Reimbursable expenses cannot be included in the taxable value: CESTAT [Read Order]

The Bangalore bench of the Customs Excise & Service Tax Appellate Tribunal ( CESTAT ) held that Reimbursable expenses cannot be included in the taxable value. The two members held that confirmation of demand of service tax Rs.5,78,742/- on reimbursement of the cost of defective parts replaced during the warranty period cannot be sustained.

M/s. Hewlett Packard India Sales Private Limited, the appellant is engaged in the manufacture, trading and servicing of computer systems, CPUs, servers etc., falling under Chapter 84 of the Central Excise Tariff Act, 1985.  During the audit, it was noticed that the appellant was providing output services under the category of ‘Management, Maintenance or Repair Service’ ( MMR ) either under a warranty period or under an Annual Maintenance Contract ( AMC ).  They procured parts and spares on which cenvat credit was availed. 

The appellants are discharging service tax on AMC service; however, no service tax was paid for services rendered during the warranty period even though defective components were replaced and the cost of the said components charged from their overseas entities, who in turn, recovered the cost of the same from the Original Equipment Manufacturer ( OEM ). 

Consequently, show-cause notices dated   30.09.2011 for the period April 2006 to March 2008 and dated  22.10.2013 for the period April 2008 to March 2013 were issued to the appellant for recovery of the service tax for services rendered during the warranty period even though no consideration was received from the service receivers but the value of the said services has been arrived at based on Rule 3 of Service Tax ( Determination of Value ) Rules, 2006 read with Section 67 of the Finance Act, 1994 equivalent to spare parts value, replaced free of cost.  On adjudication, demands have been confirmed with interest and a penalty was imposed. 

 It was submitted that during the periods in dispute, they have discharged service tax in respect of AMC service; however, no service tax was paid for services rendered during the warranty period of the sold equipment as no consideration was received.  In respect of AMC service, the appellant up to July 2012 paid service tax on the entire value charged to the customers and availed cenvat credit on inputs and input services used in such AMC services. 

From 01.07.2012, they paid service tax on the gross value in terms of Rule 2A of the Service Tax Valuation Rules and not availed cenvat credit on the duty-paid spares/inputs used in providing such services.  Also, the Department has been raising periodical demands on the indent commission received by the appellant for the warranty services provided to foreign entities from March 2005 to September 2014 under BAS and MMR service.  The first show-cause notice was issued for providing warranty support services from April 2006 to March 2008 under the category of MMR service. 

The Commissioner referring to Rule 5(1) of the Service Tax Valuation Rules, 2006 held that the gross amount charged in rendering the services also includes the value/cost of the goods and materials used/consumed/replaced during provision of the service.  Consequently, he confirmed the demand for MMR service. 

The Tribunal in the case of TAFE Access Limited Vs. CGST&CE  held that reimbursable expenses cannot be included in the taxable value.  Following the said judgment and the principles laid down by the Supreme Court, Dr D.M. Misra, Member ( Judicial ) and Mr Pullela Nageswara Rao, Member (Technical) held that confirmation of demand of service tax Rs.5,78,742/- on reimbursement of the cost of defective parts replaced during the warranty period cannot be sustained.

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