Reimbursable Expenses - Liability

[Submitted by C. Giri Prasad]

August 13, 2008

The expenses which are incurred in relation to the services provided, recovered from the client are normally taxable expenses. Before 18.04.06, there is a board circular stating that the expenses reimbursed by the client need not be included in the assessable value for the purpose of levy of service tax. The expenses which are reimbursed by the client is taxable only from 18.4.06 i.e., as per Service Tax (Determination of Value) Rules, 2006.

As per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, the cost or expenditure which is incurred by the service provider in the course of providing taxable service is to be included in the value of taxable services.

As per proviso to Rule 5 (1) of the Service Tax (Determination of Value) Rules, 2006, if the expenditure is incurred as a pure agent it can be excluded. The following conditions are to be satisfied, in simple words:

• Payment should be made to a third party as a pure agent for goods or services procured, meant to say it should be just actual amount which need to be collected.
• The principal should receive and use the services or goods procured
• The agent should be authorized to make payment
• The payment made to third party should be separately mentioned in the invoice
• It should be in addition to the service provided by him

In the case of Gujarat Borosil ltd. versus commissioner of c. ex., Surat-II, where assessee collected transport charges from all dealers which is meant to be for breakage during transit, it is held that the value is to be included in assessable value because it is for the breakage in the transport of goods which the company is not supposed to collect as it is not an insurance company.

Thus the company can charge transport charges provided it need to be at the option of the buyer but it should not be collected uniformly from all the buyers as a fixed rate which is in the nature of transit insurance and it is not mentioned in the case that it is the actual cost incurred by him for the transportation.

Thus the expenses whatever incurred by the assessee and the purchaser which are in relation to the goods need to be included in the assessable. But in the case of Dhillonkool Drinks & Beverages ltd. versus CCE, Rohtak where the dealers have incurred advertisement expenses for the promotion of products of manufacturer which normally need to be included in the assessable value, but in the case it was held that the expenses incurred by the dealer is not to be included unless there is a specific written agreement which has legal validity to enforce the same.

Even though the Service Tax (Determination of Value) Rules, 2006 says that the expenditure or costs incurred for providing the said service which are reimbursed other than to a person acting as a pure agent is to be included for payment of service tax. But there is some Board circular exempting some of the service providers from inclusion of expenses reimbursed,

Although there is no circular regarding exemption of service tax to be charged by Clearing and Forwarding Agents Service, it is held in the case of Alathur Agencies Vs CCE that the service tax is to be paid only on the commission of C & F Agent and not on rental, telephone, handling, electricity, salary of employees etc. paid by principal which is followed in the case of Popular Cement Vs CCE.

In the above scenario even though there is no service tax liability on the reimbursed expenses as stated in the above circulars and cases it is to be noted that the assessee cannot claim the expenses incurred as a deduction from the gross value but it should be charged separately as held in the case of Mett Macdonald ltd. Versus Commissioner of Central Excise, Jaipur.

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