CA Srikant Agarwal

CA Srikant AgarwalWhenever we are appointing any professional (be it chartered accountant, lawyers, consultant etc) then in addition to payment of fees we also reimburse them expenses (like travel ticket cost, hotel bills, local conveyance etc) that has been incurred by them in the course of providing services.

A common question that arises from taxation perspective is

1) whether the service provider is required to charge service tax on such reimbursement amount (Service Tax Perspective) and

2) whether the TDS is required to be deducted on such reimbursement amount by service receiver including the amount of service tax (Income Tax Perspective).

Service Tax Perspective

Whether the service provider is required to charge service tax on such reimbursement amount?

The above question from service tax perspective was examined by the Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt., Ltd Vs Union of India (2012), where the assessee has filed a writ petition before the high court for quashing the show cause notice issued by the service tax department for recovery of service tax on the amount received as reimbursement by him (assessee).

The high court decided in favour of the assessee and concluded that reimbursement of expenses received by the service provider in the course of providing taxable services can never be considered as a part of gross amount charged by the service provider for the service provided.

Against the order of Delhi High Court the service tax department has filed an appeal before the Honorable Supreme Court which is pending as on date.

In order to overcome the decision pronounced by Delhi High Court (which is pending with Supreme Court as on date), the CBEC has amended explanation to section 67 (w.e.f 14.05.2015 i.e the day on which Finance Bill has received the assent of president) as below:

“Consideration” includes:

(i) ………………….

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed.

(iii) ……………

Thus after the amendment there is no doubt that any amount received by the service provider in form of reimbursement from service recipient will form part of consideration and shall be liable to service tax.

Although payment to pure agent (like payment for stamp duty, taxes etc) will be out of the service tax net.

However the inclusion of reimbursable expenditure as consideration for the period prior to 14.05.2015 is yet to be decided by the Honorable Supreme Court.

Income Tax Perspective

Whether the TDS is required to be deducted on such reimbursement amount by service receiver including the amount of service tax ?

Case Billing procedure TDS applicability
1 Same bill consist of fees as well as reimbursement amount TDS need to be deducted on whole amount including reimbursement (Circular No. 715 dated 08/08/1995)
2 Separate bills are raised for fees and reimbursement amount TDS need to be deducted only on amount of fees and no TDS on reimbursement (Circular No. 720 dated 30/8/1995 )

As far as TDS on service tax part is concerned via CBDT Circular No. 1/2014 in F. No.275/59/2012-IT(B), Dated: January 13, 2014 it has been clarified that no TDS need to be deducted on the service tax portion of the bill provided the amount of service tax has been shown separately in the bill.

Author Bio

More Under Income Tax

Posted Under

Category : Income Tax (26745)
Type : Articles (16232)
Tags : CA Srikant Agarwal (28)

10 responses to “Reimbursement of expenses from Service / Income tax perspective”

  1. Madan Singh says:

    We are a sub contractor of government under taking ie HSCL
    who got a civil engineering works from BCCL ,and allotted the work to us on same terms& conditions of client . At that time service tax was not implemented in BCCL but HSCL kept submission of service tax ,suddenly after completion of 60 % work HSCL has deducted entire amount of tax from our bills , without any information. Is it legal ? Pl advice , how it can be reimbursed , is there any clause under works contract so the HSCL may get it reimburse from BCCL

  2. gaurav mittal says:

    Dear concern

    Please guide us, in condition of reimbursement of electricity bill related to grid supply is entertaining for service tax as per budget 2015 dt 14.5.2015.

  3. bramhadeo dawande says:

    can i claim Service tax penlaty on my client

  4. aditya says:

    article worth a read…v helpful sir .

  5. SRIKANT AGARWAL says:

    Dear Sudesh
    The services for which service provider is working as a pure agent then such payment will not attract service tax.
    The payment of notary charges, filing fees (paid to ROC etc) is within the purview of pure agent services and hence they should not attract service tax.

  6. ramachandrudu says:

    excellent article sir

  7. Ujjaval Desai says:

    Good one Srikant

  8. Ujjaval Desai says:

    Good one Srikant.

  9. CA Budhi Bhaskar srivastava says:

    CA Srikant Agarwal Ji,

    I requested you to please provide me the clarification on the following issue after amended explanation to section 67 (w.e.f 14.05.2015)

    there is a service provider who provides generator to the Banks to ensure power supply in case of power cut. they also to procure the diesel for the same on behalf of the bank. the service agreement between the service provider and the bank narrates that the bank will pay Rs. 10000/- as the services charges for the generator and reimburse the diesel cost on actual basis on production of the bill and that too on the govt rates prevail.

    Now the question is that whether this reimbursement of diesel cost will form part of the service charges and consequently attracts service tax.

    I have a contrary view to the above that the diesel cost will not be included in the value of taxable service.

    it is given in the service tax act that the cost of material used in providing output service and which is quantifiable should not form part of the service charges and in case it is not quantifiable then there exist a 70:30 rule.

    Also if we go by the legal definition of words “Reimbursement of Expenses” which mean the incidental or petty expenses only like conveyance charges, telephone charges, courier charges etc. In no way it include material cost like in this case the diesel cost.

    So I need you view and opinion on the above.

    And sir please note that the above is a burning question and raised by all such vendor providing gensets to bank in UP

    Awaiting your reply

    Regards,

    Budhi Bhaskar Srivastava
    B.com(H), ACA, FCMA

  10. Sudesh says:

    Whether reimbursement claimed for Franking and notary charges and filing fees paid by a Company Secretary on behalf of the company attracts Service Tax ?

    Regards,
    Sudesh

Leave a Reply

Your email address will not be published. Required fields are marked *