REIMBURSEMENT OF EXPENSES INCLUDE TAXABLE TURNOVER OF C&F SERVICES ?

[KAMARAJ RENGARAJ]

Introduction:

The levy of Service tax applies to services rendered by clearing and forwarding agents, who undertake, among other things, services of receipt, warehousing, despatch, record maintenance and accounts of goods on behalf of the Principal who appoints or engages such agents.  For the services rendered, the C&F agent receives commission or remuneration, by calculating minimum commission on a flat rate or turnover basis or a variable commission based on the performance, as  agreed upon between the agent and the principal. In addition to commission, it is customary that the Agent will seek reimbursement of regular expenses such as transportation charges, loading and unloading charges, rent, salary to the staff, electricity, telephone charges, stationery charges, courier charges, etc on actual basis. Ever since the introduction of service tax on C&F Agents (with effect from 16.07.1997 vide Notification No.26/97-ST dt.11.07.1997 and later as service provider from 01.09.1999), this service has seen lot of amendments and case laws with regard to valuation, applicability and cenvat credit. Plethora  of decisions have come both in favour of revenue and in favour of Assessee in the matter of reimbursement of expenses for the purpose of valuation. Very recently, the Hon’ble Madras High Court dismissed the Department’s CMA filed under Section 35G of Central Excise Act, 1944 against the Final order passed in No.902/07 dated 24.07.2007 by the CESTAT in the case of The Commissioner of Service Tax Vs M/s.Sangamitra Services Agency 2013 (7) TMI 862 - MADRAS HIGH COURT in the matter of reimbursement of expenses.

Facts and Background of the case:

The respondent is a C&F Agent based at Chennai.  Apart from regular remuneration (commission) they have got reimbursement from their principals towards freight, labour, electricity, telephone etc. The lower authorities have confirmed and demanded service tax of Rs. 4,01,767/-  on such amounts collected by them from two of their customers viz. M/s. Nestle India Ltd., M/s. Exceltia Foods Ltd. during September '99 to December '03. This demand has been challenged on merits as well as on limitation.  The SCN alleged that, under Section 67 of the Finance Act, 1994 read with Rule 6(8) of the Service Tax Rules, 1994, these charges also required to be added to the taxable value of the service rendered by the appellants as clearing and forwarding agents of their principals. The original authority and the first appellate authority held to the same effect. The appellate authority relied on the Tribunal's decision in Mett Macdonald Ltd. v. CCE , 2001 (8) TMI 2 - CEGAT, NEW DELHI wherein certain expenses incurred by the assessee and reimbursed to them by their principal towards transportation, communication, stationery etc. were held to be part of the taxable value of Consulting Engineer's service rendered by the assessee.

Thereafter, the respondent preferred an appeal before the CESTAT, and the Tribunal referred to the decision rendered by the Tribunal in the case of Sri Sastha Agencies Pvt Ltd., Vs. Asst. Commissioner reported in 2006 (11) TMI 193 - CESTAT, BANGALORE, holding that no element other than remuneration received by a Clearing & Forwarding agent from their principal was to be included in the taxable value of the service. Thus, the Tribunal allowed the appeal SANGAMITRA SERVICES AGENCY Versus COMMISSIONER OF C. EX., CHENNAI - 2007 (7) TMI 33 - CESTAT, CHENNAI. The Department filed the appeal by way of CMA before the Hon’ble Madras High Court. The Department submitted that as per the provisions of Rule 6(8) of Service Tax Rules, 1994, the value of taxable service in relation to the services provided by the Clearing and Forwarding Agent to the client for rendering services of Clearing and Forwarding operations, in any manner, shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client, engaging such agent. The department further submitted that considering the charges collected towards forwarding services, the same would form part of remuneration / commission and argued that in the case of Mett Macdonald (supra), what was considered by the Tribunal was Consulting Engineer's service, for which there was no specific rule defining taxable value/gross amount. 

 Legal Provisions:

Section 65 (25) of the Finance Act:

 ‘Clearing and Forwarding Agent’ means any person who is engaged in providing any service, either directly or indirectly, connected with the clearing and forwarding operations in any manner to any other person and includes a consignment agent.’

Rule 6(8) of Service Tax Rules, 1994, the value of taxable service in relation to the services provided by the Clearing and Forwarding Agent to the client for rendering services of Clearing and Forwarding operations, in any manner, shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client, engaging such agent.

Findings of The High Court:-.

In the absence of any material to show the understanding between the Principal and the Client that the Commission payable by the principal was all inclusive, it is difficult to hold that the gross amount of remuneration/commission would nevertheless include expenditure incurred by the assessee providing the services; that all incidental charges for running of the business would also form part of the remuneration or Commission (by whatever name called).  The phrase "by whatever name called" must necessarily have some link or reference or nature to the receipt of remuneration or commission.  Thus, if a receipt is for reimbursing the expenditure incurred for the purpose, the mere act of reimbursement, per se, would not justify the contention of the Revenue that the same, having the character of the remuneration or commission, deserves to be included in the sum amount of remuneration / Commission.

As per Rule 6(8) of Service Tax Rules, 1994, the gross amount referred to therein would apply to receipts of such sum, which would bear the character of remuneration or commission, in that, the said sum is brought under the head "receipts". 

As far as the present case is concerned, when the Revenue's case does not rest on a contention that the expenditure incurred has the character to fall under the expression "remuneration or commission", there is no hesitation in rejecting the Revenue's contention. Accordingly, the Civil Miscellaneous Appeal is dismissed.

Conclusion:

Divergent views have been taken on this issue by the fact finding authorities and the question arises now whether reimbursement of recurring expenses can form part of the taxable turnover.  The views taken by the Hon’ble High Court in Sangamitra case is for the material period September'99 to December'03 as later on the Rule 6(8) of Service Tax Rules, 1994 was  omitted Vide Notification No.10/2006-ST dated 19.04.2006.

The C&F agent is supposed to claim actual expenses without any add-on thereon and he should also provide supporting documents to the principal to avoid an inference that may be drawn that he has not acted as an agent and such expenses are incurred by him on his own. If Proper documentary evidence and records are maintained for expenses incurred on behalf of the Principal, then the taxable turnover valuation will be restricted to only commission or remuneration.  It is to be noted here that expenses like Telephone, Courier, Freight etc are already under Service tax net and adding again in the C&F Commission turnover will lead to double taxation.

The author can be reached at [email protected]

R.K RENGARAJ M.Com., MBA., LL.B