Reimbursement Expenses - Whether it is tax on Services?

IN the Finance Bill 2015, the Explanation to Section 67 - Clause (a) has been substituted. As per the new amendment, all reimbursement expenses incurred by the service provider, have to be included in the consideration.

The amendment is as below:

'(a) "Consideration” includes–

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii)  ............................................'

In terms of Section 67 of the Finance Act 1994, where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided. In the Union Budget 2015, all the reimbursement expenses have been included in the consideration. Hence while calculating service tax, the service provider has to include all the expenses whatever he incurred for rendering service.

Background of this amendment:

In the case of Intercontinental Consultants And Technocrats Pvt Ltd Vs Union of India & Anr, 2012-TIOL-966-HC-DEL-ST the Hon'ble Delhi High Court has declared that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 as ultra vires since it travels much beyond the scope of Sections 66 and 67 of the Finance Act 1994.

In those Sections, there is no provision to include the expenditure in the consideration, which are incurred by the service provider in the course of providing the taxable service. However rule 5(1) was insisting the service provider to include the expenditure. Therefore the Hon'ble High Court has quashed the said rule. In order to regularise this defect, the Government has now amended Section 67 of the Finance Act 1994 and making provision for charging service tax on the reimbursement expenses.

Whether the proposed amendment is constitutionally valid ?

The inclusion of reimbursement expenses for charging service tax is against the Article 268A and Entry 92C of the Constitution of India. Originally the Government had imposed tax on services under Entry No. 97 of the Union list and it is a residual entry.

In the year 2003, the Government has decided to amend the Constitution of India to incorporate a specific provision for leving tax on service. Accordingly the Constitution 88th Amendment Bill, 2003 was presented and inserted Entry 92C and Article 268A to levy tax on services.

Under the above said constitutional provision, the Government is empowered to levy tax on the amount received for providing services, not on the reimbursement expenses. The reimbursement expenses may be incurred by the service provider on behalf of the service recipient, and later on the same will be collected from the receiver. These reimbursement expenses may be incurred on account of several reasons like purchasing materials, machinery, availing services from other service provider etc. Therefore Article 268A of the Constitution of India does not authorise the Government to collect service tax on those expenses.

Hence the above said amendment is against the constitutional provision.

Illustrations:  

1. A is a Chartered Accountant. He is providing accounting services to his client B. On behalf of his client B, he has paid income tax of Rs.100,000/- to the Government and the same is reimbursed by B to A as reimbursement expenses. Is it correct to charge Service tax on Income tax ?

2. A is an Advocate. He has paid a court fee of Rs.100,000/- to the court, on behalf of B and the same is reimbursed by B to A as reimbursement expenses. Already excluded in the Service Definition [sec.65B(44)] Whether B has to pay service tax on court fee under reverse charge method ?

3. A is a Management Consultant. He is doing market research services to his client B. During the course of his service he has incurred expenses like air ticket, restaurant bill, hotel accommodation, etc. According to his consulting agreement with his client B, these expenses can be claimed from B at actuals. In these expenses, A has already paid service tax to the respective service providers (like Airlines, hotels, restaurant etc). Again, A has to charge service tax for these expenses from B. Is it not double taxation?

4. A is a Clearing and Forwarding agent. He has paid Rs.1140/- (Rs.1000 + Rs.140 Service Tax ) on behalf of his customer towards CHA charges. Later on he has collected the said amount from his customer. As per the amendment, A has to include Rs.1140 in his service charges and collect service tax. It means A has to charge service tax on Service tax i.e Rs.140 again.

5. A is providing computer repair service. He has engaged by B for doing computer service to their 100 computers. As per the terms of the service contract, B will get the expenses reimbursed at actuals which is incurred by A for replacing computer parts. As per the above said new amendment, any reimbursement expenses to be included in the consideration. So A has to include the amount spent for the computer parts also to be included consideration and charge service tax. Is it correct to charge service tax on the goods (computer parts) ?

Though the provision says "except in such circumstances, and subject to such conditions, as may be prescribed" no such exemption or condition is provided for including the reimbursement expenses.

Hence, the amendment of Explanation- Clause (a) of Section 67 of the Finance Act 1994 is unconstitutional and liable to be quashed.