Levy of Service Tax on reimbursement of expenses

Service tax was introduced vide the Finance Act, 1994.  The service tax regime has since undergone various changes and modifications in its growth from infancy to literal maturity.  However, typical to the characteristic of complexity of Indian Tax Laws, Service Tax too has maintained the notorious trait and over time has evolved a web of complex and confusing provisions.  Going by this trend, service tax as an independent area of dispute is surely going to present litigants and professionals with a huge scope for confrontation with the revenue along with associated pains of litigation.  It will ultimately depend on the wisdom of the judiciary to untangle the methodically planned complexities in the service tax law to arrive at a clear interpretation of what actually should have been the law, rather than what is put in the law book.

One such area of dispute or confusion has been the levy of service tax on reimbursement of expenses.  A professional is often posed with this question by clients who want to know why a levy of service tax on reimbursement of expenditure incurred on their behalf is added to their cost especially when it is not actually in the nature of remuneration.  This question is posed more by those clients who do not get the benefit of CENVAT i. e. those clients who are not registered under the Service Tax Act.

A simple explanation would be to quote provisions of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, wherein it is provided that:

“5. Inclusion in or exclusion from value of certain expenditure or costs.–

(1)   Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.


On a plain reading of the above rule, it is clear that reimbursement of expenses are includible in the gross value of service on which service tax is to be levied.


However, a recent judgement delivered by the Hon’ble Madras High Court in the case of Commissioner of Service Tax vs. Sangamitra Service Agency [2013 (7) TMI 862] seems to have put to rest the issue of service tax on reimbursement of expenses.  The issue before the Court was on a question of law, which the Department had raised in appeal against the order of the Tribunal.  The Tribunal had held that reimbursable expenses received by the assessee need not be added to the taxable value related to clearing and forwarding agents’ services.  The Department had questioned whether the view held by the Tribunal was correct in view of the provision of Rule 6(8) of the Service Tax Rules, 1994 (since omitted vide Notification no. 10/2006 dated 19 April 2006) according to which gross amount of remuneration or commission should be the taxable value in relation to services provided by a C & F Agent.


The Hon’ble High Court, while dismissing the appeal of the Department, held that if a receipt is for reimbursing expenditure incurred for the purpose, the mere act of reimbursement per se, would not justify the contention of the Revenue that the same, having character of remuneration or commission, deserves to be included in the sum amount of remuneration/commission.  The Hon’ble High Court further held that expenditure incurred does not fall under the expression “remuneration or commission”.


Coming back to the issue of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, a writ petition was filed in the Delhi High Court recently in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India & Anr. (2012-TIOL-966-HC-DEL-ST).  The Hon’ble High Court of Delhi, while admitting the petition observed that “we have no hesitation in ruling that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 is ultra vires the erstwhile Section 66 and Section 67 and travels much beyond the scope of these sections. To that extent, it has to be struck down as being 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.”


The Hon’ble High Court further stated that since it was in the process of hearing the litigation on the inclusion or exclusion of reimbursement of expenses in gross consideration for chargeability of service tax, it is advisable that the service provider comply with the provisions of Rule 5(2) of the Valuation Rules so as to exclude the expenditure or costs incurred by the service provider as a pure agent of the recipient of service for chargeability of service tax.


This article covers two different type of reimbursement of expenses, one specific to C & F Agents, covered by provisions of Rule 6(8) of the Service Tax Rules, 1994 and the other which is more general in application and covered by Rule 5(1) of the Valuation Rules.  It can be safely assumed that the last is not yet heard on the issue.  For those who would want to exercise caution, it is thus advisable to wait until the Delhi High Court decides on the issue of inclusion or exclusion of reimbursed expenditure from levy of service tax.