Venkatesh Merchantiles (P.) Ltd (Appellant) are engaged in providing taxable services of Clearing and Forwarding Agent (C&F Agent services) taxable under Section 65(105)(j) of the Finance Act, 1994 (Finance Act) read with Section 65(25) thereof. For providing C&F Agent services, the Appellant have entered into an agreement with various cement Companies (clients). In terms of the agreement, the Appellant was responsible for maintaining godowns at the cost of the clients for the storage of the goods and unloading the cements at railway station4fgodown and its transportation to various dealers, stockiest as per the directions of the clients. The Appellant was receiving per metric ton amount for these services along with reimbursement of expenses for arrangement of transport, loading and unloading of cement at rack point (railway station) and at godown and payment of godown rent.
The Department alleged for inclusion of amounts being reimbursed in the assessable value and adjudicated that the activity of arranging loading and unloading of goods at the Rake point as well as at the godown, arranging transportation of goods to dealer4f stockiest, and paying godown rent is an integral part of the service provided by the Appellant to their customers and hence, the expenses incurred on these activities reimbursed to the Appellant by their clients would be includible in the assessable value in terms of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 (“the Valuation Rules”). The Department relied on the decision in the case of Sri Bhagavathy Traders Vs. CCE [(2011) 33 STT 1] wherein it was held that expenses incurred by the C&F Agent which were reimbursed to them by their principals would be includible in the assessable value unless their clients were under legal obligation to reimburse those expenses in terms of agreement.
The Appellant pleaded that the godown rent, charges for arranging loading and unloading of the goods, etc., were being reimbursed by their principals on actual basis and the Appellant acted only as pure agent. Further, bills were also in name of principal or not in name of the Appellant. Hence, these charges cannot be treated as the amount received for the services provided and were excludible from value under Rule 5(2) of the Valuation Rules. Even otherwise, Rule 5(1) of the Valuation Rules cannot be relied upon to tax reimbursements in view of judgment in the case of Intercontinental Consultants & Technocrats (P.) Ltd. Vs. Union of India [(2012) 38 STT 75] (the Intercontinental case) holding said Rule 5(1) as ultra vires.
The jurisdictional Addl. Commissioner rejected the contentions of the Appellant and confirmed Service tax demand of Rs. 9,67,244 /- against the Appellant along with interest and penalty. On appeal being filed to the Commissioner (Appeals), the same was dismissed. Being aggrieved, the Appellant preferred an appeal before the Hon’ble CESTAT, Delhi.
The Hon’ble CESTAT, Delhi held that in terms of agreement, principals were required to maintain godown and hence, principals were liable to pay godown rent and the Appellant acted only as their agent. Similarly, bills of labour contractors for arranging loading and unloading and bills of transporters were in name of principals and not in name of assessee. Hence, payment against these bills was made by the Appellant acting as pure agent on behalf of principal. Therefore, these expenses would not be includible in assessable value.
It was further held by the Hon’ble Tribunal that Rule 5 of the Valuation Rules on the basis of which the Department sought to tax reimbursements has been struck down by Delhi High Court as ultra vires to provisions of Section 67 of the Finance Act in its judgment in the Intercontinental case. Hence, reimbursement expenses cannot be includible in assessable value of taxable services provided by the Appellant.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: firstname.lastname@example.org)