Service Tax Cannot Be Levied On Reimbursement Of Expenses Incurred By The Service Provider: Reiterates CESTAT Delhi

The Bench, consisting of Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member), held that since Rule 5 of the Service Tax (Determination of Value) Rules, 2006 has been held to be ultra vires by the Supreme Court in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd. (2018), the nature of services does not make any difference and that no service tax can be levied on reimbursements.

The appellant M/s Seher provides event management services, that are taxable under Section 65 (105) of the Finance Act, 1994 and on which the appellant has been paying service tax.

After the records of the appellant were audited by the Directorate General of Audit, it was found that the appellant had short paid service tax. Show cause notices were issued to the appellant proposing to recover the short-paid service tax as well as impose penalty under the Finance Act, 1994. The Commissioner of Service Tax accordingly passed an order on the basis of the said show cause notices. Against this, the appellant filed an appeal before the CESTAT.

The appellant M/s Seher submitted before the CESTAT that certain amounts were paid by the appellant to third party service providers, which were later reimbursed by the client. The appellant averred that with respect to the said amounts, the appellant was only acting as a pure agent and, therefore, no service tax could be levied on the said amounts.

The appellant averred that the Commissioner did not accept the appellant's claim that it was acting as a pure agent for its clients on the ground that it had not fulfilled the conditions laid down in Rule 5 (2) of Service Tax (Determination of Value) Rules, 2006.

The revenue department contended that the appellant was providing a complete service. Thus, the revenue department averred that the appellant was required to pay service tax on the entire amount, including the amount paid by the appellant to third parties which was later reimbursed to it by the client.

The CESTAT observed that the taxable services are valued as per Section 67 of the Finance Act, 1994. The CESTAT noted that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 provides that where any expenditure or costs are incurred by the service provider in the course of providing a taxable service, all such expenditure or costs shall be treated as a consideration and they shall be included in the value of the service for the purpose of charging service tax.

The CESTAT noted that Rule 5 (2) provides that the expenditure or costs incurred by the service provider as a pure agent of the recipient of the service, shall be excluded from the value of taxable service only if all the conditions specified therein are met.

The CESTAT observed that the Supreme Court in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd. (2018) had held that Rule 5 of the Service Tax (Determination of Value) Rules, 2006 was ultra vires Section 67 of the Finance Act. The Supreme Court had ruled that the value of a taxable service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service and that the service tax is to be paid only on the services actually provided by the service provider.

The CESTAT noted that the revenue department had accepted that the appellant was receiving two different types of payments, i.e., payments for the services provided by it to its clients and another towards the reimbursement of expenses incurred by it in hiring other service providers.

The CESTAT observed that the client first approved the estimates of expenses to be incurred on the other service providers and thereafter, the actual amounts incurred by the appellant were claimed after submitting appropriate utilization certificates.

The CESTAT noted that the revenue department sought to levy service tax on the reimbursed amounts on the ground that the appellant did not fulfill the conditions laid down in Rule 5 to qualify as a pure agent. However, the CESTAT noted that the Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (2018) had held that Rule 5 was ultra vires Section 67 of the Finance Act, 1994.

The CESTAT observed that the Commissioner sought to distinguish the appellant's case on the ground that the nature of services provided by the appellant were different from the ones for which reimbursement was claimed in Intercontinental Consultants and Technocrats Pvt. Ltd. (2018).

The CESTAT ruled that since Rule 5 of the Service Tax (Determination of Value) Rules, 2006 has been held to be ultra vires by Supreme Court, the nature of services does not make any difference to the taxability of reimbursements.

The CESTAT thus allowed the appeal and set aside the order of the Commissioner of Service Tax.

Case Title: M/s Seher versus Commissioner of Service Tax, Delhi – II

Dated: 13.06.2022 (Delhi CESTAT)

Representative for the Appellant: Mr. S.C. Kamra, Advocate

Representative for the Respondent: Mr. Ravi Kapoor, Authorized Representative for the Department

Click Here To Read/Download Order