Dr. Sanjiv Agarwal
Service providers and professionals are aware that Service Tax is payable @ 12.36 percent on the value to taxable services which implies gross amount charged by the service provider for such service provided or agreed to be provided. However, where the consideration is not in money form, wholly or partly, value means money consideration plus money equivalent of consideration in kind. Also, consideration includes any amount that is payable for the taxable services provided.
The valuation of services is further governed by valuation rules wherein it has been provided that if some expenses or costs are incurred by the service provider in the course of provision of service, all such costs shall be treated as a part of the consideration and be included in the value for the purpose of Service Tax. However, if such expenses are incurred as a pure agent of the service receiver, they are excluded from the value subject to seven stringent conditions so much so that even where it is a case of reimbursement, in most of the cases, it may not get excluded.
As a major relief to all the service providers, Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India (2012) 12 TMI 150 (Delhi) has over ruled this provision stating that imposing Service Tax on reimbursements is not in the scheme of law and such a provision is ultra vires (illegal) the Act itself.
In this judgment, the court has 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.
In such cases, effectively double taxation takes place as in the first place, the original service provider charges tax and then when reimbursement is claimed, even without any margin or profit on actuals only, then also Service Tax is leviable. This interpretation is a major relief to the service providers but it may be short lived as the Government is most likely to approach Supreme Court or may even amend the law in next budget retrospectively, as it is in habit of doing so.