Reimbursable Expenses in Pharma Job Work Arrangement Cannot Be Included in Taxable Value for Service Tax Levy: CESTAT [Read Order]

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that reimbursable expenses received in a pharma job work arrangement cannot be included in taxable value for levy of service tax.

Teena Labs Ltd, the appellant, is engaged in manufacture of bulk drugs and formulations. The appellant entered into a job work agreement with Aurobindo Pharma Ltd (APL) for manufacture of pharmaceutical products at the appellant’s factory on conversion basis.

Under the agreement, apart from monthly conversion charges, the appellant was also reimbursed certain expenses incurred during manufacturing activity. These expenses included power, fuel, water, maintenance of machinery and salary related expenses of employees involved in the manufacturing process.

The department sought to include these reimbursable expenses in the taxable value while demanding service tax under the category of “Renting of Immovable Property Service”. According to the department, these payments formed part of the consideration received by the appellant for allowing use of factory premises and facilities by APL.

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The adjudicating authority confirmed the demand and treated the reimbursed expenses also as part of rent received for factory premises and related facilities. Aggrieved by the order, the appellant approached the CESTAT.

The appellant’s counsel argued that reimbursable expenses cannot be subjected to service tax independently. They relied on the Supreme Court judgment in Union of India v. Intercontinental Consultants & Technocrats Pvt Ltd, where it was held that reimbursable expenses cannot be added to taxable value for service tax purposes.

The revenue counsel argued that the payment structure, including reimbursement of expenses, showed that the arrangement was not a normal job work contract and the entire consideration should be treated as taxable amount.

The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) observed that the department attempted to levy service tax on reimbursable expenses by treating those expenses also as part of rent.

The tribunal explained that in view of the Supreme Court judgment in Intercontinental Consultants & Technocrats Pvt Ltd, “the reimbursable expenses, per se, cannot be subjected to service tax.”

The tribunal held that reimbursable expenses received by the appellant in connection with pharma job work manufacturing activity were not includible in taxable value for levy of service tax. The impugned order was set aside and the appeal was allowed.

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