The Chennai Regional Bench of the Customs, Excise and Service Tax Appellate Tribunal has delivered a definitive ruling clarifying that reimbursed expenses incurred by clearing and forwarding agents cannot be included in the taxable value for service tax purposes under the pre-amendment regime of the Finance Act, 1994. This decision reinforces the principle that taxation must be strictly confined to consideration for the service rendered, and not extended to cost recoveries made on actual basis.
Background & Facts
The Dispute
The appellant, M/s. Sivaram and Swamy, is a registered clearing and forwarding agent engaged by M/s. Himalaya Drug Company. The dispute arises from the Department’s assessment of service tax for the period January 2009 to November 2009, during which the appellant received reimbursements for various expenses incurred in the course of rendering services, including freight, telephone charges, packing, electricity, stationery, and labour charges. The Department contended that these reimbursements formed part of the taxable value under Rule 5 of the Service Tax (Determination of Value) Rules, 2006, and issued a show cause notice proposing a demand of Rs. 43,550/- in service tax, along with interest and penalties under Sections 76 and 78 of the Finance Act, 1994.
Key Facts
- The appellant was registered with the Service Tax department as a clearing and forwarding agent.
- The agreement with M/s. Himalaya Drug Company explicitly defined the appellant’s remuneration as a percentage of net turnover.
- Reimbursable expenses were separately identified and borne by the principal: freight, insurance, and documentation charges.
- Operational expenses such as electricity, telephone, stationery, and labour were incurred by the appellant and reimbursed on actual basis, with no profit element.
- The agreement clearly segregated commission (consideration for service) from reimbursed expenses.
- No evidence was produced by the Department to show that any of the reimbursed amounts constituted additional consideration or remuneration.
Procedural History
- January 2009 to November 2009: Period under audit and dispute.
- 2015: Audit conducted; show cause notice issued.
- 13.10.2015: Commissioner of Service Tax (Appeals-II) passed Order-in-Appeal No. 259/2015, confirming service tax demand of Rs. 43,550/- and interest, but setting aside penalty under Section 78 while sustaining penalty under Section 76.
- 2016: Appeal filed before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Regional Bench, under Service Tax Appeal No. 40073 of 2016.
- 12.03.2026: Hearing held before the Tribunal.
- 17.04.2026: Final order pronounced.
Relief Sought
The appellant sought: (1) setting aside of the demand of service tax of Rs. 43,550/-, (2) cancellation of interest levied thereon, and (3) quashing of the penalty imposed under Section 76 of the Finance Act, 1994, on the ground that the demand was legally unsustainable and no suppression of facts was established.
The Legal Issue
The central question was whether reimbursed expenses such as freight, telephone, electricity, packing, stationery, and labour charges, incurred by a clearing and forwarding agent and recovered on actual basis, constitute part of the taxable value under Section 67 of the Finance Act, 1994, read with Rule 6(1)(viii) of the Service Tax (Determination of Value) Rules, 2006, prior to the 2015 amendment.
Arguments Presented
For the Appellant
The appellant’s counsel, Mr. K. Dayananda, contended that under Rule 6(1)(viii) of the Service Tax (Determination of Value) Rules, 2006, only the commission or remuneration received by a clearing and forwarding agent constitutes the value of taxable service. He relied on the Supreme Court’s judgment in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., 2018 (10) GSTL 401 (SC), which held that reimbursable expenses cannot be included in taxable value under the pre-amendment regime. He further cited the Madras High Court’s decision in Commissioner of Service Tax v. Sangamitra Services Agency, 2014 (33) STR 137 (Mad.), which held that reimbursement cannot be presumed to be part of remuneration without evidence. He emphasized that the appellant acted as a pure agent, with no profit element in the reimbursements, and that the agreement clearly separated consideration from cost recoveries.
For the Respondent
The Revenue, represented by Mr. N. Satyanarayana, argued that the expenses were integrally connected to the provision of clearing and forwarding services and therefore formed part of the gross amount charged for the service under Section 67. The submission was that the nature of the expenses, regardless of reimbursement, rendered them part of the service’s value. No specific statutory or judicial authority was cited to counter the appellant’s reliance on Intercontinental Consultants.
The Court's Analysis
The Tribunal undertook a rigorous analysis of Section 67 of the Finance Act, 1994, which defined the value of taxable service as the gross amount charged for such service. The Court emphasized that the phrase "for such service" imposes a strict limitation: only amounts constituting consideration for the service rendered are taxable. The Tribunal held that valuation rules cannot expand the scope of the charging provision, and that delegated legislation cannot override the statutory text.
"It is a settled principle that the charging provision must be strictly construed and no tax can be levied on amounts which do not fall within the scope of the charging section."
The Tribunal accepted the appellant’s reliance on Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., noting that the Supreme Court had explicitly held that the 2015 amendment to Section 67, which permitted inclusion of reimbursed expenses, was prospective and did not apply retroactively. The Tribunal further noted that the Madras High Court in Sangamitra Services Agency had held that reimbursement does not automatically become taxable unless proven to be part of remuneration.
The Tribunal examined the agreement between the appellant and Himalaya Drug Company, which clearly defined commission as the sole consideration for service. It found that freight, insurance, and documentation were expressly borne by the principal, while other expenses like electricity and stationery were operational costs incurred by the agent without any profit element. The Department failed to produce any evidence to rebut the claim of reimbursement or to establish that these amounts were part of the consideration.
"The burden lies on the Department to establish that a particular receipt forms part of taxable value. In the present case, this burden has not been discharged."
The Tribunal concluded that the demand was based on an erroneous legal assumption and that the issue was interpretational, not one of suppression or evasion. Consequently, the penalty under Section 76, being consequential, could not survive.
The Verdict
The appeal was allowed. The Tribunal set aside the impugned order dated 13.10.2015 in its entirety. The demand of service tax of Rs. 43,550/-, along with interest and penalty under Section 76, was cancelled. The Tribunal directed that all consequential relief, including refund of any amount already paid, be granted in accordance with law.
What This Means For Similar Cases
Reimbursements Are Not Automatically Taxable
- Practitioners must now argue that any reimbursement must be proven to constitute consideration for service, not merely assumed to be part of the value.
- Clear contractual segregation of commission and expenses is critical to avoid tax exposure.
- Tax authorities cannot rely on blanket assumptions; they must discharge the burden of proof.
Pure Agent Doctrine Prevails in C&F Services
- Clearing and forwarding agents acting as pure agents, with no profit element in reimbursements, are protected under Rule 6(1)(viii).
- Operational costs such as telephone, electricity, and stationery, when reimbursed on actual basis, are not taxable.
- Agreements must explicitly state that the agent is not bearing the cost or earning profit on reimbursements.
Pre-Amendment Law Still Governs Pre-2015 Periods
- For assessment periods before June 2015, the pre-amendment interpretation of Section 67 applies.
- Any demand based on inclusion of reimbursed expenses during this period is legally unsustainable unless supported by evidence of remuneration.
- Appeals against such demands should be filed with reference to Intercontinental Consultants and Rule 6(1)(viii).
