Nature of Service Irrelevant for Taxation of Reimbursement: CESTAT quashes Demand against Event Management Agency for Payment to Sub-Contractors [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi bench has held that the nature of services are irrelevant for the taxation of reimbursements. While holding so, the CESTAT has quashed a service tax demand against the assessee, an event management company for the reimbursements made to its other service providers and sub-contractors.

The appellant’s services are hired by the Indian Council for Cultural Relations, under Ministry of External Affairs to manage its various events. According to the Revenue, the appellant is providing a complete service and has to pay service tax on the entire amount including what has been paid by it to the third parties and is reimbursed by the client. According to the appellant, it is only providing the service of organizing the event and the amounts which it paid to third parties were only reimbursed by the client. Therefore, it was acting as a pure agent and no service tax can be levied on the amounts which it paid to third parties which have been reimbursed by the client.

While considering a second appeal, the Tribunal bench consists of Justice Dilip Gupta, President and Mr. P.V. Subba Rao, Member (Technical) observed that “the Commissioner has in the impugned order recorded that the appellant was claiming reimbursement. It is not the case of the Revenue that the appellant entered into a turnkey contract for the entire service and was hiring sub-contractors for various purposes. If such was the arrangement, the appellant would be the service provider and its service would be the entire package on which it would be liable to pay the service tax. The others would have been the sub-contractors to the appellant who would have been liable to pay service tax on the amounts they received for their services. In such an arrangement the services of others would have been input services to the appellant on which the appellant would have been entitled to avail Cenvat credit of the service tax paid by such sub-contractors. “

“In this arrangement, the only reason the Revenue sought service tax on the amounts reimbursed to the appellant by the client is that the appellant did not fulfill the conditions laid down in Rule 5 to qualify as a pure agent,” the Tribunal said.

Relying on a catena of decisions, the Tribunal quashed the demand and held that the nature of service should make no difference to the taxability of reimbursements when Rule 5 under which the tax was demanded itself has been ultra vires by Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd.

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