MARCH 04, 2015

By Chandra Sekhar P S S & Preetika Shetty, Deloitte Touche Tohmatsu India Private Limited

THE Finance Minister in the Union Budget 2015 has addressed the issue of taxability of reimbursable expenditure incurred by the service provider which has always been a matter of contention between the revenue and the taxpayer. Prior to April 2006, in the absence of specific provision to this effect, expenses recovered on actuals by the service provider were excluded from the taxable value. Vide Notification No. 12/2006-ST dated 19 April 2006, Service Tax (Determination of Value) Rules, 2006 the service tax Valuation Rules were introduced. Since then, by and large the industry has been paying service tax on all expenses incurred in relation to provision of taxable services other than those incurred as pure agent. However, the matter of taxability of such expenses has been challenged before various courts from time to time, wherein most of the decisions have gone against the assessee.

The Intercontinental Judgment

In the case of Intercontinental Consultants and Technocrats Pvt. Ltd. - 2012-TIOL-966-HC-DEL-ST, the Delhi High Court has held that Rule 5(1) of the Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and Section 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider "for such service" provided by him.

In the light of this decision, the expenses incurred and charged by service provider on cost to cost basis (other than pure agent) is to be excluded from the ‘consideration' of taxable service.

The Budget Change

As per Clause 109 of Finance Bill 2015, the clause (a) of explanation to Section 67 of the Finance Act, 1994 has been amended (effective from the date of enactment of the Finance Bill, 2015) to include all reimbursable expenditure or cost incurred and charged by the service provider in the course of providing or agreeing to provide a taxable service except as may be provided under the Rules. It is explained that the intention has always been to include reimbursable expenditure in the value of taxable service. However, in some cases courts have taken a contrary view. Therefore, the intention of legislature is being stated specifically in Section 67. This effectively means that the consideration for the taxable services shall include any out of pocket expenditure incurred and charged by the service provider in the course of providing taxable services except as may be dealt with under the Rules.

Long drawn litigation put to rest

This amendment should bring finality to the taxability issue of reimbursable expenses which has been litigated since the inception of valuation rules. Differing practices in charging service tax on reimbursable expenditure has been attempted to be resolved. This has been done by providing legal clarity through an amendment. Now we need to see whether the department would seek to give retrospective effect to this substitution. However the clause does not state that this is for "removal of doubts" or that this shall take retrospective effect.