Reimbursable Expenses cannot be included in Gross Value charged: CESTAT sets aside Service Tax Demand [Read Order]

The two-member bench of Hyderabad Customs, Excise and Service Tax Appellate Tribunal(CESTAT) held that reimbursable expenses cannot be included in gross value charged and set aside the demand of service tax.

M/s R & A Associates, the appellant are providing services of Company Secretary in terms of Section 65(85) of Finance Act, 1994. On audit, it was observed by the Department that they have been collecting amounts towards expenses like conveyance, courier charges, miscellaneous expenses, stationery charges travelling expenses etc., which they have not shown in their ST3 returns. 

Thereafter, invoking the provisions of Rule 5 of the Service Tax (Determination of Value) Rules, 2006 read with Section 67 of Chapter 5 of Finance Act 1994, as also the Rule 5(2) of Service Tax (Determination of Value) Rules, 2006 stating that such expenses were not deductable from the gross receipt for arriving at the assessable value, a Show Cause Notice demanding service tax of Rs. 2,69,613/- along with interest as also for imposition of penalty under Section 78, was issued to the Appellant.

The Adjudicating Authority, after going through the Rule position concluded that the costs incurred should form part of the taxable value/income, as such expenses do not become reimbursable merely because they are indicated separately in the invoice issued by the service provider and confirmed the demand and imposed penalty.

On appeal, the Commissioner (Appeals) after going through the nature of expenses as also the Rule position under Rule 5(1) and Rule 5(2), concluded that the Appellant has to procure such things as stationary, courier services, undertaking travels etc., for providing his services and since the Appellant has incurred expenses for providing the services hence the concept of Pure Agent is not applicable in the instant case.  Therefore, the Appellant is liable to pay Service Tax on the expenses claimed as reimbursable expenditures. 

It was submitted by the counsel of the appellant that the issue of charging Service Tax under the provisions of Rule 5 is no longer valid after the pronouncement of judgment in the case of UOI Vs Intercontinental Consultants and Technocrats Pvt Ltd..

It was argued by CA that in terms of agreement with their clients, they had mentioned that the Appellant would act as a Pure Agent and the amount would be reimbursed by the client.  And that, while the invoices were raised for the services rendered by the Appellant, debit notes were raised for the reimbursement of expenses incurred on behalf of the client.  He has also challenged the invocation of an extended period in the facts of the case, as they had specifically mentioned in their ST-3 returns the amount under the Column “amount received as Pure Agent”. 

There is nothing on record in the Show Cause Notice to the effect that the expenses incurred by the Appellants were not being reimbursed on the actual basis by the client.  On the contrary, the Appellants have submitted that these were being reimbursed by the clients on the actual basis for which they were issuing debit notes and not invoices. 

The nature of the expenses/cost is nothing but reimbursable expense/cost.  The provision under which such expense/costs were proposed to be included i.e. Rule 5 has been held to be ultra virus and, as such no longer applicable therefore such reimbursable expenses cannot be included in the gross value charged even by invoking Section 67. It is only after the amendment in the definition of consideration in 2015, that such reimbursement can be included in the gross value charged.

The bench comprising Anil Choudhary, Member (Judicial) And A K Jyotishi, Member (Technical) held that the demand cannot be sustained and therefore the Order of the Commissioner (Appeals) is liable to be set aside. The CESTAT set aside the Order of the Commissioner (Appeals) and allowed the appeal.

To Read the full text of the Order CLICK HERE

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