Service providers and professionals are aware that Service Tax is payable @ 12.36 percent on the value to taxable services which implies gross amount charged by the service provider for such service provided or agreed to be provided. However, where the consideration is not in money form, wholly or partly, value means money consideration plus money equivalent of consideration in kind. Also, consideration includes any
amount that is payable for the taxable services provided.
The valuation of services is further governed by valuation rules wherein it has been provided that if some expenses or costs are incurred by the service provider in the course of provision of service, all such costs shall be treated as a part of the consideration and be included in the value for the purpose of Service Tax. However, if such expenses are incurred as a pure agent of the service receiver, they are excluded from the value subject to seven stringent conditions so much so that even where it is a case of reimbursement, in most of the cases, it may not get excluded.
As a major relief to all the service providers, Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India (2012) 12 TMI 150 (Delhi) has over ruled this provision stating that imposing Service Tax on reimbursements is not in the scheme of law and such a provision is ultra vires (illegal) the Act itself.
In this judgment, the court has held that what is to be taxed is the gross amount charged by the service provider 'for such service'. The words 'such service' are important for taxation. It is only the value of 'such service' which can be taxed and nothing else. The value of service, to be taxed, can, therefore, never exceed the gross amount charged by the service provider for such service provided. Thus, there can be no Service Tax on reimbursements as such reimbursements (say, travelling, accommodation etc.) as it would amount to double taxation.
The court has upheld that Service Tax cannot be levied on reimbursement of expenses, that too a case of consulting engineer's services. It would also imply that such reimbursements cannot be taxed in case of other service providers also which may include architects, management consultants, chartered accountants, company secretaries, cost accountants, advocates, scientists or even a beautician .
The issue of imposing Service Tax on reimbursement of expenses has always been a issue of debate and dispute both in pre 2006 and post 2006 era when Service Tax (Determination of Value) Rules, 2006 were notified and concept of 'pure agent' was brought in. 'Pure agent' in the rues has been so defined that service provider can never be called a pure agent so long as he utilizes or consumes the services, for which reimbursement is sought in rendering of output taxable service. Such a rule defeats the very purpose of reimbursement and such amounts are subjected to double taxation - one when original service provider provides such service and two, when reimbursement is sought, even on actuals without any markup or profit element.
Earlier in CCE & C, Rajkot v. Reliance Industries Ltd. (2009 (3) TMI 859 - SUPREME COURT), where Department was in appeal, apex court held that expenses incurred on account of reimbursable expenses do not form part of value of taxable services. Hence reimbursable charges incurred by assessee for travelling allowances to consulting engineers are not required to be included in the fees for services so paid by them for the purpose of Service Tax. But the Supreme Court did not held that Rule 5(1) is ultra vires the provisions of section 67 of the Finance Act, 1994 which provides for provisions on valuation of taxable services.
However, contrary to a clear stand taken by Delhi High Court and Supreme Court, a Larger Bench of CESTAT in Shri Bhagavathy Traders v. CCE 2011 (8) TMI 430 - CESTAT, BANGALORE, earlier held that the cost of inputs or input services which go into the manufacture or output services cannot be considered as reimbursements for service provider. The reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc. amounts to a claim by the service provider that they can render such services in vacuum. What are cost for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses.
In such cases, effectively double taxation takes place as in the first place, the original service provider charges tax and then when reimbursement is claimed, even without any margin or profit on actuals only, then also Service Tax is leviable. This interpretation is a major relief to the service providers but it may be short lived as the Government is most likely to approach.
Now that Delhi high court has announced its judgment, the ball lies in the court of Government of India. Since this judgment is likely to have a major impact on revenue and will also unsettle the settled position on interpretation of law on reimbursement of expenses, it will create lot of confusion in the minds of assessees as well as service providers. The judgment is most likely to be appealed against and may also get stayed. If not or if it takes time, Government has one more weapon in its armoury i.e. to amend the law in the ensuring Budget and it may be pleased to do so retrospectively for which it is known for.
amount that is payable for the taxable services provided.
The valuation of services is further governed by valuation rules wherein it has been provided that if some expenses or costs are incurred by the service provider in the course of provision of service, all such costs shall be treated as a part of the consideration and be included in the value for the purpose of Service Tax. However, if such expenses are incurred as a pure agent of the service receiver, they are excluded from the value subject to seven stringent conditions so much so that even where it is a case of reimbursement, in most of the cases, it may not get excluded.
As a major relief to all the service providers, Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India (2012) 12 TMI 150 (Delhi) has over ruled this provision stating that imposing Service Tax on reimbursements is not in the scheme of law and such a provision is ultra vires (illegal) the Act itself.
In this judgment, the court has held that what is to be taxed is the gross amount charged by the service provider 'for such service'. The words 'such service' are important for taxation. It is only the value of 'such service' which can be taxed and nothing else. The value of service, to be taxed, can, therefore, never exceed the gross amount charged by the service provider for such service provided. Thus, there can be no Service Tax on reimbursements as such reimbursements (say, travelling, accommodation etc.) as it would amount to double taxation.
The court has upheld that Service Tax cannot be levied on reimbursement of expenses, that too a case of consulting engineer's services. It would also imply that such reimbursements cannot be taxed in case of other service providers also which may include architects, management consultants, chartered accountants, company secretaries, cost accountants, advocates, scientists or even a beautician .
The issue of imposing Service Tax on reimbursement of expenses has always been a issue of debate and dispute both in pre 2006 and post 2006 era when Service Tax (Determination of Value) Rules, 2006 were notified and concept of 'pure agent' was brought in. 'Pure agent' in the rues has been so defined that service provider can never be called a pure agent so long as he utilizes or consumes the services, for which reimbursement is sought in rendering of output taxable service. Such a rule defeats the very purpose of reimbursement and such amounts are subjected to double taxation - one when original service provider provides such service and two, when reimbursement is sought, even on actuals without any markup or profit element.
Earlier in CCE & C, Rajkot v. Reliance Industries Ltd. (2009 (3) TMI 859 - SUPREME COURT), where Department was in appeal, apex court held that expenses incurred on account of reimbursable expenses do not form part of value of taxable services. Hence reimbursable charges incurred by assessee for travelling allowances to consulting engineers are not required to be included in the fees for services so paid by them for the purpose of Service Tax. But the Supreme Court did not held that Rule 5(1) is ultra vires the provisions of section 67 of the Finance Act, 1994 which provides for provisions on valuation of taxable services.
However, contrary to a clear stand taken by Delhi High Court and Supreme Court, a Larger Bench of CESTAT in Shri Bhagavathy Traders v. CCE 2011 (8) TMI 430 - CESTAT, BANGALORE, earlier held that the cost of inputs or input services which go into the manufacture or output services cannot be considered as reimbursements for service provider. The reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc. amounts to a claim by the service provider that they can render such services in vacuum. What are cost for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses.
In such cases, effectively double taxation takes place as in the first place, the original service provider charges tax and then when reimbursement is claimed, even without any margin or profit on actuals only, then also Service Tax is leviable. This interpretation is a major relief to the service providers but it may be short lived as the Government is most likely to approach.
Now that Delhi high court has announced its judgment, the ball lies in the court of Government of India. Since this judgment is likely to have a major impact on revenue and will also unsettle the settled position on interpretation of law on reimbursement of expenses, it will create lot of confusion in the minds of assessees as well as service providers. The judgment is most likely to be appealed against and may also get stayed. If not or if it takes time, Government has one more weapon in its armoury i.e. to amend the law in the ensuring Budget and it may be pleased to do so retrospectively for which it is known for.
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2 comments:
Whether reimbursement of medical claims by the service provider who has not added this in the service tax, should add now. Apart from this, the vehicle was provided by the service recipient for the performance of service provider and the Petrol/Diesel for the vehicle was paid by the recipient itself, whether that should also be added to the service and Service Tax to be paid accordingly.
Whether the medical bills( both Hospitalization and out- patient)submitted and reimbursed to the service provider has not taken initially as value for the purpose of Service Tax, now demanding retrospectively i.e. from 2009-10 on wards(as Demanded by Service Tax Department). Whether Reimbursement is Service Tax chargeable?. Further, Vehicles were provided to them by the service recipient and the Fuel bills were directly paid to the Petrol bunk by the Service recipient. Is that also Service Tax chargeable?
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