2022 (6) TMI 614 - AT - Service Tax

Recovery of Short paid Service Tax - works contract service - taxability of reimbursements - demand of service tax on the entire amount including what has been paid by it to the third parties and is reimbursed by the client - HELD THAT - The Commissioner has in the impugned order recorded that the appellant was claiming reimbursement. It is not the case of the Revenue that the appellant entered into a turnkey contract for the entire service and was hiring sub-contractors for various purposes. If such was the arrangement, the appellant would be the service provider and its service would be the entire package on which it would be liable to pay the service tax. The others would have been the sub-contractors to the appellant who would have been liable to pay service tax on the amounts they received for their services. In such an arrangement the services of others would have been input services to the appellant on which the appellant would have been entitled to avail Cenvat credit of the service tax paid by such sub-contractors. Revenue accepts that the appellant was receiving two types of payment one for its services and another towards reimbursement of the expenses which it incurred in hiring other service providers. Estimates of expenses to be incurred on the other service providers are approved by the client and the actual amounts incurred by the appellant are claimed by it as reimbursements from the client after submitting appropriate utilization certificates - In this arrangement, the only reason the Revenue sought service tax on the amounts reimbursed to the appellant by the client is that the appellant did not fulfill the conditions laid down in Rule 5 to qualify as a pure agent. However, it is found that Rule 5 itself has been held to be ultra vires of Section 67 by the Supreme Court in the case of UNION OF INDIA AND ANR. VERSUS M/S. INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. 2018 (3) TMI 357 - SUPREME COURT . The Commissioner sought to distinguish the appellant s case on the ground that the nature of services for which reimbursements were made in Intercontinental case were different from the case of the appellant. The nature of service should make no difference to the taxability of reimbursements when Rule 5 under which the tax was demanded itself has been ultra vires by Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. - the demands confirmed against the appellant do not survive. The penalty imposed upon the appellant also needs to be set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Taxability of reimbursements received by the appellant.
2. Applicability of Rule 5 of Service Tax (Determination of Value) Rules, 2006.
3. Interpretation of Section 67 of the Finance Act, 1994.
4. Applicability of the Supreme Court judgment in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd.

Detailed Analysis:

1. Taxability of Reimbursements Received by the Appellant
The appellant, an Event Management Service provider, received two types of payments: professional fees for its services and reimbursements for expenses incurred in hiring third-party service providers. The core dispute was whether the reimbursements should be included in the taxable value for service tax purposes. The Revenue argued that the appellant should pay service tax on the entire amount, including reimbursements, as it was providing a complete service. The appellant contended that it acted as a pure agent for the client concerning these reimbursements, and thus, they should not be subject to service tax.

2. Applicability of Rule 5 of Service Tax (Determination of Value) Rules, 2006
The Commissioner, in the impugned order, rejected the appellant's claim of acting as a pure agent, stating that the appellant did not meet the conditions laid down in Rule 5 (2). However, the appellant argued that Rule 5 itself was declared ultra vires by the Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. The Tribunal noted that Rule 5 was indeed held ultra vires of Section 67 by the Supreme Court, rendering the Commissioner's reliance on this rule invalid.

3. Interpretation of Section 67 of the Finance Act, 1994
Section 67 deals with the valuation of taxable services. The Tribunal examined both the pre- and post-amendment versions of Section 67, emphasizing that the value of taxable service should be the gross amount charged for providing such service. The Supreme Court, in the Intercontinental case, clarified that any amount not calculated for providing the taxable service should not be included in the valuation. The Tribunal applied this interpretation to conclude that reimbursements should not be included in the taxable value.

4. Applicability of the Supreme Court Judgment in Intercontinental Consultants and Technocrats Pvt. Ltd.
The appellant relied on the Supreme Court judgment, which held that reimbursements could not be charged to service tax. The Commissioner attempted to distinguish the appellant's case by arguing that the nature of services in the Intercontinental case was different. However, the Tribunal found this distinction irrelevant, stating that the nature of services should not affect the taxability of reimbursements when Rule 5 itself was declared ultra vires.

Conclusion:
The Tribunal concluded that the demands for service tax on reimbursements received by the appellant do not survive due to the Supreme Court's ruling in the Intercontinental case. Consequently, the penalties imposed were also set aside. The appeal was allowed, and the impugned order was set aside with consequential relief to the appellant.

(Order pronounced in open court on 13/06/2022.)