Taxability Of Reimbursement Under Service Tax

Taxability Of Reimbursement Under Service Tax

Reimbursement of Expenses is Not Taxable under Service Tax : Delhi HC – Update as on 30th November,2012 

( Post Originally Published on 27/2/2012)

1.  As per sub section (iii) of section 67 of Finance Act, 1994, the value of taxable service, where the consideration for the service provided or to be provided is not ascertainable, the value of the taxable service would be determined as per the provisions of theService Tax (Determination of Value) Rules, 2006.

2.  The valuation norms provide for a three tier valuation mechanism including provisions for valuation of non-monetary consideration. The valuation of services can now be done three fold as under –

3. Rule 5  deals with circumstances where certain costs or expenses could be excluded from or added to value of taxable services. It has been provided that all expenses and costs incurred by the service provider for providing the taxable services during the course of such service shall be included as part of value of taxable services.

In such cases, there will be no exemption or abatement from service tax in respect of such costs or expenses. For example, cost of consumables, office expenses, telephone expenses, rentals etc. However, where the service provider incurs expenses and cost as a agent of service receiver, i.e., for or on behalf of the service receiver (as a pure agent of the client), such costs or expenses shall be excluded from the value of taxable services. For claiming such costs or expenses to be out of scope of value of service, the service receiver should act as a ‘pure agent’ or agent of the service receiver.

4. As per Explanation to Rule 5, A pure agent or agent shall be a person who satisfies the following conditions —

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

(b)   neither intends not holds any title to the goods or services so provided as an agent of the client;

(c)   never uses such goods or services provided; and

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

5. Rule 5 pertains to reimbursable expenditure incurred by the service provider as a pure agent of his client. 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. The service provider who seeks to claim exclusion of certain value from the taxable value should also fulfil all the conditions specified in rule 5(2).

6. Further, As per Rule 5(2), 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:-

       (i) the service provider acts as a pure agent of the recipient of service when he   makes payment to third party for the goods or services procured;

(ii) 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;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on  his behalf;

(v) 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;

(vi) 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;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party;. and

(viii) 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.

7.  CBEC has clarified vide letter No 31/41 2006 dated 19.4.2006 as follows-

“There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value.”

8. In Rolex Logistics Pvt. Ltd v. CST, Bangalore 2009 -TMI – 32160 – CESTAT BANGLORE), it was held that reimbursement of expresses 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.

9.[Mckinsey & Company Inc. Versus Commissioner of C. Ex. & CUS., Mumbai  2007(006) STR 0420 Tri-Mum]. In the said judgment it has been adjudicated that if the nature of expenses incurred by the service provider is such that these expenses are required to incurred by the client but are incurred by the service provider who is thereafter reimbursed these expenses are eligible for abatement. [Case was however appealed before High Court Mumbai which chose not to grant relief to party in cases where reimbursement could not be proved by documentary evidenceand also that in such expenses, cover of bonafide belief will not be available.) So, In case of Appellant the abatement shall be allowed if it produced the documentary evidence to the Department to establish that it was merely a pass through arrangement.

10. The legal position as it stands today is that the value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenses or costs included by the service provider in the course of providing taxable service should from integral part of value of service.This shall, however, by subject to Rule 5 of valuation rules

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Related Tags Reimbursement, Servicetax