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Service tax on freight reimbursement

Mangesh (Service) (46 Points)

31 August 2011

If pvt Ltd company send material to party on Freight To Pay basis, and at the month end issued credit note for the same. Is service tax applicable? If yes please provide me details

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11 Replies

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 31 August 2011

Originally posted by : Mangesh
	If pvt Ltd company send material to party on Freight To Pay basis, and at the month end issued credit note for the same. Is service tax applicable? If yes please provide me details

Freight to pay basis means - freight to be paid by the consignee at the time of receipt of goods, so the person who is paying the service tax is liable for service tax.

when the consignment is booked "to pay basis" then what is the use of credit note in this regard?

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Amit Gupta (Loosening Myself) (1508 Points)
Replied 31 August 2011

Originally posted by : U S Sharma
	Originally posted by : Mangesh If pvt Ltd company send material to party on Freight To Pay basis, and at the month end issued credit note for the same. Is service tax applicable? If yes please provide me details Freight to pay basis means - freight to be paid by the consignee at the time of receipt of goods, so the person who is paying the service tax is liable for service tax. when the consignment is booked "to pay basis" then what is the use of credit note in this regard?

Service tax liability would be consignee if it is in organised sector..

jaganathan (accounts executive) (272 Points)
Replied 31 August 2011

Consignor or consignee is payable as per the terms & conditions.

Chandra Sekhar P (G.M. Finance & Accounts) (116 Points)
Replied 31 August 2011

If your company bills on the basis of FOR, even though the freight is paid by the customer, you need to pay service tax on the freight.

The service tax paid on freight, (FOR basis) can be taken as input service tax.(This is a debatable point)

Regards

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ajay garg (SR. MANAGER ) (28 Points)
Replied 01 September 2011

Dear

As I understand, your company is sending material to your customer on topay basis and your customer is paying the freight to the truck driver at the time of taking deliver hence if he is also falliing under seven category notification no. 35/2004 S.T. dated 03.12.2004, he is liable to pay the service tax. "Person who is paying the freight to the transporter is liable to pay the service tax.

If your consignee is individual/properitor, not falling under seven category and your company is falling under seven category then even if your consignee is paying the freight to the transporter but you are liable to pay the service tax.

Regards

Ajay Garg

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Nihit A Dalmia (ACA, Mcom) (44 Points)
Replied 24 September 2011

Originally posted by : Mangesh
	If pvt Ltd company send material to party on Freight To Pay basis, and at the month end issued credit note for the same. Is service tax applicable? If yes please provide me details

Hello Mangesh,

From the above query, it seems that a company is sending goods to a party and the party is paying freight to the goods transport agency. Hence it falls under seven conditions of the circular, and whoever pays the freight is liable to pay service tax.

Now, the company is issuing credit note for the same. This means that the party (customer) has acted as an agent and has got the related expenses reimbursed. In such case, the company is paying freight through his party and hence the company is liable for service tax.

Also, it needs to be clarified that under Rule 5 of Service Tax (Determination of Value) Rules, 2006, there is a concept of "PURE AGENT" wherein if the party falls under any 4 conditions of PURE AGENT, then the reimbursement of expenses is not chargeable to service tax. Following is the literature of a Pure Agent : -

For the purposes of sub- rule (2), "pure agent" means a person who-

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;

(d) receives only the actual amount incurred to procure such goods or services.

Transportation Charges (GTA Service) paid by the agent may or may not be in the capacity of pure-agent. Where the actual amount paid to the GTA is claimed in the bill, supported by an evidence, would constitute is re-imbursement of expenses. But where the profit element is involved and no evidence is added, it is difficult to say that the amount has been incurred in the capacity of pure agent.

Conclusion:

If the customer(party) is an agent/ consignee agent (contractual agreement should be there) and is getting its expenses on freight/incidendal expenses reimbursed by providing actual bills paid to transportation agency, then he will be considered a PURE AGENT (above 4 conditions should be fulfilled), in such case, the party would not be liable to service tax on reimbursement of freight. But if such is not the case (the credit note received includes element of profit margin/commission etc), then such amount shall be chargeable to service tax.

Now the question who shall pay:

If the party is a pure agent, and it is a reimbursement of actual cost incurred, then company/principal is liable to pay service tax on freight cost and not the party. In case such cost is not reimbursed, then service tax shall be paid by the party (ST is payable by that person who pays the money).

Case Laws:

There is debate on such matter and in previous case laws, additional reimbursement was not charged to service tax but inclusion of such rule has made the matters more complex and hence the matter stands debatable and has to be considered depending on circumstances of each case.

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