Recent circular about reimbursement claims by Custom House Agents.

[C.A. DEV KUMAR KOTHARI]

More than twelve years ago w.e.f.15th June 1997 Custom House Agents services were made taxable.  Initially through the circular F.No.B-43/1/97-TRU, dated 06.06.1997 clarifications were issued about this service.  Later on new valuation rules came in force in 2006 and this circular was superceded. In this circular it is recognized that CHA avail many services from others and get reimbursement and those services are not of a CHA.

Difficulties are faced as to what reimbursable expenses should be excluded from taxable value of service, what documents and procedure should be followed etc. To avoid conflicts and litigation new circular provide seven conditions to be eligible for exclusion of reimbursable sums from taxable service. It appears that conditions provided are too technical and are devoid of recognizing practical difficulties.

CIRCULAR NO. 119/13/2009-ST dated December 21, 2009:(Vide F.No.332/36/2008-TRU).

CBEC has clarified that reimbursable charges paid by the CHA  will not form part of the value of taxable service. However, there have been laid down numerous conditions as mentioned in Point 6(a) to 6(g) of the circular. If these conditions are not satisfied then the exemption will not be available.

 Analysis of Circular:

For the purpose of analysis the contents of the circular are reproduced in  first column of the following table with high lights and some discussion is made in second column of the table:

Subject :Service tax valuation issues pertaining to Customs House Agents Service-reg.	The circular relates only to valuation of services of CHA and does not concern   input service of CHA.
Customs House Agent's (CHA) Services are taxable since 15th June 1997. As per the definition (section 65 (105) (h) of the Finance Act, 1994) the 'taxable service' means any service provided or to be provided to any person, by a custom house agent in relation to the entry or departure of conveyance or the import or the export of goods and the term 'service provider' shall be construed accordingly. Further, as per definition appearing under section 65(35) of the aforesaid Act, a 'custom house agent' means a person licensed, temporarily or otherwise, under the regulations made under sub-section (2) of section 146 of the Customs Act, 1962. The Custom House Agents Licensing Regulations, 2004, made under the said section, prescribe the procedure for grant of license by the customs department. They (regulation no. 13) also place obligations on such license holders during their interface with customs department pertaining to customs formalities for conveyance or imported or export goods. In sum, the above provisions read in harmony, show that the activities of a CHA i.e. pertaining to customs formalities in relation to the entry or departure of conveyance or the import or the export of goods, is subjected to service tax under CHA services.	This paragraph relates to nature of service provider, service receiver and taxable service of CHA. The effective date of levy etc. It is stated that activities of a CHA  pertains to customs formalities in relation to the entry or departure of conveyance or the import or the export of goods, is subjected to service tax under CHA services.Thus, there are two type of services namely:   entry or departure of conveyance and (ii) import or the export of goods.
02. While the principal job of a CHA is to get the import or export consignments cleared through customs, they, being the 'persons on the spot', also at times arrange services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers (i.e. importers or exporters). These services are provided by different agencies such as Port Trust, Steamer Agents, Cargo Handlers, Warehouse-keepers, Packers, Goods Transport Agents. Normally the CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges CHAs. Similar arrangement can occur for payment of statutory levies like Custom Duties, Port charges, Cesses etc. leviable on the said goods.	Principal job of a CHA is recognized as to get the import or export consignments cleared through customs. - this is in nature of liaison work with customs department. In this sense they are considered as expert in legal practices and procedure and liaison work. Besides CHA are 'persons on the spot', therefore, they also render or arrange for  services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers. CHA also pays different levies and fees etc. on behalf of their customer and then recover the same from customers.
03. Issue was raised at the initial stage itself as to whether the charges, which are said to be paid by the CHAs and later recovered from the customers (i.e. reimbursable charges) should be added to the value for charging service tax from CHAs. Through the circular F.No.B-43/1/97-TRU, dated 06.06.1997 the Board had clarified that the service tax would be charged on the 'service charges only' and statutory levy and other reimbursable charges would not be included in the taxable value. It was also provided that in case there are lump sum payments towards the reimbursable as well as service charges, service tax would be charged on 15% of the gross value only.	In earlier circular it was provided that service tax would be charged on the 'service charges only' and statutory levy and other reimbursable charges would not be included in the taxable value. In case there are lump sum payments towards the reimbursable as well as service charges, service tax would be charged on 15% of the gross value only. As explained later this circular stood withdrawn when the Service Tax (Determination of Value) Rules 2006 were prescribed.
04. In 2006 (w.e.f. 19.04.2006) the Service Tax (Determination of Value) Rules were prescribed. Consequently all previous circulars relating to valuation were withdrawn. The said rules brought in the concept of 'pure agent' and provided that expenditure or costs incurred by the service provider as pure agent alone will be eligible for exclusion from taxable value.	the Service Tax (Determination of Value) Rules 2006 brought in the concept of 'pure agent'. It was then provided that expenditure or costs incurred by the service provider as pure agent alone will be eligible for exclusion from taxable value.
05. It is reported that disputes have arisen on the issue of inclusion of such reimbursable charges, which are currently pending at various stages of dispute settlement mechanism. Certain field formations have also issued communications, directing that charges on certain activities incurred by CHAs are not covered under exclusions available to 'pure agent'. It is also reported that divergent practices as regards the records & documentations, are being followed by the CHAs in relation to the charges for receiving services from other service providers as well as to their billings to their customers. This has added to the conflict and litigation.	As usual, in case of CHA, disputes are being raised by the revenue officers about excludability of reimbursable expenses, documents, and practices to be followed. On technical grounds also claims are rejected. This is leading to conflicts and litigation.
06. With a view to resolve the disputes and to bring it clarity, the issue has been examined. The divergent practices followed at different places and lack of consistency in the manner of maintaining records and issuance of documents by the CHAs, make it impossible to lay down any specific guidelines or issue any specific directions. In the circumstances, it is clarified that essentially, the exclusion should be allowed to such charges from the taxable value of CHA services, where all the following conditions are satisfied:-	The purpose of the circular is to resolve disputes and to provide some standard procedures and practices. However, in view of conditions laid down in circular, more disputes may arise on each and every conditions. Seven  conditions have been  provided as  (a) to (g) and all need to be satisfied
a) The activity/service for which a charge is made, should be in addition to provision of CHA service (as mentioned in paragraph 1);	The activity/ or service should be other than that of CHA.
b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to (i) arrange for such activities/ services for the customer; and (ii) make payments to other service providers on his behalf;	Many times there is informal understanding or trade practice. However, in view of condition now imposed, it will be written arrangement in this regard.
c) The CHA does not use the activities /services for his own benefit or for the benefit of his other customers;	The services should be exclusive for particular customer. Therefore apportionment of common costs will not be allowed. Suppose coolie charges are paid for two customers, there should be separate payments for two customers. A combined bill of coolie provider will not be considered.
d) The CHA recovers the reimbursements on 'actual' basis i.e. without any mark-up or margin. In case of CHA includes any mark-up or profit margin on any service, then the entire charge (and not the mark-up alone) for that particular activity/ service shall be included in the taxable value;	The exact amount is to be recovered. Even if a small addition is made, for mark-up for overhead or interest, the entire amount will be taxable. This is not justified. In fact, in such cases the mark-up amount could be included in value of service of CHA
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided and the reimbursable amounts. It is not necessary such evidence should bear the name or address of the customer. Any other evidence like BE No./Container No./ BL No./ packing lists is acceptable for the establishment of such nexus. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like;	The CHA should provide evidence. Such evidence should be separate for each customer. The evidence can be with reference to customers name or consignment/ Container no. BL no. etc. lot relating to customer etc. In case there are goods of two or more customers in the same container, it should be separately documented. A common invoice or receipt will not be acceptable.
f) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice (showing the charges against each entry separately) issued by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions mentioned herein, the charges against those entries alone should be added back to the taxable value;	Each charge should be for separate activity for particular customer and supported by separate invoice/ receipt. If this condition is not satisfied, then the charge which is not so supported will be included in taxable value of service of CHA.
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable in the taxable value for the purposes of charging tax on CHA services.	Any other miscellaneous charges shall be included in taxable value. Therefore, any mark-up can be included in own service charges.
07. The conditions mentioned at paragraph (06) would be applicable for services provided with effect from 19th April 2006, i.e. after the introduction of the valuation rules. For the prior period, the taxable value should be determined in accordance with the prevailing instructions issued by Board as referred to foregoing paragraph 03 of this circular. Any communication issued by any of the subordinate offices which are contrary to the conditions referred to in paragraph 06 of this circular, or as the case may be, the prevailing Boards circulars stands superceded to the extent of the contradiction.	The new circular is applicable w.e.f. 19th April,2006. Before that earlier circular shall be applicable. Any other circular/ communication issued by any subordinate authority which has contradiction with these circulars shall stand superceded to the extent of such contradiction.
08. The pending disputes may be settled in terms of this circular.	Pending disputes are to be settled in terms of the applicable circular, as the case may be.

From the above analysis of the circular it appears that stringent conditions have been provided in the circular. In some cases of patty nature reimbursements it may not be possible to satisfy the conditions.

Other services provided by CHA:

In the earlier circular also the nature of other services which are rendered or arranged by CHA were elaborately discussed. The relevant paragraph 2.3  from the F.No. B 43/1/97-TRU, Dated 6-6-1997 is analyzed below:

The services rendered by  CHA  are not merely limited to the clearing of the import and export consignment.

The CHA also renders the service of  different types like:

loading/ unloading of import or export goods from /at the premises of the exporter / importer.

packing, weighment, measurement of the export goods, transportation of the export goods to the customs station or the import goods from the customs station to the importer's premises, carrying out of various statutory and other formalities such as payment of expenses on account of octroi, destuffing / pelletisation, terminal handling, fumigation, drawback/DEEC processing, survey / amendment fees, dock fees, repairing and examination charges, landing and container charges, statutory labour charges, testing fees, drug control formalities, sorting / marking / stamping / sealing on behalf of the exporter / importer.

CHA also incurs various other expenses such as crane / fork lift charges, taxi charges, photostat and fax charges, bank collection charges, courier service charges, and miscellaneous other expenses on account of the exporter / importer.

For all the above charges, the CHA is ordinarily reimbursed by the importer / exporter for whom the above services are rendered.

Apart from the above charges, the CHA also charges the client for his service under the head / nomenclature of 'agency and attendance charges' or similar kind of heads which is purported to be his service charge in respect of the services rendered in relation to the import / export goods.

Many of such services availed may now be taxable. Many of such services are such that for which perfect document and that too separately for each customer (consignment wise) is difficult to be made available by the service provider who may be an unorganized person of self employed nature carrying his work himself or with help of some assistants / family members or associates. For example, suppose for photo copying of 500 pages a consolidated bill is received, it is difficult to obtain separate bill for say 50 customers to whom the 500 pages belong.

Suggestion:

There should be a monitory limit above which these stringent conditions should be applied. For a reimbursement up to Rs. ten thousand or up to 20% of CHA's own charges, only declaration may be accepted instead of strict requirement of separate supporting document for each customer.