2025 (1) TMI 1036 - AT - Service Tax

Recovery of service tax - Manpower Recruitment and Supply Services - reimbursement expenses of salary incurred by the respondent on behalf of their principal towards the employees/workers supplied thereto by the respondent during the period 2010-11 to 2012-13 - includible in the taxable value for the purpose of service tax or not - pure agent services - extended period of limitation. HELD THAT - As for the department s assertion with regard to Section 67 of the Act it is a clear mandate of law that the value of taxable service for levy of service tax has to be in consonance with the provisions of Section 66 of the Act ibid which levies tax only on the value of taxable service per se alone. Thus it is inbuilt in the mechanism of law to ensure that only taxable service component is required to be considered with reference to Section 67 of the Act. Reading Sections 66 and 67 of the Act harmoniously it would be evident that the valuation of taxable service is nothing more nor anything less than the consideration paid for the service which alone is taxable and leviable to service tax. It is also evident from the combined reading of the two aforesaid sections that only service component provided by the supplier of service can be valued and assessed to service tax - For subjecting the value to tax it is imperative that a distinction is accorded between reimbursement and remuneration which is a consideration for service delivery. In the case of Union of India vs. Intercontinental Consultants And Technocrats Pvt.Ltd. 2018 (3) TMI 357 - SUPREME COURT the hon ble apex court in the context of reimbursable expenses had even held Rule 5(1) to be ultra vires. It held that the Gross amount charged has to be ascertained with respect to deliveries for such service . From the facts of this case it is quite clear that the charges for deliverance of Manpower Service in the present matter are separately indicated and are not contained in the salary i.e. required to be paid to the personnel made available to their clients by the respondent. Slew of cases have evidently held that reimbursement expenses are not taxable and it is only the remuneration component and not reimbursement i.e. required to be subjected to levy of service tax. In the case of Security Guards Board for Greater Bom. Thane Dist. Vs. C.C.E. Thane-II 2016 (12) TMI 859 - CESTAT MUMBAI after a detailed examination of the matter it was held that wages and allowances collected by the Board as an Agency for payment to concerned persons/authorities were excludible from the value of the Service Tax and the taxable value for the purpose of levy needs to exclude the said charges. Extended period of limitation - HELD THAT - It is evident that the case has been made out by the department on the basis of public records of the respondent apart. In any case not only was the appellant filing returns and was being regularly audited even the exercise as contemplated by the department by way of the impugned show cause notice is revenue neutral. Under the circumstances no case of suppression of facts can be substantiated. The figures as available in the books of accounts/other records of the respondent have been in public domain. Under the circumstances the question of invocation of extended timelines does not arise and demand made out is certainly beyond limitation. Conclusion - Reimbursed expenses when acting as a pure agent are not includible in the taxable value for service tax. The distinction between reimbursement and remuneration must be maintained. The demand was time-barred due to lack of suppression. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the reimbursement of salary expenses by the respondent to its clients, in the course of providing 'Manpower Recruitment and Supply Services', should be included in the taxable value for the purpose of service tax.
• Whether the respondent acted as a 'pure agent' and if the reimbursed salary expenses can be excluded from the taxable value under Section 67 of the Finance Act, 1994.
• Whether the invocation of extended timelines for demand due to alleged suppression of facts by the respondent is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Inclusion of Reimbursed Salary Expenses in Taxable Value

• Relevant Legal Framework and Precedents: The Revenue relied on Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, and Section 67 of the Finance Act, 1994, arguing that all costs incurred by the service provider in providing taxable service should be included in the taxable value. The case of Jyoti Computer Services was cited to support their stance.
• Court's Interpretation and Reasoning: The court noted that the reimbursement of salary was on an actual basis and not a part of remuneration for services rendered. The adjudicating authority found that these were not taxable under the Service Tax law.
• Key Evidence and Findings: The court examined the agreements and invoices, which showed separate billing for service charges and salary reimbursements. The reimbursements were made without any markup, indicating they were not part of the taxable service value.
• Application of Law to Facts: The court applied the principle that only the service element should be taxed, excluding reimbursable expenses, as established in various precedents.
• Treatment of Competing Arguments: The court rejected the Revenue's argument that the reimbursement should be included in taxable value, citing the distinction between reimbursement and remuneration.
• Conclusions: The court concluded that the reimbursed salary expenses were not part of the taxable value for service tax purposes.

Issue 2: Acting as a Pure Agent

• Relevant Legal Framework and Precedents: Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, allows exclusion of expenses incurred by a service provider acting as a pure agent.
• Court's Interpretation and Reasoning: The court found that the respondent fulfilled the conditions of a pure agent, as they paid salaries on behalf of their clients without retaining any margin or markup.
• Key Evidence and Findings: The court examined the factual matrix, including agreements and payment records, confirming the pure agent status.
• Application of Law to Facts: The court applied the criteria for pure agents, confirming that the respondent acted on behalf of their clients, and thus, the expenses were excludable.
• Treatment of Competing Arguments: The court dismissed the Revenue's contention that the respondent was not a pure agent, as the evidence supported the respondent's position.
• Conclusions: The court concluded that the respondent acted as a pure agent, and the reimbursed expenses were not includible in the taxable value.

Issue 3: Invocation of Extended Timelines for Demand

• Relevant Legal Framework and Precedents: The Revenue alleged suppression of facts to justify extended timelines for demand under Section 73 of the Finance Act, 1994.
• Court's Interpretation and Reasoning: The court found no evidence of suppression, as the respondent had been regularly filing returns and was audited with no objections raised previously.
• Key Evidence and Findings: The court noted that the practice of assessment and payment of service tax was known to the department, negating the suppression claim.
• Application of Law to Facts: The court applied the legal standards for suppression, finding no basis for extended timelines.
• Treatment of Competing Arguments: The court rejected the Revenue's assertion of suppression, citing lack of evidence.
• Conclusions: The court concluded that the demand was time-barred and could not be sustained.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The invoices raised in the name of individual personnel and their corresponding salary sheets and payment sheets prepared by the noticee were examined and found that whatever amount was charged by the noticee from their clients in the name of salary of an individual personnel the same and precise amount was transferred to his bank account without retaining any margin or mark up it in."
• Core Principles Established: Reimbursed expenses, when acting as a pure agent, are not includible in the taxable value for service tax. The distinction between reimbursement and remuneration must be maintained.
• Final Determinations on Each Issue: The appeal by the Revenue was dismissed. The reimbursed salary expenses were not taxable, the respondent acted as a pure agent, and the demand was time-barred due to lack of suppression.