Reimbursement of Expenditure & Service Tax
An analysis of judgement in Sercon India (P.) Ltd. Vs. Commissioner (Adjudication) Service Tax
[(2013) 32-taxmann-390 (Delhi)]
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.
Sec. 35F of the Central Excise Act, 1944 has been made applicable to the service tax matters by Sec. 83. Where the appeal is proposed to be filed against an order enhancing the service tax liability, the appellants needs to pre-deposit the disputed amount of service tax, interest and penalty as demanded in the order.
Facts and issues involved:-
Sercon India (P) Ltd. is engaged in providing consulting engineer services and receives payments not only for its service but also for reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients.
CESTAT, a demand of service tax of approximately Rs. 3.57 crores raised against the Sercon India (P) Ltd. by invoking the provisions of Rule 5(1) of the Service Tax (Determination of value) Rules 2006. A penalty of Rs. 4 crores was imposed on the Sercon India (P) Ltd.. As against this, the Tribunal has directed that the Sercon India (P) Ltd. should deposit a sum of Rs. 1 crore in three instalments, namely, Rs. 40 lacs by 20.02.2013, Rs. 30 lacs by 20.03.2013 and Rs. 30 lacs by 10.04.2013. The Sercon India (P) Ltd. deposited the first instalment of Rs. 40 lacs. The Sercon India (P) Ltd. was seeking waiver of deposit of the balance amount of Rs. 60 lacs.
As per the financial statements of the Sercon India (P) Ltd., total revenue, on account of transactions between 01.10.2002 and 31.03.2007, came to approximately Rs. 57.58 crores. Out of this, the billing for professional service was a figure of approximately Rs. 33 crores. The expenditure for which the reimbursement was claimed and billed by the Sercon India (P) Ltd. was to an extent of approximately Rs. 14.58 crores (though the actual amount received as reimbursement was approximately Rs. 14.22 crores). The balance figure of approximately Rs. 10 crores was stated to be ‘contra entries’. These contra entries, according to the learned counsel for the Sercon India (P) Ltd., merely inflated the figure of receipts, but in reality, the actual receipts did not increase by Rs. 10 crores inasmuch as there were contra entries indicating direct costs of the same amount of Rs. 10 crores.
Sercon India (P) Ltd. challenged Rule 5(1) in a Writ Petition.
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Court observed that, prima facie, the issue of levying and charging service tax on reimbursable expenditure has been settled by the decision of this Court in Intercontinental Consultants & Technocrats (P.) Ltd. (supra). Therefore, prima facie, the amount of Rs. 14.22 crores, which has been actually received by the petitioner from its clients towards reimbursement of expenses, could not be the subject matter of service tax.
Final Verdict/High Court Judgement:-
High Court allowed the writ petition by directing that the pre-deposit of Rs. 40 lacs be regarded as sufficient compliance of the provisions of Sec.35F of the Central Excise Act, 1944 read with Sec. 83 of the Finance Act, 1994 for hearing the petitioner’s appeal which is pending before the Tribunal. The Sercon India (P) Ltd. shall not be required to deposit any further amount till the disposal of the appeal.
When an appeal is filed, it means that assessment proceeding is not over. As the assessment proceeding is not over, the assessee is not required to pay any duty or penalty. Therefore, Section 35F requires mere pre deposit of duty/penalty amount and not payment of duty/penalty amount. It is settled that payment under Section 35F or any payment pending appellate proceeding, with or without order of appellate authority is not a “payment of duty”. In fact, there cannot be a liability to pay duty, when assessment proceedings are pending before appellate authority.
The issue of taxability of out-of-pocket expenses has always been a matter of litigation. Before April 2006, there was no specific provision to this effect and, by way of clarification only, expenses recovered on actuals were excluded from the taxable value. From April 2006 onwards , with the introduction of Valuation Rules, industry has been paying service tax on all expenses that are not incurred as pure agent.
In coming para’s lets discuss about nature of out of pocket expenses.
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 traveling 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.
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 fro manpower Supplied by recruitment service Providers for the assignment.
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.
Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. of India [(2012) 12-TMI-150 (Del.)] held that the Rule providing service tax on reimbursement is ultra vires the main provisions of the Service Tax law contained in the Chapter V of the Finance Act ,1994, particularly sections 66 , 67 and 94. Court held that imposing Service Tax on reimbursements is not in the scheme of law and such a provision is ultra vires the Act itself. In this judgment, the court held that what is to be taxed is the gross amount charged by the service provider ‘for such service’. The words ‘such service’ are important for taxation. It is only the value of ‘such service’ which can be taxed and nothing else. The value of service, to be taxed, can, therefore, never exceed the gross amount charged by the service provider for such service provided. Thus, there can be no Service Tax on reimbursements as such reimbursements (say, travelling, accommodation etc.) as it would amount to double taxation.
Author – R. Kumar, B.Com. MBA (Finance)
Author can be reached at firstname.lastname@example.org