Reimbursement of out of pocket expenses
This query is : Resolved
19 November 2015
Good morning
My question is relating to service tax applicability on reimbursement of out of pocket expense
Our company incurred around 2L expense for reimbursement of out of pocket expenses to a managing consultants
such expenditure is included in taxable portion or not
Thanks in advance
19 November 2015
Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, reads as:
(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.
In coming paras we’ll discuss in detail the out of pocket expense and its relationship with service tax for better understanding of this subject:-
Any out of pocket expenses incurred for attending the assignment like traveling expenses, boarding and lodging expense, and other miscellaneous expenses while on tour for client or customer, which are reimbursed by the client or customer, cannot be considered as service charges, fees or remuneration. It is just like travelling expenses of employees working for employer while on tour.
If such expenses are also included within the meaning of salary or fees, it will lead to anomalous situations. For an example, if the expenses are directly made by the client they will not be fees but if the expenses are incurred by the professionals and reimbursed by the client then it will be considered as fees. The difference created only because of difference in time and manner of payment, is not at all logical, reasonable or justified. Therefore, it cannot be said that the expenses incurred by the professionals who are reimbursed by the client is a part of fees.
When a reimbursement is claimed, it means that there is some other person who has provided some service or supply. The claimant has received some goods or services from other persons who supplied goods or rendered services. Therefore, the claimant is not a service provider but the person from whom service is availed is the service provider. The claimant has availed such service for and on account of the client and not on his own account. Therefore, in such a case a service is provided by another service provider to the main client through the middle service provider.
For Example A CA takes project for verification of assets of a steel plant on the following basis: Fees for supervision and certification Rs. 5,00,000/- Reimbursement of recruitment service Providers on actual basis for manpower Supplied by recruitment service Providers for the assignment.
Or
The Steel plant to avail services of Recruitment Service provider for verification purposes and to arrange for manpower for verification under supervision of CA.
In both cases services of recruitment service Providers are availed by the Steel Plant. The CA while obtaining bill of Recruitment Service provider and paying to him must clearly mention that the supply of manpower is to Steel plant and on account of steel plant.
In this case there is a separate service provide Recruitment Service provider. He will charge service tax, if applicable.
Now suppose in the above case CA agrees to render service to Steel Plant for a consideration of Rs. 15,00,000 inclusive for manpower required. He may provide his own assistants and / or avail manpower from other CA’s or Recruitment Service provider.
In such a case there will be no claim for reimbursement from plant. The entire amount of Rs, fifteen lakh will be his fees for verification of assets. If such service falls in taxable category, then tax will be levied on full service. If a tax is levied on services availed from other CA’s or RSP, then CA will claim CENVAT for input services.
Case Studies:-
Commissioner of Service Tax Vs. Sangamitra Service Agency [(2013) 7-TMI-862 (Mad.)]
Hon’ble Madras High Court in this case has put to rest the issue of service tax on reimbursement of expenses. The issue before the Court was on a question of law, which the Department had raised in appeal against the order of the Tribunal. The Tribunal had held that reimbursable expenses received by the assessee need not be added to the taxable value related to clearing and forwarding agents’ services. The Department had questioned whether the view held by the Tribunal was correct in view of the provision of Rule 6(8) of the Service Tax Rules, 1994 (since omitted vide Notification no. 10/2006 dated 19 April 2006) according to which gross amount of remuneration or commission should be the taxable value in relation to services provided by a C & F Agent.
The Hon’ble High Court, while dismissing the appeal of the Department, held that if a receipt is for reimbursing expenditure incurred for the purpose, the mere act of reimbursement per se, would not justify the contention of the Revenue that the same, having character of remuneration or commission, deserves to be included in the sum amount of remuneration/commission. The Hon’ble High Court further held that expenditure incurred does not fall under the expression “remuneration or commission”.
(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.
In coming paras we’ll discuss in detail the out of pocket expense and its relationship with service tax for better understanding of this subject:-
Any out of pocket expenses incurred for attending the assignment like traveling expenses, boarding and lodging expense, and other miscellaneous expenses while on tour for client or customer, which are reimbursed by the client or customer, cannot be considered as service charges, fees or remuneration. It is just like travelling expenses of employees working for employer while on tour.
If such expenses are also included within the meaning of salary or fees, it will lead to anomalous situations. For an example, if the expenses are directly made by the client they will not be fees but if the expenses are incurred by the professionals and reimbursed by the client then it will be considered as fees. The difference created only because of difference in time and manner of payment, is not at all logical, reasonable or justified. Therefore, it cannot be said that the expenses incurred by the professionals who are reimbursed by the client is a part of fees.
When a reimbursement is claimed, it means that there is some other person who has provided some service or supply. The claimant has received some goods or services from other persons who supplied goods or rendered services. Therefore, the claimant is not a service provider but the person from whom service is availed is the service provider. The claimant has availed such service for and on account of the client and not on his own account. Therefore, in such a case a service is provided by another service provider to the main client through the middle service provider.
For Example A CA takes project for verification of assets of a steel plant on the following basis: Fees for supervision and certification Rs. 5,00,000/- Reimbursement of recruitment service Providers on actual basis for manpower Supplied by recruitment service Providers for the assignment.
Or
The Steel plant to avail services of Recruitment Service provider for verification purposes and to arrange for manpower for verification under supervision of CA.
In both cases services of recruitment service Providers are availed by the Steel Plant. The CA while obtaining bill of Recruitment Service provider and paying to him must clearly mention that the supply of manpower is to Steel plant and on account of steel plant.
In this case there is a separate service provide Recruitment Service provider. He will charge service tax, if applicable.
Now suppose in the above case CA agrees to render service to Steel Plant for a consideration of Rs. 15,00,000 inclusive for manpower required. He may provide his own assistants and / or avail manpower from other CA’s or Recruitment Service provider.
In such a case there will be no claim for reimbursement from plant. The entire amount of Rs, fifteen lakh will be his fees for verification of assets. If such service falls in taxable category, then tax will be levied on full service. If a tax is levied on services availed from other CA’s or RSP, then CA will claim CENVAT for input services.
Case Studies:-
Commissioner of Service Tax Vs. Sangamitra Service Agency [(2013) 7-TMI-862 (Mad.)]
Hon’ble Madras High Court in this case has put to rest the issue of service tax on reimbursement of expenses. The issue before the Court was on a question of law, which the Department had raised in appeal against the order of the Tribunal. The Tribunal had held that reimbursable expenses received by the assessee need not be added to the taxable value related to clearing and forwarding agents’ services. The Department had questioned whether the view held by the Tribunal was correct in view of the provision of Rule 6(8) of the Service Tax Rules, 1994 (since omitted vide Notification no. 10/2006 dated 19 April 2006) according to which gross amount of remuneration or commission should be the taxable value in relation to services provided by a C & F Agent.
The Hon’ble High Court, while dismissing the appeal of the Department, held that if a receipt is for reimbursing expenditure incurred for the purpose, the mere act of reimbursement per se, would not justify the contention of the Revenue that the same, having character of remuneration or commission, deserves to be included in the sum amount of remuneration/commission. The Hon’ble High Court further held that expenditure incurred does not fall under the expression “remuneration or commission”.
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19 November 2015
Hope Above Case Study will help you
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