Debit Notes already issued on Reimbursable Expenses: CESTAT quashes Service Tax Demand [Read Order]

In a significant ruling, the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ), Chennai Bench quashed a service tax demand related to reimbursable expenses.

The case revolved around whether reimbursable expenses incurred by service providers and claimed via debit notes should be included in the taxable value for the purpose of service tax under the reverse charge mechanism.

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The appellant, Sundaram Asset Management Co. Ltd., is engaged in managing assets of various mutual fund schemes. During an audit of the company’s accounts, the Department observed that the appellant, while discharging its service tax liability on reverse charge basis for promotional services received from mutual fund distributors, had not included certain reimbursable expenses in the taxable value. These reimbursable expenses were claimed by the service providers through debit notes.

The Department issued a show-cause notice on April 8, 2013, demanding service tax of ₹10,70,000 for the period from 2010-2011 to 2011-2012, along with interest and penalties, on the grounds that these expenses should have been included in the taxable value. The original authority confirmed the demand, and the Commissioner ( Appeals ) upheld this decision. Sundaram Asset Management then filed an appeal before the CESTAT.

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Representing the appellant, Shri Rajaram Ramanan, the consultant, argued that reimbursable expenses should not be included in the taxable value, citing the Supreme Court’s landmark judgment in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India, where the Court held that reimbursable expenses cannot form part of the taxable value for the purpose of service tax. The appellant had discharged service tax on the service charges properly, but the Department had included reimbursed expenses such as auditorium rentals, mailing expenses, and transportation costs in the service tax demand.

The Tribunal bench, comprising Hon’ble Ms. Sulekha Beevi C.S. ( Member Judicial ) and Hon’ble Mr. Vasa Seshagiri Rao ( Member Technical ), examined the facts and noted that the demand was raised on the basis of reimbursable expenses incurred by the distributors for services rendered, which were claimed through debit notes.

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The Tribunal pointed out that these expenses had already been addressed by the Supreme Court in the Intercontinental Consultants case, where it was clearly held that reimbursable expenses should not be treated as part of the gross taxable value for service tax purposes.

The Tribunal, after considering the submissions and the relevant Supreme Court ruling, concluded that the Department’s demand for service tax on reimbursable expenses was unsustainable. The Tribunal observed that the appellant had properly discharged service tax on the service charges mentioned in the invoices and that the reimbursable expenses claimed through debit notes could not be included in the taxable value.

The CESTAT Bench further held that Rule 5(1) of the Service Tax ( Determination of Value ) Rules, 2006, which the Department relied on, did not apply in this case since the Supreme Court had already invalidated its use for reimbursable expenses in similar circumstances.

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Accordingly, the CESTAT Bench set aside the impugned order and quashed the service tax demand, allowing the appeal in favour of Sundaram Asset Management with consequential reliefs. The ruling reinforces the principle that reimbursable expenses cannot be subjected to service tax, providing clarity and relief to businesses dealing with similar tax disputes. The order was pronounced on September 11, 2024.

To Read the full text of the Order CLICK HERE

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