R. Kumar, B.Com. MBA (Finance)
Service tax was introduced vide the Finance Act, 1994 and since then the same has undergone with various changes and modifications in its growth from infancy to literal maturity. Service Tax has maintained the notorious trait and over time has evolved a web of complex and confusing provisions. Going by this trend, service tax as an independent area of dispute is surely going to present litigants and professionals with a huge scope for confrontation with the revenue along with associated pains of litigation. It will ultimately depend on the wisdom of the judiciary to untangle the methodically planned complexities in the service tax law to arrive at a clear interpretation of what actually should have been the law, rather than what is put in the law book.
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.
The subject of valuation has always been one of the controversial areas in the field of indirect taxes, whether it is Central Excise or Customs and even Service Tax. This aspect has received utmost attention in the taxation of goods mainly because of the multiple stages that the goods pass whereas the taxable event is only one. Whereas in case of services, the same being intangible nature, the issues were comparatively less. But, one aspect of valuation of services that has received equal amount of attention in the context of service tax is charging of consideration in addition to the agreed consideration in the form of reimbursements. A professional is often posed with this question by clients who want to know why a levy of service tax on reimbursement of expenditure incurred on their behalf is added to their cost especially when it is not actually in the nature of remuneration. This question is posed more by those clients who do not get the benefit of CENVAT i.e. those clients who are not registered under the Service Tax Act.
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.
In coming paras we’ll discuss in detail the out of pocket expense and its relationship with service tax for better understanding of this subject:-
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 travelling 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.
For 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 for 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.
Commissioner of Service Tax Vs. Sangamitra Service Agency [(2013) 7-TMI-862 (Mad.)]
Hon’ble Madras High Court in this case has put to rest the issue of service tax on reimbursement of expenses. The issue before the Court was on a question of law, which the Department had raised in appeal against the order of the Tribunal. The Tribunal had held that reimbursable expenses received by the assessee need not be added to the taxable value related to clearing and forwarding agents’ services. The Department had questioned whether the view held by the Tribunal was correct in view of the provision of Rule 6(8) of the Service Tax Rules, 1994 (since omitted vide Notification no. 10/2006 dated 19 April 2006) according to which gross amount of remuneration or commission should be the taxable value in relation to services provided by a C & F Agent.
The Hon’ble High Court, while dismissing the appeal of the Department, held that if a receipt is for reimbursing expenditure incurred for the purpose, the mere act of reimbursement per se, would not justify the contention of the Revenue that the same, having character of remuneration or commission, deserves to be included in the sum amount of remuneration/commission. The Hon’ble High Court further held that expenditure incurred does not fall under the expression “remuneration or commission”.
Delhi Hon’ble Court while deciding the petition by the petitioner held the following:
– Rule 5 (1) of the Rules is ultra vires Sec. 66 and Sec. 67 of the Finance Act, 1994 since it travels beyond the scope of the aforesaid sections.
– The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as part of the gross amount charged by the service provider for the services provided.
– The reimbursement of expenses for air travel tickets, train, hotel, etc. may also lead to double taxation.
The Court while striking down the provisions of Rule 5(1) of the Rules held, “Reading Sec. 66 and Sec. 67 (1) (i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge.
Sub-section (4) of Section 67 which enables the determination of the value of the taxable service “in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax.
We are, therefore, undoubtedly of the opinion that Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.”
In the case of the Intercontinental Consultants, the Court pronounced that Rule 5 (1) of the Service Tax Valuation Rules which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax in ultra vires of Sec. 66 and 67 of the Finance Act, 1994.
While the jurisdiction of this decision will be restricted to the jurisdiction of the Delhi High Court, it will trigger a number of similar writs in High Courts across the country probably leading to a reference to the Apex Court too. In hindsight it appears that the decision to integrate central excise and service tax was not a very reasoned one. Valuation and CENVAT Credit are both integrally connected with central excise law but alien to service tax. Manufacture and service are totally different in nature and envisaging a common law for both is not going to be easy. Since inception service tax law has used the term gross amount charged to determine the value of the service. This can be taken to mean the amount that one charges for rendering a service – for instance a charge by a CA at a rate per hour based on the number of hours spent. Logically, one charges only for the value of services rendered but expenses are claimed as a reimbursement. Rule 5(1) of the Valuation Rules did not make this distinction between a charge and a claim and included all expenses in the value except expenses incurred as a pure agent. The concept of a pure agent may not be valid in the service industry as it can be claimed that one always acts as a pure agent of a client irrespective of the number of Rule 5 (1) under the pretext of double taxation may not hold water for long as double taxation as a concept has been accepted in the country and has been blessed by the Apex Court too. The difference between a charge and a claim should be the reason for not levying service tax on expenses reimbursement.
The Government should take this decision in its right spirit and not reuse the Brahmastra and amend Rule 5 (1) to retrospectively include all reimbursements as has been its want. The law should state that as long as there is a one-to-one correspondence between the claim and the expense and there is no profit being made by the service provider out of the expense claim, it should not be eligible to tax. Doing anything different will only tempt a litigious tax-payer to knock on the comforting chambers of the Delhi High Court frequently.
History has shown us that the Department does not accept stances taken on the basis of judgments other than the jurisdictional High Court. Hence, tax-payers who agree with the decision of the High Court will be well advised to get together and file a writ in their jurisdictional High Court.
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