Whether reimbursable expenses are to be included in taxable value or not?

PJ/Case Law/2013-14/1681

Case:-SUKHVARSHA MANAGEMENT SERVICES PVT. LTD

Citation:-2013 (29) S.T.R. 645 (Commr. Appl.)

Brief Facts:-This appeal has been filed by M/s. Sukhvarsha Management Service Pvt. Ltd., Chennai-17 (hereinafter called the appellant) who are engaged in the business of recruitment and supply of personnel of their clients. They have branches at Secunderabad, Bangalore, Pune and Kolkata from where they conduct their business. The company was incorporated during 2004 and they obtained their Centralized Registration during August, 2004 under MRA and BAS.

Brief facts of the case are that during Audit of Accounts of the appellant by the Officers of the Internal Audit of Service Tax Commissionerate, Chennai it was found that the appellant had not included the reimbursement of salary and other contributions to the tune of Rs. 25,30,694/- paid by their clients for the supply of manpower undertaken by them for the period from 16-6-2005 to January, 2006 in the value of taxable service for the purpose of payment of service tax. It was also noticed that after the said period, they started paying service tax on such salary and contributions paid to their personnel and received from their clients. It was noticed that during the period from January, 2007 to April, 2008, the appellant has received reimbursable expenses of Rs. 5,49,015/- from M/s. Hutchison Essar South Ltd., Chennai, to whom the appellant has provided the service of recruitment and supply of personnel, and the same were not included in the value of taxable services for the purpose of payment of service tax and also noticed that there were belated payment of Service Tax during the period May, 2005 to July, 2008, for which they had not paid interest. Therefore, show cause notices proposing to demand service tax of Rs. 2,34,238/- (for the period from 16-6-2005 to January, 2006) and Rs. 60,418/- (for the period from January, 2007 to April, 2008) was issued under proviso to Section 73(1) of the Finance Act, 1994 and also charging interest under Sec. 75 of the Finance Act, 1994 besides proposal for imposing penalties under Section 76 and 78 of the Finance Act, 1994 was issued to the appellant. Interest of Rs. 34,479/- towards interest on the delayed payment of Service Tax under Section 75 of the Finance Act, 1994 (for the period from May, 2005 to July, 2008). After due process of law, the LAA confirmed the proceedings initiated in both the show cause notices after dropping the proposal for penalty under Section 76 of the Finance Act, but gave an option to the appellant that the penalty imposed under Section 78 would be 25%, if the payment of Service Tax, Education cess, interest and 25% of the penalty were made by the appellant within thirty days of Communication of this impugned OIO.
Appellant contention:-Aggrieved, the appellant had filed this appeal mainly on the following grounds :-

(i) that the lower adjudicating authority (LAA) has confirmed the demand of service tax and also justified the imposition of penalty on appellant on the only ground that there was no interpretation of law involved. This finding of the adjudicating authority is clearly in conflict with the clarifications issued by the Board in the following Circulars :-

In F.No. B43/1/97, dated 6-6-1997, it was clarified, in respect of customs house agent’s service and steamer agents service, that reimbursements of expenses were not chargeable to service tax.

In F.No. 343/5/97, dated 2-7-1997, it was clarified, in relation to Consulting Engineers, Service and Manpower Recruitment Agents service, that reimbursements of actual expenses were not subject to service tax.

In F.No. B11/3/98 TRU, dated 7-10-1998, it was clarified, in respect of Market Research Agency Service and Security Agency Services, that expenses reimbursed by the service recipient were not subject to service tax.

In. F. No. B11/1/2002, dated 1-8-2002, it was clarified, in respect of Cargo Handling Service, that service tax was not payable on reimbursement as in the case of service of Customs House Agent.

(ii) that there is plethora of case laws to confirm that no service tax is payable on reimbursement expenses incurred by the service providers and no penalty is imposable when the service tax is paid prior to issue of show cause notice. The impugned order has deviated from the above settled position of law and hence not maintainable in law, to that extent;

(iii) that the demand of service tax of Rs. 60,418/- for the period from Jan., 2007 to April, 2008, in respect of reimbursable expenses incurred by appellant on behalf of M/s. Hutchison Essar South Ltd., Chennai relating to (i) Office Rent, (ii) Furniture Rent, (iii) Broadband connection charges, (iv) Electricity Bill (v) Computer hiring charges, (vi) other office expenses like printing charges for visiting cards, Boarding/lodging, Interior Decoration etc., is totally in conflict with the provisions of Section 67 of the Finance Act, 1994 read with Service Tax (Determination of Value) Rules, 2006;

(iv) that they had produced the copies of invoices raised on the customer viz. M/s. Hutchison Essar South Ltd., Chennai, which clearly indicate the amounts as reimbursable expenses incurred at the customer’s instance. No verification or enquiry was made by the department. In the absence of any evidence contrary to the above, the rejection of the evidence on record and finding of the adjudicating authority that appellant did not provide any evidence cannot be a valid ground for demand of service tax.

During the course of personal hearing, it was also pleaded that the salary paid directly to the labourers should not form part of the taxable value since the clients of his client did not pay service tax on the salary. There cannot be service tax on the reimbursable expenditure since his client acted as “pure agent”. Equal penalty is not imposable since his client paid the disputed amount from his pocket with interest before the issue of SCN.
Reasoning of Judgment:-We have considered the submission from both the parties and perused the record. We have carefully gone through the case records and submission of the appellant. Appeal has been filed against the confirmation of Service Tax of Rs. 60,418/- on reimbursable expenditure with interest and imposition of penalty of Rs. 2,94,656/-. There is no dispute that the amount received from the clientsi.e. M/s. Hutch and M/s. Zenta was reimbursable amount as the show cause notice itself admits. It is settled law that the principle of taxation is to tax only on the consideration received and retained. In the instant case various expenses incurred during the course of business activity were paid to the persons concerned. For example there cannot be second opinion that amount paid TNEB cannot be included in the taxable value for demanding Service tax. Likewise other amounts received also were paid to the concerned persons and were not retained by the appellant and hence the demand of Rs. 60,418/- is not sustainable. Consequently no interest and penalty are also demandable.
As regards the imposition of penalty, the appellant claims that on the ground of interpretation of law, penalty is not imposable under Section 78 of the Act and Tribunal agrees with the contention of the appellant. During the material periods and even after that, there were conflicting decisions with regard to the inclusion and exclusion of salary and other reimbursable expenses in the taxable value. Even there are Board’s Circulars in this regard clarifying that the actual reimbursable expenses are not liable to be included in taxable value. Therefore, it was held that the imposition of penalty under Section 78 is not sustainable.
In view of the facts and circumstances, Tribunal allowed the appeal by setting aside the impugned order.

Decision:-Appeal allowed.

Comment:-The essence of this case is that the amounts undoubtedly representing mere reimbursement of expenses is not includible in the taxable value of service and is not leviable to service tax.

Comments

MEHUL SHAH on 04 September, 2013 wrote:

meaning if we reimburse exps.one to one then those are not liable for service tax and if we receice excess of reimbursement then only total amount is liable for service tax

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PJ/Case Law/2013-14/1681

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