Reimbursement of Expenses Can’t Be Taxed Under Business Auxiliary Services: CESTAT [Read Order]

In M/s. Ipca Laboratories Ltd. vs. Commissioner of CE & ST, LTU, Mumbai, the Mumbai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that reimbursement expenses by the assessee in promoting its products to the distributor cannot be taxed under Business Auxiliary Services.

The appellant engages in the manufacture and distribution of P&P medicaments. For distribution, appellant has availed service of a Distributor who has appointed sales representatives for the promotion of the appellant’s product. Salary of these sales representatives is reimbursed by the appellant to these distributors. Revenue demanded the tax on such amount under the head of “Business Auxiliary Services”.

The Counsel for the appellant argued that the activity of sales representative is to promote the goods belonging to the Distributors. He further argued that this amount given as salary of the sales representative hired by the distributors is a reimbursement of expenses. Relying on the decision of Delhi High Court in the case of M/s. Inter Continental, the Counsel argued that reimbursement of expenses will not form part of the value of taxable service.  It was also submitted by him that the services received from M/s. Regulatory Concepts were regarding executory services of registration of therapeutic products and that the said service was not in the nature of any advice, consultancy or technical assistance in the science and technology and therefore no tax could be levied under the head of “Scientific and Technical Consultancy Services”.

Regarding the demand of tax under the head “Online Database Access and Retrieval Service”, the Counsel argued that invoiced raised by M/s Dialogue Corporation was for alert storage charges and internet charges and that the said firm does not own any website where data could be accessed and that no information was accessed by the appellant from any database of the said firm. He contended that M/s. Dialogue Corporation simply supplies the data to the appellant and the same is not received online but are received as and when asked for.

The CESTAT Bench comprising of Judicial Member Ramesh Nair and Technical Member Raju relying on the decision of Tribunal in the case of Genom Biotech Pvt. Ltd vs. CCE, Nashik, observed that the agreement with the distributors provided that the product promotion activities would be under the direct supervision of the appellant. The Court noted that the invoice raised by the distributors in respect of the expenses describe the same as “amount towards marketing survey and promotional expenses” and “marketing expenses” and that the invoices did not contain any breakup of the expenses, nor did the debit notes. Thus, it was concluded that no Service tax could be demanded.

With respect to the demand of tax under the head “Scientific and Technical Consultancy Services”, the Court relying on the decision of the Tribunal in the case of Administrative Staff College of India held that the regulatory services are not in the nature of “Scientific and Technical Consultancy Services” and therefore no Service Tax under the said head could be demanded.

The Bench addressing the next issue noted that in absence of online database access, no Service Tax could be demanded under the head of “Online Database Access and Retrieval Service”. However, the demand under the head “Management Consultancy Service” was upheld by the Tribunal.  Finally, the Tribunal invoking Section 80 of the Income Tax Act,1961 Set aside the penalty imposed under Section 76 & 78 of the Act.