Reimbursed Expenses Excludable only When 'Pure Agent' Conditions u/r 5 of Service Tax Rules are Satisfied: CESTAT [Read Order]

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that reimbursed expenses can be excluded from the value of taxable services only if the conditions for acting as a ‘pure agent’ under Rule 5 of the Service Tax (Determination of Value) Rules, 2006 are satisfied.

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The appellant, Shri Rakesh Kumar Agarwal, is a government-approved property valuer who provides land and property valuation services to banks and financial institutions for loan-related purposes. Based on information received from the Income Tax Department for the financial years 2015-16 and 2016-17, the service tax department found that the appellant had received gross payments of Rs. 34,67,283 and Rs. 26,67,360, respectively, but had not paid service tax on these amounts.

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The department issued show cause notices treating the entire gross amount as taxable and proceeded to raise service tax demands of Rs. 5,02,756 and Rs. 4,00,104 respectively. The adjudicating authority confirmed the demands and imposed equal penalties under Section 78 of the Finance Act, 1994, along with multiple penalties under Section 77 and late fees under Section 70. The Commissioner (Appeals) later upheld these orders, leading the appellant to file appeals before the Tribunal.

The appellant’s counsel argued that the total amounts received included substantial reimbursed expenses incurred on behalf of clients for legal reports, land verification, government documentation, and other necessary fieldwork.

They argued that his actual professional fee was below the taxable threshold as per Notification No. 33/2012-ST and that service tax could not be levied on reimbursed expenses which were clearly identifiable and supported by documents.

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The appellant further relied on the Supreme Court’s ruling in Intercontinental Consultants & Technocrats Pvt. Ltd. v. Union of India, which held that Rule 5(1) was ultra vires to Section 67 of the Finance Act and that reimbursements cannot be included in the taxable value.

The revenue counsel argued that the appellant failed to furnish records during the initial inquiry, so the entire receipts were rightly treated as taxable consideration. They argued that the appellant could not claim exemption on reimbursed amounts without fulfilling the strict criteria under Rule 5(2) relating to “pure agent” conditions.

The two-member bench comprising Judicial Member P.K. Choudhary observed that the facts were squarely covered by the Supreme Court’s judgment in Intercontinental Consultants. The tribunal clarified that for reimbursement to be excluded, the service provider must meet all eight conditions under Rule 5(2), including separate disclosure, no profit on the reimbursed amounts, and the client’s authorization for third-party payments.

The tribunal ruled that the impugned orders could not be sustained as they were passed without considering the legal position settled by the apex court. Accordingly, both appeals were allowed, and the service tax demands along with penalties were set aside, granting consequential relief to the appellant.

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