Reimbursable expenses - Whether includible in Value of taxable service of C&F Agency?

Case: M/S. SHRI BHAGAVATHY TRADERS v/s COMMISSIONER OF CENTRAL EXCISE, COCHIN

Citation: 2011-TIOL-1155-CESTAT-BANG-LB

Issue:- Service Tax - C&F Agency - Whether reimbursements of expenses are includible in value of taxable services?

Brief Facts:- Appellants were engaged in rendering C&F agency services to several persons including M/s Indian Oil Corporation Ltd (IOCL). Service Tax was imposed on C & F agency services with effect from 1.9.1999 and appellants have taken registration and were paying service tax.

The officers, on the basis of investigation, found that appellants were not paying service tax on the correct taxable value as they were preparing two invoices, one for service charges and another for amounts claimed as reimbursement of expenses incurred towards transportation charges, loading and unloading charges, rent, salary to the staff, electricity, telephone charges, stationery charges, courier charges, etc. Accordingly, a Show Cause Notice dated 2.4.2007 proposing recovery of service tax short paid for the period from April 2003 to March 2006 on the C & F services rendered by them along with interest and proposing imposition of penalty was issued.

The Original Authority confirmed the demand and imposed penalty of equal amount under Section 78 in addition to penalties under Sections 76 & 77.

Matter came before the Tribunal. It was noted by the Tribunal that is certain cases, the Tribunal had held that reimbursement charges should not form part of the gross value for the discharge of service liability. Whereas in the decision in M/s Naresh Kumar & Co Pvt Ltd v/s CST, Kolkata [2008-TIOL-1016-CESTAT-Kol] it was held by Coordinate Bench that the cost incurred on re-imbursement of expenses if any, needs to be included in gross value of taxable service rendered.

In view of the contrary decisions of the Tribunal, matter was referred to Larger Bench.

Appellant’s Contention:- Appellant referred to agreements they entered with IOCL and contended that they were required to submit bills separately for both fixed operating expenses as well service charges incurred on operation of the C & F Agent. As per the agreement, expenses incurred towards electricity and water charges, communication expenses, stationery charges, security charges, manpower charges, transportation/freight charges, etc. are reimbursable on actual basis subject to maximum limits specified in the rate schedule annexed to the said agreement. Appellant submits that similar agreements have been entered into with other parties during the relevant period. Accordingly, the appellants were preparing separately invoices for reimbursable expenses and they were not including the same in the value for the purpose of paying service tax.

They referred to Board's Circular F No. B43/7/97-TRU dated 11.7.1997 and submitted that the activities of clearing and forwarding agent are as follows:

- Receiving the goods from the factories or premises of the principal or his agents;
- Warehousing these goods;
- Receiving dispatch orders from the principal;
- Arranging dispatch of goods as per the directions of the principal by engaging transport on his own or through the authorized transporters of the principal;
- Maintenance of records or the receipts and dispatch of goods and the stock available at the warehouse;
- Preparing invoices on behalf of the principal.

Appellant submits that only the gross amounts of remuneration or commission paid to C & F Agent by the client shall be the value for the purpose of charging service tax as C & F Agent. Further Appellant submits that the value of taxable service is defined as "gross amount charged for the services rendered". Also referring to the provisions relating to valuation in terms of Service Tax Rules 1994, it was submitted that the gross amount charged by the service provider should be only "for such services" and not other amounts which may be recovered as reimbursement of expenses incurred for other activities. In this regard, Appellant submits that certain activities like loading & unloading became taxable under Cargo Handling Service with effect from 16.8.2002, transportation became taxable under Goods Transport Agency Service with effect from 1.1.2005 and Storage & Warehousing Service became taxable with effect from 16.8.2002. Appellant submits that expenses incurred on activities on behalf of the principal and recovered as reimbursements cannot be treated as part of value of C & F services.

Referring to Board's Circular No. B 43/1/97 dated 6.6.1997, Appellant submits that value of Customs House Agent Service and Steamer Agent Service did not include several expenses incurred on account of exporter/importer. Referring to Circular No. F No. 343/5/97 dated 2.7.1997, it was submitted that the value of Consulting Engineering Service and Manpower Recruitment Service did not include amount incurred on behalf of the clients and which are reimbursed on actual basis. That even when the amounts are collected on lump-sum basis, reimbursable expenses are permitted on the basis of documentary evidence adduced by the service provider. Referring to Circular No. B 11/1/1998 TRU dated 7.10.1998, issued in the context of value of Market Research Agency Service and Security Agency Services, Appellant submits that expenses incurred on travelling, boarding and lodging which are reimbursed are not to be included in the value of taxable service. In the light of the above Board Circulars relating to various services, Appellant submits that it is clear that expenses incurred on behalf of the client and claimed as reimbursement are to be excluded while arriving at the value of taxable services.

Only with effect from 19.4.2006, the provisions of Section 67 have undergone changes and the concept of "consideration" has been introduced and by virtue of Rule 5 of the Service Tax (Determination of Value Rules, 2006) the consideration is defined to include reimbursement of expenses also.

Appellant relies on the following decisions in support of his submissions claiming exclusion of reimbursable expenses from the value of taxable services:

-Sri Saatha Agencies Pvt. Ltd. Vs. Asst. Commissioner of C. Ex & Cus, PalaldCad [2007 (6) STR 185 (Tri.-Bang.)] = (2006-TIOL-1923-CESTAT-BANG)
-Bhagyanagar Services Vs. CEE, Hyderabad [2006 (4) STR 22 (Th. -Bang.)] = (2006-TIOL-1253 CESTAT-BANG)
-CCE C&ST, BBSR-1 Vs. M/s Nilalohita Enterprises - (2007-TIOL-680-CESTAT-Ko/)
-Sangamitra Services Agency Vs. CCE, Chennai - (2007-TIOL-1335-CESTAT-MAD)
-Apco Agencies Vs. CCE [2008 (10) STR 169] = (2008-TIOL-507-CESTAT-BANG)
-S & K Enterprises Vs. CCE [2008 (10) STR 171] = (2008-TIOL-653-CESTAT-BANG)
-E. V. Mathai & Co. Vs. CCE [2006 (3) STR 116] = (2003-TIOL-270-CESTAT-BANG)
-Keralam Enterprises Vs CCE [2008 (9) STR 503] = (2007-TIOL-2133-CESTAT-BANG)
-U. M. Thariath & Co. Vs. CCE [2007 (8) STR 161] = (2007-TIOL‑1655-CESTAT-BANG)
-Nandhini Warehousing Corp. Vs. CCE [2007 (8) SRT 511] =(2007- TIOL- 82- CESTAT-BANG)
-Albaith Steel P. Ltd. Vs. CCE [2008 (10) STR 554] = (2 008‑TIOL - 343- CESTAT-BANG)
-Jayalakshmi Enterprises Vs CCE [2008 (9) STR 19]
-Alathur Agencies Vs. CCE [2007 (7) STR 402] = (2007-TIOL‑2316- CESTAT- BANG)
-B. S. Refrigeration Ltd. Vs. CCE [2006 (4) STR 103] = (2006‑TIOL -1189- CESTAT- BANG)
-Rolex Logistics P. Ltd. Vs. CST [2009 (13) STR 147] = (2009‑TIOL - 270- CESTAT- BANG)

Respondent’s Contention:- Revenue argued that the service tax has been levied on the gross amount paid by service recipient and that the gross amount will include all expenses incurred towards provision of service till the same is consumed at the destination, since the service tax is a destination based consumption tax.

Revenue further submits that Rule 6 (8) of Service Tax Rules, 1994, as it existed in the relevant time, provided that "the value of taxable service in relation to service provided by clearing and Forwarding Agent to a client for rendering services of clearing and forwarding operations in any manner shall be deemed to be gross amount of remuneration or commission paid to such agent by the client engaging such Agent". Therefore, the argument that reimbursement of expenses incurred by the appellant shall not form part of the value of taxable service is not correct.

Revenue places reliance on the following decisions in support of his submissions:

-Naresh Kumar & Co. Pvt. Ltd. [2008 (11) STR 578 (Tn.)] = (2008- TIOL-1016-CESTAT-KOL)
-Kirloskar Pneumatics Co. Ltd. - (2011-TIOL-453-CESTAT-MUM)
-Harveen & Co. - (2011-TIOL-848-CESTAT-DEL)

Reasoning of Judgment:- The Larger Bench of the Tribunal held that the reference does not relate to scope of the Clearing & Forwarding Agent services and, therefore, submissions relating to the same need not be dealt with in this order. Further Larger Bench stated that three of the decisions have been rendered by Single Member Benches of the Tribunal though the issue involved relates to valuation. The other decisions relied upon by the assessee appear to have been based on facts of the said cases without discussion on the legal provisions on valuation of services. Some of the decisions have merely followed the earlier decisions without recording findings on the nature of agreements and contractual obligations of the assessee.

It is to be noted that some decisions are "leader" decisions and others are mere "followers". The "leader" decisions specifically refer to the issues in dispute, record rival submissions and contain the reasons for coming to the conclusions/decisions. Such decisions throw up "ratios" to be followed.

The Larger Bench analysed the judgments given in Rolex Logistics P. Ltd. Vs. CST, Naresh Kumar & Co. Pvt. Ltd, Agarwal Colour Advance Photo System [2010 (19) STR 181] and in Harveen & Co.

It was noted 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 entered into a contract for supply of 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 raw materials and uses the materials 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 re-imbursement 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.

The Larger Bench held that similar is the situation in 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 expenses incurred on behalf of recipient shall arise.

It was held that various Board circulars relied on by appellant clearly referred to amounts payable on behalf of service recipient. These circulars cannot be held to be in support of appellant’s claim that they can split part of the amount as reimbursable expenses and the rest as towards service charges.

It was held that the claim of re-imbursement towards rent for premises, telephone charges, stationary charges etc amounts to a claim by the service provider that they can render such services in vacuum. What are costs for input services and input used in rendering services cannot be treated as reimbursable costs. There is no justification on legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses.

It was noted that the Appellant have not shown any decisions of Division Bench of the Tribunal rendered in their favour.

In the end it was held that there is no conflict in decisions rendered by Co-ordinate Benches. Matter remitted to Referral bench.

Decision:- Appeal dismissed.

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PJ/Case Laws/2012-12/1014

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