Service Tax Valuation | Reimbursable Expenses Excluded From Taxable Value : CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal has delivered a significant ruling on service tax valuation, holding that reimbursable expenses cannot be included in the taxable value under Section 67 of the Finance Act, 1994. This decision reinforces the Supreme Court's precedent in UOI v. Intercontinental Consultants and Technocrats Pvt Ltd, clarifying the limits of taxable value determination and the inapplicability of extended limitation periods in such cases.

Background & Facts

The Dispute

The appellant, Translanka Air Travels (P) Ltd., a General Sales Agency for Sri Lankan Airlines Private Limited, was engaged in providing manpower to SAPL under an agreement dated 10.12.2003. The appellant classified its services under 'Airport Service' and paid service tax after availing abatement. However, the Department contended that the activity fell under 'Manpower Recruitment and Supply Service' as defined under Section 65(68) of the Finance Act, 1994, and demanded service tax on the full value, including reimbursable expenses such as salaries and allowances.

Procedural History

The dispute progressed through the following stages:

• 2010: Show Cause Notice issued demanding service tax of Rs. 6,60,631 along with interest and penalty under Section 78 of the Finance Act, 1994.
• 2011: Order-in-Original No. 127/2011 confirmed the demand, interest, and penalty.
• 2015: Order-in-Appeal No. 96/2015 upheld the original order, leading to the present appeal.

Relief Sought

The appellant sought the setting aside of the impugned order, contending that reimbursable expenses were incorrectly included in the taxable value and that the extended period of limitation was wrongly invoked.

The Legal Issue

The central question before the Tribunal was whether reimbursable expenses incurred by the appellant on behalf of SAPL and later reimbursed without markup could be included in the taxable value under Section 67 of the Finance Act, 1994 and Rule 5 of the Service Tax (Determination of Value) Rules, 2006 for the purpose of levying service tax.

Arguments Presented

For the Appellant

The appellant argued that:

• The expenses reimbursed by SAPL were actual out-of-pocket expenses without any markup and thus excludable from taxable value.
• The demand was based on Rule 5 of the Service Tax (Determination of Value) Rules, 2006, which was struck down as ultra vires by the Supreme Court in UOI v. Intercontinental Consultants and Technocrats Pvt Ltd.
• The Trade Notice No. 53-CE (ST)/97 dated 04.07.1997, prevalent during the disputed period, excluded reimbursable expenses from taxable value.
• The Department had issued multiple show cause notices for the same period, violating the principle of finality in proceedings as held in Paro Food Products v. CCE.

For the Respondent

The respondent reiterated the findings of the appellate authority, contending that the reimbursable expenses formed part of the gross value under Section 67 and Rule 5 and were thus liable to service tax.

The Court's Analysis

The Tribunal examined the legal framework governing service tax valuation and the precedents cited by the appellant. The key observations were:

1. Supreme Court Precedent: The Tribunal noted that the Supreme Court in UOI v. Intercontinental Consultants and Technocrats Pvt Ltd had struck down Rule 5(1) of the Service Tax Valuation Rules, 2006 as ultra vires Section 66 and Section 67 of the Finance Act, 1994. The rule had provided for the inclusion of expenditures or costs incurred by the service provider in the taxable value, which the Court held was beyond the scope of the statutory provisions.

   "Rule 5(1) of the Service Tax Valuation Rules, 2006, which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was struck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections."

2. Reimbursable Expenses: The Tribunal held that the reimbursable expenses, being actual out-of-pocket expenses without any markup, could not be included in the taxable value. The Show Cause Notice itself characterized these expenses as reimbursable, and the demand was premised on the now-invalid Rule 5, rendering the demand unsustainable.

3. Extended Period of Limitation: The Tribunal found no evidence of wilful suppression or misstatement of facts by the appellant. It relied on Paro Food Products v. CCE to hold that the Department could not issue multiple show cause notices for the same period on different grounds, as this would violate public policy and the principle of finality in proceedings.

   "All grounds possible should be taken by the Department when initiating the proceeding. They cannot issue show cause notice on one ground, conclude the proceedings, and later issue another show cause notice on another ground for the same period."

4. Penalty and Interest: Given that the primary demand of service tax was unsustainable, the Tribunal held that the consequential demand for interest and penalty under Section 78 was also untenable.

The Verdict

The Tribunal allowed the appeal and set aside the impugned Order-in-Appeal No. 96/2015 (STA-II) dated 01.04.2015. The demand for service tax on reimbursable expenses, along with interest and penalty, was held to be unsustainable in law.

What This Means For Similar Cases

Reimbursable Expenses Are Not Taxable

The Tribunal's decision reinforces the principle that reimbursable expenses, incurred on behalf of a client and reimbursed without markup, cannot be included in the taxable value for service tax purposes. Practitioners should:

• Argue that demands based on Rule 5 of the Service Tax Valuation Rules, 2006 are invalid post the Supreme Court's decision in UOI v. Intercontinental Consultants.
• Rely on the Trade Notice No. 53-CE (ST)/97 dated 04.07.1997, which excluded such expenses from taxable value.

Extended Limitation Period Cannot Be Invoked Lightly

The Tribunal's observations on the invocation of the extended period of limitation provide clarity on procedural fairness:

• The Department must take all possible grounds in a single proceeding and cannot issue multiple show cause notices for the same period.
• Absence of wilful suppression or misstatement of facts with intent to evade tax precludes the invocation of the extended period.

Precedent-Based Challenges to Service Tax Demands

This judgment provides a strong precedent for challenging service tax demands where:

• The demand is based on reimbursable expenses included in taxable value.
• The Department has issued multiple show cause notices for the same period.
• The extended period of limitation is invoked without sufficient evidence of suppression or misstatement.