2023 (8) TMI 743 - AT - Service Tax

Non-payment of Service tax - reimbursable expenses - foreign owners where payment is received in foreign currency - export of service or not - period October 2006 to March 2011. Whether the amounts recovered by the appellants through debit notes are to be treated as part of taxable value for the purpose of levy of service tax or not, and on which he had passed an order confirming the adjudged demands? HELD THAT - Ship Management Service was brought into service tax net in Union Budget 2006 by specifically including it as taxable service and explained the same by providing an inclusive definition. Owners or operators of ships may enter into an agreement with ship managers for provision of a wide range of services in respect of running and operations of ships. Indicative list of services provided under this category are mentioned under the definition of ship management service . Further, the existing section 67 was substituted with a new section 67 to provide for determination of value of taxable service. Prior to this, service tax was charged on the gross amount received. The proposed section provides for determination of taxable value in cases where the consideration received for taxable services provided is not wholly in money terms and the consideration received is in money terms but not known explicitly. Separate valuation rules were also brought out for this purpose. Hence, it is desirable to examine the above legal provisions along with the rules. In rendering ship management services, the appellants have incurred various expenditures for and on behalf of the ship owners and claimed reimbursement for the same. In terms of the above specific clauses of the agreement, the appellants have carried out their responsibilities as agents, for and on behalf of the owners. Accordingly, all monies received by the appellants was credited in a separate bank account and the interest accrued on the same was also credited to the owners. Commission and discount obtained by the appellants was also credited to the owner s bank account - The expenses were shown for the month as per budget allotted/agreed to, actual expenses, variation and the total expenditure incurred up to the month for the financial year with full year budget as compared to last year actual expenditure. Thus, both on the facts of the case and on the interpretation of legal provisions of the Finance Act, 1994, the demand of service tax on reimbursement expenses goes beyond the mandate of Section 67, which is a charging section for levy of service tax. Section 67, both before and after 01.05.2006 amendment authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money - service provided by the petitioner falls under clause (zzzt). It is only the value of such service that is to say, the value of the service rendered by the appellants to ship owner, which is that of a ship management service, that can be brought to charge and nothing more. It is not the case of the Revenue that on ship management fees, for the services rendered by the appellants, they have failed to pay the service tax. Thus the quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the ship management service provided by them. The Principal Bench of this Tribunal had dealt with the similar issue in the case of M/s Seher Vs. Commissioner of Service Tax, Delhi II 2022 (6) TMI 614 - CESTAT NEW DELHI by holding that the service tax demands confirmed under Rule 5 do not survive, in asmuchas Rule 5 itself has been held to be ultra vires of Section 67 by the Hon ble Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. 2018 (3) TMI 357 - SUPREME COURT . Thus, the impugned order cannot be sustained - appeal allowed.

Summary

Issues Involved:
1. Whether the amounts recovered by the appellants through debit notes are to be treated as part of taxable value for the purpose of levy of service tax.
2. Whether the appellants acted as a 'pure agent' in incurring expenses on behalf of ship owners.
3. Validity of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 in relation to Section 67 of the Finance Act, 1994.

Issue 1: Taxability of Amounts Recovered Through Debit Notes
The core issue was whether the amounts recovered by the appellants through debit notes should be included in the taxable value for service tax. The Tribunal found that the amounts collected by appellants are part of the taxable value for rendering 'ship management services' as per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. However, the appellants contended that they had paid service tax on the 'ship management fees' and claimed that the reimbursement expenses were raised as 'pure agent' of the service recipient, thereby excluding these from the value of taxable services in terms of Rule 5(2).

Issue 2: Appellants Acting as 'Pure Agent'
The Tribunal examined whether the appellants fulfilled the conditions to be considered a 'pure agent' under Rule 5(2). It was found that the appellants met all the conditions prescribed under Rule 5(2), such as acting on behalf of the ship owners, using separate bank accounts for transactions, and not adding any markup to the reimbursed amounts. The Tribunal concluded that the reimbursement expenses collected by appellants should be treated as costs incurred by the service provider as a 'pure agent' of the recipient of service on behalf of the ship owner.

Issue 3: Validity of Rule 5(1)
The Tribunal referenced the Hon'ble Supreme Court's decision in the case of Intercontinental Consultants and Technocrats Pvt. Ltd., which held that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 is ultra vires Section 67 of the Finance Act, 1994. The Supreme Court ruled that the value of taxable service shall be the gross amount charged by the service provider "for such service" and cannot include reimbursable expenses or costs. Consequently, the Tribunal found that the demand for service tax on reimbursement expenses goes beyond the mandate of Section 67.

Conclusion:
Based on the above findings, the Tribunal concluded that the impugned order cannot be sustained. The appeal filed by the appellants was allowed, and the impugned order dated 14th October 2015 was set aside. The Tribunal's decision was pronounced in open court on 10.08.2023.