Is Reimbursable expenses included in Assessable value, Central Excise

[SANDESH SHINDE]

Dear Sir,

IS Reimbursable expenditure related to travel and hotel expenses charged separately in the invoice say for example Erection and Commissioning service is to be included in Taxable value for calculating Service tax value, and if theservice provider has included in taxable value and has charged service tax to us on that value and we had availed service tax credit of such as a input service, Will be any issue for us, Please expalin, Pls give any reference regarding this,Thanks and regards.

Posts / Replies

[Pradeep Khatri]

Dear Sandesh,

According to the InterContinental Judgment such reimbursable expenses are not required to be included in the value of taxable services to determine the service tax. This judgment was related to the period before 01-07-2012. Now, this judgment would be applicable in Negative Tax Regime or not, there is no clarification in this regard as yet.

If service tax had already been paid and you have availed the CENVAT credit after following the provisions of CENVAT credit Rules, 2004 as amended from time to time, then, we don't foresee any issue.

Please also cross check it with your indirect tax consultant.

Regards

YAGAY and SUN

(Management and Indirect Tax Consultants)

[Madhukar N Hiregange]

Inter continental decision is good law even after -ive list in my view.

If the supply is made and then erection and commissioning happens then whether the resultant product is an immovable property may have to be seen. If so the erection installation would be liable for ST and for the supply CED would be payable.

[Akash Deep]

Dear Sandesh,

reimbursements were never includible in the taxable value of service for the reason that they never make consideration for the service recipients.the crus of to understand the scope of term "reimbursements. below is the analysis of term reimbursements. hope this will make you understand what the reimbursements is.

The term “reimbursement” has not been defined in law, though the same has been explained by the judiciary several times. With the objective of maintaining brevity, review of all the earlier pronouncements of different Courts and Quasi-judicial authorities becomes telling any idle parade of familiar learning and unnecessary. The concept of reimbursement has recently been dealt by the larger bench of the Hon’ble Tribunal, Delhi in case of M/s Shri Bhagavaty Traders v Commissioner of Central Excise, Cochin = 2011 (8) TMI 430 - CESTAT, BANGALORE. After considering the earlier judicial pronouncements, Hon’ble Tribunal reached to the conclusion that what are the costs for input services and inputs used in rendering services cannot be treated as reimbursable cost. In its decision Hon’ble Tribunal, has considered the concept of reimbursement in context of manufacturer as well as service provider. Though the period involved in this case was April 2003 to March 2006, the interpretation of term “reimbursement” will be applicable across the board. In context of manufactures, Hon’ble Tribunal has observed that person selling the goods cannot treat the cost of raw material or the cost of labour or other cost component for input services which went in to the manufacture of said goods as “reimbursement”. Similarly, in context of Service providers, it has been observed by the Hon’ble Tribunal that when a service recipient has an obligation, legal or contractual, to pay an amount to any third party and the said amount is paid by the service provider on behalf of service recipient, the amount so paid by the service provider can be claimed as reimbursement. The relevant text of the above mentioned judgment is reproduced as under:

“6.1 Having analyzed the various decision cited on behalf of the assessee and on behalf of the department, it would be appropriate to consider the scope of the term "reimbursements" in the context of money realized by a service provider. A person selling the goods to another cannot treat cost of raw materials or the cost of labour or other cost components for inputs services, which went into the manufacture of the said goods as reimbursements. If the buyer has enters into a contract for supply of raw materials after negotiating prices from the supplier for the raw materials and the raw materials are received by the manufacturer and the manufacturer pays the amounts to the supplier of raw materials and recovers the same from the buyer, it can certainly be considered as reimbursements. It is to be noted that in such a case, the manufacturer has no role about choosing the source of the materials procured or the price at which the materials procured and the manufacturer is not under any legal or contractual obligation to pay the amount to the supplier. However, if the manufacturer procures raw materials from a source of his choice at a price negotiated between him and supplier of the raw materials and uses the material for manufacture of the final products which he sells, the question of his collecting the cost of raw materials as reimbursement does not arise. The concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods.

6.2 Similar is the situation in the transaction between a service provider and the service recipient. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. For example, when rent for premises is sought to be claimed as reimbursement, it has to be seen whether there is an agreement between the landlord of the premises and the service recipient and, therefore, the service recipient is under obligation for paying the rent to the landlord and that the service provider has paid the said amount on behalf of the recipient. The claim for reimbursement of salary to staff, similarly has to be considered as to whether the staff were actually employed by the service recipient at agreed wages and the service recipient was under obligation to pay the salary and it was out of expediency, the provider paid the same and sought reimbursement from the service recipient.”

In a nutshell, any cost which has been born by the manufacturer or service provider without having any obligation, either legal or contractual, just for the sake of expediency or on the request of the purchaser of the goods or service receiver, shall be eligible as reimbursement subject to the condition that inclusion of such cost is not mandated by law.

3.2 APPLICABILITY OF SERVICE TAX ON PORTION OF REIMBURSEMENT

Under any tax law, the quantification of tax and its collection is as necessary as the levy of tax. Under service tax law, the levy of tax is by virtue of section 66 of the Finance Act, 1994. Under the same section, mechanism for collection of service tax is left for the discretion of the government. Quantification of tax under service tax law is proportionate to the value of service provided. Section 67 of the Finance Act, 1994 provides for valuation of services for charging service tax. Under section 67 where provision of service is for consideration in money, service tax is chargeable on the gross amount charged by the service provider.

3.2.1 Prior to enactment of Service Tax (determination of Value Rules, 2006)

The issue of taxability of “reimbursements” or “out of Pocket expenses” (hereinafter both the terms are being used interchangeably as reimbursement includes out of pocket expenses also) has always been a bone of contention between Department and assessee. As a general tendency of minimising the tax burden, assessee is always under constant endeavor to allocate its expenses within the scope of “reimbursement”. Before the enactment of Service Tax (Determination of Value) Rules, 2006 Trade Notices were issued excluding reimbursements from value for the purposes of service tax. Relevant text of some important circular/ trade notices is provided as under:

1. Trade Notice No. 39-CE (ST-39)/97 dated 11.06.1997 (New Delhi Commissionerate) (In relation to Steamer Agent Services)

The steamer agents pay certain statutory levies or port dues on behalf of their clients. Certain other expenses are incurred on behalf of client such as pilotage and birth charges, cargo expenses, ship handling expenses etc. For these expenses, the shipping line reimburses the steamer agents. These expenses will not be subject to service tax.

2. B43/5/97-TRU, dated 2.7.97 = 53/CE (ST)/97, dated4.7.1997 (New Delhi Commissionerate) in relation to Manpower Recruitment Agency

Service tax on manpower recruitment agency shall be the gross amount charged to the client for services provided in relation to the recruitment of manpower excluding the amount incurred by MRA on behalf of the client towards expenses which are reimbursed on actual basis. The Commissioner may selectively, in doubtful cases require the MRA to substantiate such actual expenses on the basis of the documentary evidence.

3. Trade Notice 8/98 dated 13.10.1998 [Pune – 1 Commissionerate]

Department has clarified that out of pocket expenses like travelling, boarding, and lodging on reimbursable basis are not subject to service tax. The assessee will have to produce documentary evidence substantiating his claim from the gross amount. It is clarified that this is applicable in the case of all the services.

4. Trade Notice No. 7/98 – ST, dated 13.10.98 [Mumbai Commissionerate]

In the case of market research agency similar averment as in Circular no. 43/5/97 It has been further stated similar dispensation in respect of reimbursable/out of pocket expenses charged to the client on actual basis is also available in respect of other services.

All the above mentioned Trade Notices have already been superseded by the department vide Circular No. 97/8/2007 dated 23.08.2007. Department has clarified in some of its Circulars that in the case of ‘Advertising Agency Services’, ‘Manpower Recruitment and Supply Agency Services’ and ‘Security Agency Services’ specified expenses recoverable on actual basis shall form part of value of taxable services.

Considering the above discussion we are of the view that “reimbursements” recovered from the client by the service provider on actual basis shall not be subject to service tax, provided the following conditions are fulfilled cumulatively:-

(1) Expenditure must have first been incurred by Service Provider;

(2) Expenditure must have been incurred on behalf of Service Recipient i.e. customer, client etc.;

(3) Expenditure incurred must have been reimbursed on actual basis. There should not be any profit element;

(4) Service Provider must have documentary evidence in support of such actual reimbursement; and

(5) Expenditure should not be related to the service provided by service provider. In simple words, distinction should be made between cost incurred by service provider in providing taxable services and expenditure incurred on behalf of client, not forming cost of services. Any expenditure forming cost of taxable service cannot be claimed as expenditure incurred on behalf of client.

3.2.2 After enactment of Service Tax (Determination of Value) Rules, 2006

In a situation where amount of tax is directly related to the value of service, valuation of service i.e. gross amount charged by the service provider, inclusions and exclusions permitted by law gains significant importance. With an objective to minimise the tax burden, tax payers has always exhibited a tendency to treat as many expenses as possible as reimbursements. Section 67(1)(i) of the Finance Act, 1994 stipulates that where the provision of service is for a consideration in money, service tax will be charged on the gross amount charged from the service provider. Subsection 4 of section 67 further provides that subject to the provisions of sub-section (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Section 67(1)(i) and 67(4) is reproduced as under:

“67 Valuation of taxable service for charging service tax

1. Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall-

1. in a case where the provision of service is for a consideration in money, the gross amount charged by the service provider for such service provided or to be provided by him;

(4) Subject to the provisions of sub-section (1), (2) and (3), the value shall be determined in such manner as may be prescribed.”

To clear the situation in respect of what expenditures or costs should include or exclude from gross amount, legislature has enacted “Service Tax (Determination of Value) Rules, 2006, under rule making power conferred by Section 94 of the Finance Act, 1994. Notification No. 12/2006 has notified the Service Tax (Determination of Value) Rules, 2006.

Rules 5 (1) of the Service Tax (Determination of Value) Rules, 2006 talks about what all expenditure or costs should be included or excluded from the value for the purpose of charging service tax. Rule 5(1) is reproduced as under:

“(5) Inclusions in or exclusion from value of certain expenditure or costs.

1. 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- For the removal of doubts, it is hereby clarified that for the services specified in sub-clause (zzzx) of clause (105) of section 65 of the Finance Act, 1994, the value of taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraph authority.”

A reading of Rule 5(1) reveals that, as a general rule, legislature has provided for the inclusion of all expenditure or cost to be included in the value for the purpose of charging service tax. However, exception to Rule 5(1) is carved out in Rule 5(2). As per Rule 5(2) any expenditure incurred by the service provider as a “pure agent” of the service receiver shall be excluded from the value of taxable service for the purposes of charging service tax. Rule 5(2) is reproduced as under:

“ 2) Subject to the provisions of sub-rule (1), 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 if all the following conditions are satisfied, namely:¬-

(i) 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;

(ii) 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;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) 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;

(vi) 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;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) 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.

Explanation1:-For the purposes of sub-rule (2), "pure agent" means a person who¬-

(a) 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;

(b) 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;

(c) does not use such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services.

Explanation2.- 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.

Illustration1.- X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y bi1led X including charges for Television advertisement and paid service tax on the total consideration bi1led. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent.

Illustration 2.- In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately/ on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

Illustration 3.- A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.

Illustration 4.- Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars, for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight, accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.

Under Rule 5(2), any expenditure incurred by the service provider as a pure agent will be excluded, subject to the other conditions as mentioned therein. It would be apt to have an understanding of the concept of “pure agent” at the first hand. As per Explanatiopn-1 to Rule 5(2) pure agent is a person who has entered in to a contractual agreement with service receiver to act as his pure agent and incurring expenditure on behalf of service receiver in course of provision of service. Contractual agreement for acting as “pure agent” may be express or implied. It is not necessary that it must be a separate agreement in written form. Only the intention of service provider to act as a pure agent and acceptance of such intention by service recipient by conduct will suffice the purpose.

Other important conditions are that “pure agent” must not hold or intend to hold title of any goods or service so procured for service recipient and must not use such goods or services so procured for provision of his own services and should receive only the actual amount incurred to procure such goods or services.

An analysis of the conditions mentioned under Rule 5(2) reveals that intention of the legislature is to exclude that expenditure only that, primarily, are the burden of service receiver, but for the purpose of expediency, or under contractual agreement, service provider incurs expenses on behalf of service recipient, for the time being and recovers the same from service recipient later on. The prohibitory condition that goods or services procured by the service provider must not be used by the service provider for provision of his own service, clearly indicates that legislature always have the intention not to provide the status of “reimbursement” to any expenditure which has been used in or for provision of his own service by the service provider. As the expenses incurred for provision of his own service by the service provider become cost of the services, same shall be included in value of service. The condition imposed by the legislature in terms of knowledge of the service recipient that service receiver should be aware of the fact that goods or services shall be provided by the third party, reinforces the above stated intention of the legislature. Finally, the condition, in most express terms, that 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 account, leaves no doubt about the intention of the legislature that any expenditure incurred on behalf of service recipient for provision of service out of the scope of his own service shall be excluded from value for the purposes of charging service tax and same can be treated as “reimbursement”.

It may also be noted that, Rule 5 of the Service Tax (Determination of Value) Rules, 2006v only crystallizes the interpretation of the Judiciary of term “reimbursement” in terms of “expenses incurred in capacity of pure agent”. Conceptually, there are no two views about interpretation of term “reimbursement” before and after the enactment of Service Tax (Determination of Value) Rules, 2006 and “exclusions” provided under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.

Considering the Rule 5(2) of Service Tax (Determination of Value) Rules, 2006 and trade Notices issued before the enactment of the above stated Rules, service tax is not applicable on the portion of reimbursement. However, it may be again cautioned that whether a particular expenditure can be treated as “reimbursement” or not shall depend on factual situation and will be subject to the satisfaction of condition of Rule 5(2). Hence, no readymade solution is possible and one has to go on case to case basis. One has to be very careful while determining whether particular expenditure would qualify as reimbursement or not.

[shyam prasad mahanta]

Dear Shinde ji,

Under Service Tax rules, Duty is payable on value of service rendered. Reimbursement of expenses cannot be included in service value to be rendered by either Service provider or Service Receiver (in case of reverse charge mechanism).

Inclusion of Travel and Hotel expenses by service provider in Taxable value and applying service tax on service already charged to service tax shall result in double taxation.

However, even if service tax is charged on reimbursable expenses, cenvat credit shall be available to the Service receiver on the duty paid by him.

[ganeshan kalyani]

In the on going discussion, kindly clarify in the Rent-a-car service, the service provider charges a bill adding the toll tax paid attaching proof. As regard the toll tax is concerned it is just a reimbursement. What base should be taken to discharge service tax liability under reverse charge for rent-a-car hire charges. Whether excluding toll tax or the invoice amount plus toll tax.

regards,

ganeshan