Whether reimbursement of any amount is chargeable to service tax?

Case:- COMMR. OF C. EX., GOA VersusMACHADO & SONS AGENTS & STEVEDORS PVT. LTD.

Citation:- 2016 (44) S.T.R. 459 (Tri. - Mumbai)

Brief facts:-This appeal is filed by the Revenue against Order-in-Original No. GOA/ST/Commr/2/12-13, dated 28-2-2013 passed by the Commissioner of Customs, Central Excise & Service Tax, Panaji, Goa.
The relevant facts that arises for consideration, after filtering out unnecessary details are during the course of inspection of the records of the respondent, it was noticed that they were receiving certain amounts pertaining to Port Services, Cargo Handling Services and Steamer Agent services (hereinafter referred to as the said services) from various parties to whom they had provided the said services, however, they were not paying Service Tax on the entire amounts so received as seen in the ledger accounts maintained by them in respect of each client for the aforesaid services. The amounts received by them were actually the input taxable services rendered by them/cost of Government dues/charges, which had been billed by them and were to be included in the gross amount charged and which had been broadly classified as cargo related charges, Customs Cess charges, Customs Light Dues charges, Customs Overtime charges, Hire of Launches charges, MP-Child Labour charges, M.V. Bulk Prosperity charges, etc. The lower authorities issued a show cause notice for the demand of Service Tax on the amounts received for the said services as also sought interest, besides seeking to impose penalties. Respondent contested the show cause notice on merits and also on limitation. The adjudicating authority after considering the evidence produced by the respondent during the course of personal hearing, came to the conclusion that amounts received for the said services are reimbursement. Accordingly, by reasoned order he dropped the proceeding initiated by the show cause notice.

Appellant’s contention;- Learned Special Counsel appearing on behalf of the Revenue would draw our attention to the facts of the case, show cause notice and various other documents. He would submit that the respondent is registered with the department for providing various services like Port services, Cargo Handling, Steamer Agents, “Business Auxiliary Services” and renting of immovable property services. He would draw our attention to the fact that respondent had collected the charges under various heads like Cargo related charges, MPT-CHLD charges, M.V. Bulk Prosperity charges, M.V. Dona Paula Expenses, Vessel related charges, West of Break Bulk water charges, Wharf Dues and Plot Rent, Customs Cess, Customs Light Dues Charges, Customs Overtime Charges, Hire of Launches Charges, Shipment Income, Wagon Freight Charges, Ship Agency Income. It is his submission that these charges having paid by respondent to Port Authority for stevedoring/operations and should be considered for discharge of Service Tax liability under port services. He would submit the charges mentioned viz. paid to Customs Department, Panaji are collected from their service recipient, hence Service Tax liability arises. It is his submission that the adjudicating authority in his entire order has not elaborated as to who are the principal/service recipients, to whom the respondent is claiming to be a pure agent. Whether or not the expenditure incurred by the respondent is for providing a service to the principal is in the nature of a pure agent would depend on the contractual relationship between the principal and other party. Without correctly ascertaining the principal and the services rendered to the same by the respondent, the adjudicating authority has erred in dropping the proceeding initiated by the show cause notice. It is his submission that the adjudicating authority has mentioned that nature of expenses incurred and payments made by the respondent on behalf of their principal, is being done so as a pure agent, seems to be incorrect, as the activity relates to Cargo related activity and labour engaged for loading/unloading of Cargo an activity which is an integral part of the services provided by respondent to their principal/clients and the respondent holds licence for these activities at the Mormugao Port Trust. The respondent has not produced any contract between them and their principal to show that there exists a contractual relationship between the respondent and their principal for the respondent to act as a pure agent to incur expenditure or cost in the course of providing the taxable service. It is his submission that nothing is brought on record to show that Mormugao Port Trust could not claim the charges for the services from the respondent’s principal. It is his submission that in the case of Sri Bhagyavathy Traders v. Commissioner of Central Excise, Cochin - 2011 (24)S.T.R.290 (Tri.-LB), it has held that only when service recipient is having obligation legal or contractual, to pay certain amount to any third party and said amount is paid by the service provider on behalf of the service recipient, question of reimbursement arises. He would also submit that adjudicating authority has erred in dropping the proceeding on the ground of limitation also; he urged the appeal filed by the Revenue be allowed.

Respondent’s contention:- Learned Counsel appearing on behalf of respondent would submit that they had justified the claim that the amount received for the said services was reimbursement charges on actual basis. It is his submission that the rigours with Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 are complied with as is accepted by the adjudicating authority in Paras 24, 25 and 27 of the impugned order. He would submit that the Hon’ble High Court of Delhi in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. v. Union of India - 2013 (29)S.T.R.9 (Del.), held that Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 is ultra vires of Act. It is his submission that accordingly for value of services, which are provided or to be provided by the respondent himself only can be charged to Service Tax. It is his submission that the Service Tax on reimbursible amount will be double taxation, as service provider has charged the Service Tax as and the respondent has paid them and plain reimbursement from their client cannot be again taxed as there is no service when reimbursement is claimed. Hence findings of adjudicating authority are correct. He would submit that the appeal needs to be dismissed.

Reasoning of judgment:-Hon’ble judges have considered the submissions made at length by both sides and perused the records.

On perusal of the records, it transpires the demand of Service Tax liability is on account of certain amounts received by the respondent as reimbursement charges. It is the case of the Revenue that these amounts need to be considered for imposing Service Tax on the respondent.

On perusal of Order-in-Original, they find that the adjudicating authority has considered the entire proposal in show cause notice and analysis thereof and has also considered the various evidences which are produced by respondent on him. they reproduce the relevant findings :-
“22. I have gone through Annexure VIII - Colly to Reply to show cause notice, i.e., copies of certain documents which are in the form of letters/mails received from their clients either duly appointing the noticee as agent or entrusting the job of attending to their vessels due to call at Mormugao/Panaji Ports. I find that the said letters/mails referred particular vessels which were due to call on Mormugao and Panaji Ports respectively for mostly loading of bulk iron ore. Most of the said letters/mails made it clear that the noticee was appointed by them as their agents for the said vessels’ call at the said ports for arranging all port, Customs Formalities, Payments, Tax formalities, etc., directly with the above port prior to ship’s berthing for smooth loading operation in good time. It appeared that based on the letters/mails whose nature is nothing but authorizations, the noticee acted on behalf of their principals by way of arranging/organizing related activities through third parties for loading/unloading of vessels and in turn effecting payments to the Govt. Departments, statutory Bodies and others.
23. As per case records (Annexure-B to the Written submissions at the time of P.H. held on 30-8-2012), I find that nature of expenses incurred and payments made by the noticee on behalf of their principals and classified/categorized as Cargo related charges, Customs Cess charges, Customs Light Dues Charges, Customs Overtime Charges, Hire of Launches Charges, MP-Child Labour charges, M.V. Bulk Prosperity charges, M.V. Dona Paula Expenses, Ship Agency Income, Shipment Income, Vessel related charges, Wagon Freight Charges, Wharf Dues & Plot Rent, W.O.B.-Shipment charges is described in detail as below.

Sr. No.	Account Head Category	Nature of Payment	To whom payment was made by the noticee
1	Cargo related charges	Cargo dues for loading of vessels at Mormugao and Panjim Port	Mormugao Port Trust/ Captain of Ports
2	Customs Cess	Customs Cess during loading of Cargo	Commissioner of Customs & Central Excise
3	Customs Overtime	Customs Overtime fees during loading of vessels	Commissioner of Customs & Central Excise
4	Customs Light Dues	Light House Dues for Agency Vessel	Commissioner of Customs & Central Excise
5	Hire of Launches	Launches engaged by Customs/Immigration/ Port Health Officer during custom clearance and completion of vessel and also for draft survey	Mormugao Launch Owners Association
6	MPT-Child Labour charges	Labourer engaged during loading of vessel at Mormugao Port Trust	Mormugao Port Trust - Cargo Handling Labour Dept.
7	M.V. Bulk Prosperity	Expenses incurred on behalf of principals towards Hotel/Taxi arranged for Representative, Bunker supplied, Cash to Master, Port Dues for loading of vessels by Transhipper	1. Mormugao Port Trust 2. Bunkers 3. Cash paid to Masters
8	M.V. Dona Paula Expenses	All expenses are reimbursement for handling/ manning of the Floating Crane Dona Paula e.g. Crane Operators Salary, Material supplied, launches engaged by crew, taxies and miscellaneous expenses	1. Mormugao Launch Owners Association 2. Mormugao Port Trust 3. Crane Operators as wages
9	Ship Agency Income	Amount paid to parties on behalf of principals	Goa Mineral Ore Exports, Goa Chamber of Commerce
10	Shipment Income	Amount paid to parties on behalf of principals	Goa Mineral Ore Exports, Goa Chamber of Commerce
11	Vessel related charges	Port Dues, Pilotage, Berth Hire, etc. for Agency vessel	Mormugao Port Trust/Captain of Ports
12	Wagon Freight	Amount paid to transport coal by rail wagons	South Central Railway
13	Wharf Dues & Plot Rent	Plot rent for storing coal cargo discharged from vessel at MPT	Mormugao Port Trust
14	W.O.B.-Shipment Expense	Additional stevedoring expenses for loading of vessels at West of Break water, Mormugao as Promotional Scheme Charges	Mormugao Port Trust - Cargo Handling Labour Dept.

23.1 From the above chart and as per the case records, it appeared that the noticee organized certain activities on behalf of their principals as detailed above in connection with the loading/unloading of cargo into/from the vessels berthed at Mormugao Port/Panaji Port and made payments to the third parties which include Govt. Departments, i.e., Commissioner of Customs & Central Excise, Captain of Ports (Govt. of Goa) and South Central Railway as well as statutory bodies like Mormugao Port Trust and few private bodies. As it can be seen that the amounts paid to the Commissioner of Customs and Central Excise towards Customs Cess, Customs Overtime and Customs Light Dues are statutory in nature and payable as per enactments thereby the same are outside the purview of Service Tax provisions and Service Tax is not recoverable on the said amounts. Also seen that the noticee paid substantial amounts to Mormugao Port Trust, Captain of Ports and South Central Railway towards services as mentioned above on behalf of their principals. These organizations are either Govt. Departments or Statutory Bodies created for rendering specific services which are distinct and different from the taxable services being provided by the noticee. Sample copies of invoices of Mormugao Port Trust produced by the noticee during the course of personal hearing showed that Mormugao Port Trust are recovering Service Tax under different categories on amounts collected towards their taxable services since they are registered with Service Tax wing of this Commissionerate. The services rendered by Mormugao Port Trust are distinct and different from the services of the noticee as can be seen. Similar is the case with other third parties also to whom payments were made by the noticee on behalf of their principals.
23.2 Therefore, from the nature of the payments made it can’t be said that such payments are in the nature of expenditure incurred by the noticee for providing the taxable services and hence can’t be included in the taxable value. Moreover, the noticee says that the recipients of such payments have charged the Service Tax to their principals but they have not taken any credit of such tax payment. If they are the recipient of the service then they would have taken the Service Tax paid as credit. It implies that they have acted as only agents to their principals who paid the amounts or reimbursed the expenses on such services. Such expenses can’t be linked to the services provided by the noticee. As agent to their principals they are required to organise a job and for that they get some payment which they call as agency income and the actual cost of the job is reimbursed by the principals. It the said cost is also treated as includible in the agency income and then subjected to tax then they should be actually providing that service to the principals. But the evidence suggests that the job is done by a third party and not by the Agent. Therefore, asking agent to include the cost of job in his agency income and pay the tax is not tenable.”
As against the above said factual findings of the adjudicating authority, they find that, in the appeal memorandum the factual findings are not dislodged by any contrary evidence. During the last hearing, they directed both the parties to produce sample documented invoice, of the respondent for claiming that the amounts are reimbursible expenses, same are produced before them. On perusal of the said documents, they find that respondent had issued invoices indicating therein that particular invoice is for reimbursement of an amount paid to Mormugao Port Trust towards Cargo related charges and annexing invoice which is in respondent’s name issued by Mormugao Port Trust. Various documents which are produced before them indicate procedure followed by the respondent, i.e., pay the amount to service provider and claim the same as reimbursement from their client. In their view, this activity of the respondent is covered as an activity of a pure agent. They find that this issue has been considered by the Hon’ble High Court of Delhi in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. (supra), wherein there lordships have held that the provision of Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 which would mean any amount of reimbursement of the expenses cannot be included for discharge of Service Tax liability.

Reliance placed by learned Counsel for Revenue on the Larger Bench decision of Tribunal would not take the case of the Revenue any further as the judgment of the Hon’ble High Court of Delhi in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. (supra), is directly on the point and needs to be followed.

As they have disposed of the appeal only on its merits, they are not recording any finding on various other submissions made by both sides.

In view of the foregoing and in the facts and circumstances of this case, they hold that the impugned order is correct and legal and does not suffer from any infirmity. The appeal is rejected.

Decision:- Appeal rejected.

Comment:- The analogy of the case is based on the decision of the judgment of the Hon’ble High Court of Delhi in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. Respondent had acted on behalf of their principals and paid certain amount on behalf of assessee and claimed same as reimbursement from client. Invoices shows that it is for reimbursement of an amount paid to Port Trust towards cargo related charges. Respondent’s activity is covered as an activity of a pure agent and reimbursement of expenses is not a service. Service tax liability arose on for service portion. Hence reimbursement of expenses is not includible for discharge of Service Tax liability.

Prepared by:- Monika Tak

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PJ/Case Law/2016-17/3349

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