Service tax on Reimbursement of Expenses
Posted @ March 10, 2014, 9:33 pm under (Service Tax Updates)
The Department, on the basis of Rule 5(1) has been taking the view that all the money that flows, whether related to the services or not, from the service receiver to the service provider is to be included under gross amount charged'. This decision comes as a huge relief in these cases also and the whole concept of gross amount charged' is bound to undergo a sea change to the advantage of the service provider.
THE decision of the Delhi Court, in the case of Intercontinental Consultants and Technocrats Pvt Ltd v. Union of India and Anr, reported in 2012-TIOL-966-HC-DEL-ST, is a landmark judgment.
As reported, the Delhi High Court has unequivocally held and reiterated the well accepted principle that the Rules cannot override the statutory provisions contained in the Act and that Rule 5(1) of the Service Tax (Determination of Valuation of Services) Rules, 2006 isultra vires Sections 66 and 67 of the Finance Act, 1994. The relevant extract of the decision is reproduced below
11. In the aforesaid backdrop of the basic features of any legislation on tax, we have no hesitation in ruling that Rule 5 (1) 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 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. The illustration 3 given below the Rule amplifies what is meant by sub-rule (1). In the illustration given, the architect who renders the service incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc. to enable him to effectively perform the services. The illustration, therefore, says that these expenses are to be included in the value of the taxable service. The illustration clearly shows how the boundaries of Section 67 are breached by the Rule. Apart from travelling beyond the scope and mandate of the Section, the Rule may also result in double taxation. If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication.
Inter-Group billings for reimbursements at actuals will now come out of tax net
Corporates recovering costs or expenses, at actuals, from sister companies, etc. will no longer be required to discharge service tax on the reimbursement of expenses. Charging sister companies for reimbursements, at actuals, is a practice, widely practiced, even between companies in India and their associated enterprises. Most of these transactions including import transactions could get out of the service tax net.