service, before and after amendment. Relevant part of Section 67 (prior to amendment in the year 2006) can be read as: -
67. Valuation of taxable services for charging service tax.—For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him.
Explanation 1.—For the removal of doubts, it is hereby declared that the value of a taxable service, as the case may be, includes,— (a) the aggregate of commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker; ----------------------------------------------------------- but does not include—
(i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit; -------------------------------------------------------------------------------------------------
Aforesaid section, clearly states that, service tax shall be levied on the gross amount charged by the service provider and also for bringing in more clarity over some costs, explanations have been inserted as mentioned supra which clarifies certain inclusive and non inclusive part of costs in the value of service. On careful analyses, of the section 67 including the explanations made therein, it can be easily understood that, the expenses incurred by the service provider while providing the main service which are reimbursed by the service receiver later, are nowhere excluded. And also, provision mentioned in section 67 is also self explanatory as the word used in said section are gross amount charged. Therefore, any amount charged including expenses incurred by the service provider under the invoice, whether such charges are being stated separately or not, shall be deemed to be part of value of service provided and hence chargeable to service tax.
Position on and after the introduction of Service tax(determination of value) Rules, 2006
In exercise of the powers conferred by clause(aa) of sub section(2) of section 94 of the Finance Act. 1994(32 of 1994), the Central Government amended Section 67, w.e.f. 18th April 2006, with the new section 67 and notified the service tax (determination of value) Rules, 2006 under the section 67 vide notification no. 12/2006. It is hereby required to note that, prior to the amendment, value of taxable services was defined under section 67 as “gross amount” charged by the service provider as discussed supra, but now the value the value of taxable services will be governed by section 67 read with the service tax(determination of value) Rules,2006. Section 67 and the rules notified there under, which provide for valuation of services for charging service tax under different situations. Now, as per the provisions of the service tax(determination of value) Rules, 2006, service tax is leviable on all the expenditures or costs incurred by the service provider in the course of providing a taxable service, which includes reimbursement of traveling expenses or the other amount such as photocopies, telephone expenses etc. The same can be analyzed by referring to Rule 5(1) of the said rules where it has been provided that: (
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.
Also, the government in its circular no. B1/4/2006-TRU dated 19th April 2006, clarified that “all expenditures or costs incurred by the service provider in the course of providing a taxable service form an integral part of the taxable value and are includible in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client."
Services provided in the capacity of Pure Agent is not taxable
There could be situations where the client of the service provider specially engages the service provider, as his agent, to contract with a third party for supply of any goods or services on his behalf. In those cases, such goods or services so procured are treated as supply to the client rather than to the contracting agent. The service provider in such case incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amount paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includable in the taxable value. However, if the service provider act as undisclosed agent i.e. acting in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as reimbursable expenditure.
Such an agent is termed as ‘pure agent’ which means a person who:-
a) Enter into contractual relationship with the recipient of service to act as his pure agent to incur certain cost/expenses in the course of providing taxable service.
b) Neither intends to hold nor holds any title of goods/services so procured/provided as pure agent of recipient of services.
c) Does not use such goods/services so procured.
d) Receive only actual amount incurred to procure such goods/services. The expenditure or costs incurred by the service provider as a pure agent of the recipient of service shall be excluded from the value of taxable service if all the following conditions are satisfied, namely;
Rule 5(2) (2)
Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-
a) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods/services procured;
b) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
c) the recipient of service is liable to make payment to the third party;
d) the recipient of service authorizes the service provider to make payment on his behalf;
e) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
f) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
g) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
h) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Reimbursement of Expenses cannot made part of Taxable value: Judiciary
However, keeping aside all the provisions made under Service tax(determination of value) Rules 2006, circulars issued in this regard, FAQ’s etc., the Hon’ble High court took a different stand in one of the landmark judgments of M/s Intercontinental consultants & Technorates (P.) Ltd. Vs Union of India [2012] 28 taxmann.com 213 (Delhi) dated 30th November 2012, where the Hon'ble High court held that the Rule 5 (1) 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 sections 66 and 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law.
The Judiciary decided the case on following grounds:
Section 67 quantifies the charge of service tax provided in Section 66, which is the charging section. Further, section 67(as reproduced in paras above), authorizes the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money. The underlined words i.e. "for such service" are important in the setting of Section 66 and 67. The charge of service tax under section 66 is on the value of taxable services. The taxable services are listed in section 65(105). It is only the value of such service that is to say, that 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. It is pertinent to note herewith that, section 66 levies service tax at a particular rate on the value of taxable services and section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus in built mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider "for such service". Further, reading Section 66 and Section 67 (1) (i) together and harmoniously, it seems that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge.Further, Hon'ble High Court in the matter of M/s Intercontinental consultants & Technorates (P.) Ltd. Vs Union of India [2012] 28 taxmann.com 213 (Delhi) dated 30th November 2012 also clears that:
"Even if the rule has been made under section 94 of the Act which provides for delegated legislation and authorizes the Central Government to make rules by notification in the official gazette, such rules can only be made "for carrying out the provisions of this Chapter" i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax. "
To conclude the whole stand taken by the High court in the aforementioned case, it was said that, the Rule 5(1) of the Service Tax(Determination of value) Rules 2006, cannot travel beyond the section 67 as under such rule, it has been stated that, the value of taxable service shall also include the expenses incurred, whereas the section 67 only talks about actual value of such service and nothing more or less. Hence, held such rule to be ultra vires section 66 and 67 of the Act ibid, and therefore has no statutory relevance.
Whether to rely on the judgment given by the Hon’ble High court or should comply with provisions under Rule 5(1)
Keeping aside all the provisions made under Service tax(determination of value) Rules 2006, circulars issued in this regard, FAQ’s etc., the Hon'ble high court took a different view as explained supra. However, there are still disputes at various levels whether service tax is leviable on the reimbursement of out of pocket expenses. Ministry of finance in their education guide, para 10.1.6 has clarified as under: - “10.1.6:- The service recipient would need to discharge liability only on the payments made by him. Thus the assessable value would be calculated on such payments done (Free of cost material supplied and out of pocket expenses reimbursed or incurred on behalf of the service provider need to be included in the assessable value in terms of Valuation Rules.”
Government, has always covered reimbursement of expenses under the service tax levy, whether it was pre or post 2006 era. And also, to clarify the view the, government introduced rule(5) under Service tax( determination of value) rules 2006, where, service tax levy on reimbursement of expenses was specifically explained. Therefore, it is advisable to levy service tax on reimbursement of expenses, as the view taken by Hon’ble High court of Kolkata as mentioned is a subject matter of litigation and can be appealed against in the supreme court.
Service Tax Team
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