MARCH 12, 2015

By Ms Sonal Singh

CHARGEABILITY of Service Tax on 'reimbursable expenditure' has been an area that has attracted a lot of debate and doubt in the past. One of the proposals made in Budget-2015 seeks to address the uncertainty in this area. Vide clause 109 of the Finance Bill, 2015, an amendment to the definition of 'consideration', provided in the Explanation (a) to Section 67 of the Finance Act, 1994 ("Act"), has been proposed so as to include ' any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service' within the ambit of consideration. Therefore, post the amendment, consideration for the purposes of Section 67 of the Act shall include any amount that is payable for the taxable services provided or to be provided and any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. In order to fully appreciate the impact of this amendment it will be pertinent to trace the legislative and judicial development that led to the present amendment.

Section 67 of the Act stipulates that where service tax is chargeable on any taxable service with reference to its value, then such value shall in case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him. Currently, 'consideration' for the purpose of Section 67 has been defined under Explanation (a) to Section 67 to include any amount that is payable for the taxable services provided or to be provided. Thus, a plain reading of the above provision indicates that, where the consideration for the provision of service is in money, the gross amount charged by the service provider for such service provided by him shall be the value of taxable service for the purpose of charging service tax. The term 'for such service' holds relevance here as it signifies that only amount charged in relation to provision of service will be includible in taxable value.

The provisions relating to inclusion in or exclusion of certain expenditure or costs from the value are contained in Rule 5 of the Service Tax (Determination of Value) Rules, 2006 ("STV Rules"). Rule 5(1) of the STV Rules provides that where any expenditure or costs are incurred by the service provider in the course of providing taxable services, all such expenditure or costs incurred shall be included in the value for the purpose of charging service tax on the said service.Thus, as per Rule 5(1) expenses incurred by the service provider and reimbursed to him by the service recipient are includible in the value of taxable service.

The Delhi High Court in the case of Intercontinental Consultants and Technocrats Private Limited v. Union of India - 2012-TIOL-966-HC-DEL-ST held that Rule 5(1) of the STV Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. The High Court laid emphasis on the words 'such service' contained in Section 67 and held that it is only the value of such service which is rendered by the service provider, which can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him.

It is noteworthy that the decision of the Delhi High Court was pertaining to a period prior to 01/07/2012 when the service tax law was based on the concept of positive list. Therefore, its applicability in the negative list regime where Section 66 of the Act has ceased to have effect was highly doubtful. This is for the reason that the major observation of the court that the reimbursements do not fit into the phrase 'for such services' would not be applicable in the present context, as the same would easily be covered by the expression 'any activity carried out by a person for another'. Despite the slim chances of the applicability of the decision in the present regimen, there was a lot of uncertainty in the industry and conflict in the stand taken by the department and quasi-judicial forums regarding the inclusion of reimbursable expenditure while computing the value of services.

The present amendment, which is effective from the date of enactment of Finance Bill, 2015, gives rest to the debate and clarifies that consideration for the purposes of Section 67 of the Act shall include any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. However, the question that still remains is whether the amendment made to Section 67 is only clarificatory and hence retrospective or it will operate only prospectively. The department may take a view that the intention has always been to include reimbursable expenditure in the value of taxable services and the same is evident from Rule 5(1). However, in some cases courts have taken a contrary view and therefore the intention of legislature is being stated specifically in Section 67.

(The author is a Senior Associate in Lakshmikumaran & Sridharan and the views expressed are personal)