In the course of providing a Taxable Service, we incur reimbursable expenditures such as travelling and boarding expenses, postage, telephone, etc., and indicate these items separately on the invoice issued to the recipient of service. Do we have a Service Tax liability on the value of such reimbursable expenditures?
Valuation related disputes have been on constant rise and an area of unending disputes between the Service providers and the Department. The manner of determination of value is a complex subject leading to confusion and misinterpretation of the Service Tax Valuation principles. The Service Tax Officers have been empowered to reject the value declared by a service provider vide Service Tax Notification No. 12/2006-S.T. dated 19.04.2006, thus giving immense powers to the Department and wherever there are such powers, abuse of the same cannot be ruled out. However, a service provider needs to understand these Valuation principles so that unnecessary futile litigations can be avoided. According to the Service Tax (Determination of Value) Rules, 2006, the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration and in all other cases, the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.
Prior to the introduction of Service Tax (Determination of Value) Rules, 2006, all such reimbursable expenditures were excluded from the gross taxable value in accordance with the clarifications and Circulars issued by the Department vide No. B11/1/2001-TRU dated 09.07.2001 and accordingly a service provider was required to produce only documentary evidences in support of reimbursable deduction. However all such passed clarifications and Circulars were resended on introduction of Master Circular dated 23.08.2007
The service provider usually excludes all the reimbursable expenditures from the Taxable value without following the principles and guidelines issued vide the CBEC Circular F. No. B1/4/2006-TRU dated 19.04.2006 and thus fails to avoid the pitfalls. Value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditures or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includable in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client. However, there are certain exceptions specially in the case of service providers acting as pure agent.
This exclusion from the gross value is available to a pure agent subject to fulfillment of eight specific conditions and those who fail to follow this Eight- Fold Path will fail to attain the Nirvana from Service Tax litigations.
Path 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;
Path 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;
Path 3 – the recipient of service is liable to make payment to the third party;
Path 4 – the recipient of service authorises the service provider to make payment on his behalf;
Path 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;
Path 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;
Path 7 – the service provider recovers from the recipient of service only such amount as has been paid by him to the third party and the
Path 8 – the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
But the irony is that even after following these Eight-Fold Path, one will not attain Nirvana from the Service Tax Valuation litigations unless he makes sure he falls under the criteria of an pure agent and as such 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. In absence of any of the above conditions, a service provider is not entitled for exclusion of the reimbursable expenditure from the Taxable value and thus will have to pay the Service Tax accordingly.