Valuation of Re-imbursement under Service Tax

[Submitted by Sriharsha K. M.,
CA student,
Bangalore, Karnataka]

September 30, 2008

Introduction:

The concept of valuation is important and critical factor for every taxing law. It is the most important process in determining the amount of tax to be paid. It should be done in a good manner; otherwise, the assessee will pay more amount than the actual one or less amount.

Meaning of Valuation:

According to Black's Law Dictionary, Valuation means (1)"The process of determining the value of a thing or entity." (2)."The estimated worth of a thing or entity."

In finance, valuation is the process of estimating the market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company).

In algebra, a valuation is a measure of size or multiplicity. They generalize to commutative algebra the notion of size inherent in consideration of the degree of a pole or multiplicity of a zero in complex analysis.

In logic and model theory, a valuation can be:

• In propositional logic, an assignment of truth values to propositional variables, with a corresponding assignment of truth values to all propositional formulas with those variables.
• In first-order logic and higher-order logics, a structure, and the corresponding assignment of a truth value to each sentence in the language for that structure.

In measure theory or at least in the approach to it through domain theory, a valuation is a map from the class of open sets of a topological space to the set positive real numbers including infinity.

Meaning of Valuation in Service tax:

Valuation in Service tax means ascertaining the amount of taxable service in which service has been already provided or to be provided.

The valuations of services under service tax are governed by Section 67 of the Finance Act 1994 as amended and the Service Tax (Determination of Value) Rules 2006. The rules have been prescribed from 19.4.2006. This circular specifically supercedes all the earlier circulars in relation to value.

1. Where the provision of service is for a Consideration in money, the amount charged by the service provider for such service provided or to be provided by him
   Will be the value taken for valuation [Section 67(1) (i)].
    
2. Where the provision of service is for a consideration not wholly or partly
   Consisting of money, the amount in money, with the addition of service tax charged,is equivalent to the consideration and will be the value taken for valuation [Section 67(1)(ii)].
    
3. Which if not ascertainable, the amount as may be determined in the prescribed
   Manner will be the value taken for valuation [Section 67(1) (iii)].
    
4. Where the gross amount charged by a service provider, for the service provided
   Or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount.
    

Provisions relating to Re-imbursement of expenses under service tax

Upto 18th April, 2006, the service tax is payable only on gross amount charged for service rendered. Before 18th April 2006, there was a broad circular stating that reimbursable expenses were not included in the assessable value for the purpose of levy of service tax. If a service provider incur some expenditure on behalf of customer that amount is not part of service provided by and will not be taxable. The expenses which are reimbursed by the client are taxable only from 18-04-2006, 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.

Reimbursement of expenses and pure agent:

As per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 if the expenditure incurred as a pure agent of the service receiver, it should be excluded from the assessable value subject to the following conditions,

1. The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
2. The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
3. The recipient of service is liable to make payment to the third party;
4. The recipient of service authorizes the service provider to make payment on his behalf;
5. the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
6. the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
7. the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
8. the goods or services procured by the service provider form the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

(Pure Agent means a person who-

• enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
• neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
• does not use such goods or services so procured; and
• Receives only the actual amount incurred to procure such goods or services.)

2) Service provided to the receiver and acts as a pure agent, in such cases, the re-imbursement expenses not be included in the value of the service tax,

3) Expenses incurred on behalf of the recipient of service, though separately invoiced can be included in the value of taxable service.

4) Expenses incurred by the service providers which are inputs for rendering taxable service, separately agreed, shown and invoiced as reimbursements. For example, reimbursement of telephone expenses incurred by a consulting engineer should be included in the value of taxable service

Whether out of pocket expenses can be included or not?

Further, 'Out of Pocket' expenses also includable in the assessable value of the tax liability. It includes traveling expenses, food charges incurred by the chartered accountant firm during audit etc. example: While in Audit, the Chartered Accountant firm incur out of pocket expenses, it is reimbursed and included in the assessable value.

Discussion of related case laws:

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.

But in the case of Malabar Management Services ltd. Versus Commissioner of Service Tax where assessee is providing a Business Auxiliary Services to the ICICI Bank to market the Bank's personal loans. They reimburse the expenses of salary of personnel, infrastructural expenses like Rent, electricity, telephone charges, stationary etc. from the Bank. But the Bank charge Services tax only on the consideration and not on the reimbursed expenses. As per the agreement made between Bank and Assessee, there is a fixed rate of commission is mentioned in the agreement. The department demanded Service tax on the reimbursed amount. Finally, the tribunal held that reimbursable expenses are not part of the assessable value on the fact that the consideration is already fixed in the agreement.

• In the Mett Macdonal ltd. Versus Commissioner of Central Excise, Jaipur, it was held that the reimbursable expenses are not part of the assessable value on the basis of circular dated

Even though, the Service Tax (Determination of Value) Rules 2006, provides for the inclusion of reimbursable expenses in the assessable value, but some of the circulars exempts the service providers in including the reimbursable expenses in the assessable value. Such Service provider's are-

• Customs house agents' service; steamer agents' service
• Cargo Handling Service
• Consulting Engineers, Service and Manpower Recruitment Agents' Service, (if reimbursed actual expenses)
• Market Research Agency Services and Security Agency Services

Conclusion:

If the reimbursed expenses are not included in the assessable value, it is the loss of revenue to the government. It has no effect on customer, when the reimbursable expenses are excluded. Because, he is not pay duty on such amount, and not take credit on the reimbursable amount. When the reimbursable expenses are included, it effects on the service receiver who not avail credit on Input services. Because, they pay tax on the reimbursable amount and they not avail the credit.

Go to "Articles" Listings

Read our disclaimer and privacy policy
In case of problems viewing CAalley, please inform us