Inclusions / Exclusions of certain expenditures or costs – Reimbursement of expenses / pure agent - Service Tax Practice Manual / Ready Reckoner - Service Tax

Valuation Rules- Inclusions / Exclusions of certain expenditures or costs Reimbursement of expenses / pure agent Rule 5 of Service Tax (Determination of Value) Rules, 2006 is applicable where: - General Provisions - all cost or expenditure shall be included - rule 5(1) Rule 5(1) provides that, Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. Explanation 2 of the rule 5 states that, for the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice. Re-imbursement of expenses However rule 5(2) provides that in certain cases re-imbursement of expenses or cost shall be excluded if the expenditure or costs incurred by the service provider as a pure agent of the recipient of service shall be excluded from the value of the taxable service. In rule 5(2), the scope of pure agent and condition under which claim of re-imbursement of expenses can be made have been prescribed in detail with illustration. ============== Guidance Note 8 of the Education Guide [CBEC] - Valuation 8.5 Inclusion or exclusion from value of certain expenditure or costs borne by the service provider. Rule 5 of Service Tax (Determination of Value) Rules, 2012 lays down the details of expenditure and cost borne by the service provider which have to be included or excluded while determining the value of taxable service. 8.5.1 What is the expenditure or costs that are to be included in the value of taxable services as per rule 5 of the Valuation Rules? As per Rule 5 any expenditure or cost that are incurred by the service provider in the course of providing taxable services are treated as consideration for taxable service provided or agreed to be provided and shall be included in the value for the purpose of charging Service Tax on the said service. However, Explanation to sub-rule (1) of Rule 5 clarifies that for the value of telecommunication services shall be the gross amount paid by the person to whom the service is actually provided (i.e. the subscriber). 8.5.2 Which costs or expenditure is to be excluded from the value of taxable service as per Rule 5? As per sub rule (2) of Rule 5 the expenditure or cost incurred by the service provider as a pure agent of the recipient of the service shall be excluded from the value of taxable service if all the following conditions are satisfied: the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service; the recipient of service is liable to make payment to the third party; the recipient of service authorises the service provider to make payment on his behalf; the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party; the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service; the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account. 8.5.3 What is the meaning of pure agent? Pure agent has been defined in Explanation to sub-rule 2 of Rule (5) of the Valuation Rules as a person who- enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; does not use such goods or services so procured; and receives only the actual amount incurred to procure such goods or services.