Service Tax is not chargeable on reimbursement of expenses

[Bimal jain]

The Hon’ble Supreme Court of India in the case of COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX, NAVI MUMBAI VERSUS HINDUSTAN CONSTRUCTION COMPANY LTD. - 2025 (2) TMI 266 - SC ORDER  disposed of the case and held that the Court did not find any good ground and reason to interfere with the CESTAT Judgment, where it was held that no service tax should be charged on reimbursement of expenses because no service element is involved.

Facts:

M/s. Hindustan Construction Company (“the Respondent”) was engaged in the business of providing taxable services under the head of ‘construction and other services’. For provision of such services, the Respondents were initially registered with the Service Tax department w.e.f. September, 2004 and subsequently, obtained the centralized registration w.e.f. May, 2007.

The Respondents incurred certain expenditure such as insurance premium, advance tax payment, stamp paper/duty, hotel expenses etc. on behalf of their group companies. The said expenses did not relate to any supplies made to the Respondents. Incurrence of such expenses were used to be reimbursed by the group companies at actual.

The Respondents also shared cost of common expenditure that has been incurred by them, with their group companies in accordance with company’s group policy. To recover the said expenses, the Respondents issued debit notes in favour of their group companies. The Respondents did not pay any service tax on the transactions made by them with their group companies, owing to the reason that there is no provision of any taxable service between them and it was mere arrangement of accounting such reimbursable expenditure.

During the course of audit of the books of accounts, the officers of the service tax department (“the Petitioner”) observed that the Respondents had recovered amounts from their related party by raising debit notes on two broad heads viz.,

• debit notes raised for reimbursement of various revenue expenses; and
• debit note raised for reimbursement of expenses incurred on behalf of group companies.

On the basis of such observation, the audit wing had alleged that the amount so recovered by the Respondents should be considered as a taxable service under the category of ‘business support service’, defined under Section 65 (104c) of the Finance Act, 1994 (“the Finance Act”).

Based on the audit report, the Department had issued periodical Show Cause Notices (“SCNs”) dated April 21, 2014, March 24, 2015 and February 19, 2016, proposing for recovery of the service tax demand for the period October, 2008 to March, 2015. The said SCNs were adjudicated vide Order-in-Original dated April 28, 2017, in confirming the proposed demands against the Respondents. On appeal against the said adjudication order dated April 28, 2017, this Tribunal vide Final Order dated September 24, 2021 had set aside the adjudication order and allowed the appeals in favour of the Respondent.

In continuation to the earlier show cause proceedings, the Department had issued another SCN dated March 09, 2018, proposing for recovery of service tax demand for the period April 01, 2015 to March 31, 2017. The said SCN was adjudicated by Commissioner, CGST & Central Excise vide Order-in-Original dated March 30, 2019 (‘the Impugned Order’), in confirming service tax demand of Rs.11,71,17,556/- along with interest. Besides, the Impugned Order has also imposed penalties of Rs. 1,17,11,756/- and Rs. 10,000/- under Section 76 the Finance Act and 77 the Finance Act, respectively.

Hence, aggrieved with the Impugned Order, the Respondent filed an Appeal before the  Customs, Excise & Service Tax Appellate Tribunal (“CESTAT”).

Issue:

Whether Service Tax is chargeable on reimbursement of expenses?

Held:

The CESTAT, Mumbai in HINDUSTAN CONSTRUCTION COMPANY LTD. VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX, NAVI MUMBAI - 2023 (1) TMI 1470 - CESTAT MUMBAI  held as under:

• Observed that, in order to have the cost effectiveness, the Respondents incur various expenses for and on behalf of their group companies and cost of such services were recovered as reimbursement by way of raising debit notes. The service tax demands raised for the earlier period viz., October, 2008 to March, 2015 were set aside vide Final Order dated October 24, 2021, by relying upon the judgement of the Hon’ble 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
• Noted that, the period involved in the present dispute is from April 01, 2015 to March 31, 2017. The phrase ‘service’ has been defined in Section 65B to mean ‘any activity carried out by a person for another for consideration, and includes a declared service…..’. On reading of the said definition clause, it transpires that in order to constitute a service, there must be involvement of more than one person i.e., a service provider and a service receiver; and that there must be ‘consideration’ for provision of such service. The phrase ‘consideration’ explained in the Explanation, appended to Section 67 has provided that ‘consideration’ includes any amount that is payable for the taxable services provided or to be provided. The said explanation clause, providing the meaning of the phrase ‘consideration’ was substituted by the Finance Act, 2015, dated May 14, 2015.
• Opined that, clause (ii) in the Explanation is relevant, which provides that any reimbursable expenditure or cost incurred by the service provider for provision of the taxable service is to be considered as ‘consideration’, for the purpose of levy of service tax thereon. In the present case, the Respondent herein have not provided any taxable service to their group companies, which is evident from both the SCN and the Impugned Order. The nature of activities undertaken by the Respondents were discussed by the original authority in the Impugned Order.
• Held that, the Impugned Order has not specifically discussed as to how and which particular services were provided by the Respondents to their group companies. Though, the original authority stated that the act of sourcing of the service for the group companies would be categorized under ‘business support service’, but has not dealt with the vital aspect regarding the manner of provision of a service, that too a taxable service. Rather, the facts of the case indicate that the mode of operation undertaken by the Respondents in making payment for the services and getting the same reimbursed are not for provision of any service, but are only reimbursement for the services procured for their group companies. Thus, the reimbursement of the cost/expenses incurred by the Respondents as per actual, cannot be regarded as consideration, flowing to the Respondents towards the taxable services provided by them. In other words, the amount claimed in the debit notes are for the simple reimbursement of the cost/expenses incurred by the Respondents in terms of the cost sharing arrangements with the group entities, with the only purpose of cost effectiveness, having no service element involved therein. in absence of any provision of service by the Respondents to their group companies, mere claim of reimbursement of actual cost and expenses should not form a part of provision of any taxable service, for payment of service tax thereon. Hence, the Impugned Order was set aside.

The Petitioner filed writ application before the Hon’ble Supreme Court in COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX, NAVI MUMBAI VERSUS HINDUSTAN CONSTRUCTION COMPANY LTD. - 2025 (2) TMI 266 - SC ORDER which was disposed of because the Court did not find any good ground and reason to interfere with the CESTAT Judgment.

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