Service tax on Reimbursements

              IamSMEofIndia E circular- Service tax on reimbursements 

                                        Clarification  :  it  is  “Compulsory”   (with  some  Exceptions)

  1. Integrated  Association  of  Micro,  Small  &  Medium  Enterprises  of  India         
  2. Executive  Summary  :  This   law   existed   for   more   than   10   years.   However,   there  was  confusions  and  court  cases.    . This   year,   Government   has   changed   the   law   itself   to   act  as  a  “clarification”.  Some  “conditions”  are  yet  to  be  prescribed,  so  for  time   being  old  rules  (of  2006  continue  )   So,  Now,  in  our  view    w.e.f.   1st   April   2015,   If   it   is   a   Pure   Agent   ,   and   all   8   conditions,  are  satisfied,  then  no  service  tax,  ELSE,  Tax   is  levied.   And   for   period   upto   31st   March   2015,   the   matter   is   sub-­-judice  in  the  Supreme  Court  of  India.   .. 
  3. Root  Reason  for  this  clarification : Some  people  had  innocently,  or  deliberately,  started   innovative  billing,  to  reduce  the  tax  liability.   Example  :  Repair  /  Installation  charges  /  Consultants   were   giving   billing   in   two   parts.   A   contract   of   Rs   50,000  was  being  broken  into  Rs  10,000  as  service  fee,   and  Rs  40,000  as  Re-­-imbursement  of  Travel,  Salaries,   Food,  subcontractors  etc.   And  thus,  service  tax  was  being  paid  to  Government   on   only   Rs   10000.   Government   found   that   this   was   wrong….  Hence  the  law  clarified.  
  4.  Service  Tax  on  Re-­-imbursements   (a)Valua5on  Rules,  2006,  on  this  topic   (b)Delhi  High  Court  Decision   (c)Latest  change  in  Law,  Finance  Act,  2015   Three  parts  of  this  Publica8on  :  
  5. First  Source  :  See  the  Government  Rules  in  this  regard   •? Service  Tax  (Determina8on  of  Value)  Rules,  2006    Source  :   hhp://­-rules.html     
  6.  Rule  5(1)  says :  Inclusion  in  or  exclusion  from  value   of  certain  expenditure  or  costs.–   (1)  Where  any  expenditure  or  costs  are  incurred   by  the  service  provider  in  the  course  of  providing   taxable  service,  all  such  expenditure  or  costs  shall   be   treated   as   considera5on   for   the   taxable   service  provided  or  to  be  provided  and  shall  be   included  in  the  value  for  the  purpose  of  charging   service  tax  on  the  said  service.   ……………”  
  7. Opinion,  at  this  stage   If  we  follow  the  Rule  5(1),  in  case  of  a  C  and  F   Agent,      It  is  clear  that  all  the  expenses  C  and  F  Agent,   makes  to  get  the  shipment  done,  including  all   expenses  whatsoever,     Are  covered   However,  Govt  gives  a  big  exception  
  8.  Rule  5(2)  :    Rules  for  “Exception”   (2)   Subject   to   the   provisions   of   sub-­-rule   (1),   the   expenditure   or   costs   incurred   by   the   service   provider   as   a   pure   agent   of   the   recipient   of   service,   shall   be   excluded   from   the     value   of   the   taxable  service  if  all  the  following  condi5ons  are  satisfied,  namely:-­-  (i)    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;   (ii)   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;    (iii)            the  recipient  of  service  is  liable  to  make  payment  to  the  third   party;  
  9. Condi5ons  (contd.)   (iv)            the  recipient  of  service  authorises  the  service  provider  to   make  payment  on  his  behalf;    (v)              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;    (vi)            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;    (vii)          the  service  provider  recovers  from  the  recipient  of  service   only  such  amount  as  has  been  paid  by  him  to  the  third  party;  and     ((  NO  PROFIT  ))  (viii)        the  goods  or  services  procured  by  the  service  provider  from   the  third  party  as  a  pure  agent  of  the  recipient  of  service  are  in   addi5on  to  the  services  he  provides  on  his  own  account.  
  10. Pure  Agent  Means :Explana1on   1.–For   the   purposes   of   sub-­-   rule   (2),   “pure   agent”  means  a  person  who–   (a)           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;   (b)          neither  intends  to  hold    nor  holds  any  5tle  to  the   goods  or  services  so  procured  or  provided  as  pure  agent  of   the  recipient  of  service;   (c)          does  not    use    such  goods  or  services  so  procured;  and   (d)          receives  only  the  actual  amount  incurred  to  procure   such  goods  or  services.  
  11. Summary  ….  At  this  point    The   summary   at   this   point   was   that   re-­- imbursements   are   taxable,   except   those   covered  in  the  explicit  exemptions   But,  people  were  not  clear   And  cases  were  going  in  litigations  
  12. Then,   There  was  a   Court  Case   Delhi  High   Court   decided…  
  13. Delhi  High  Court  Decision   : Name   of   Writ   Person   :   “Inter   con5nental   Consultants   and   Technocrats   Ltd   vs   Union   of   India”,  decided  in  Nov  2012,  reported  in            [2013  (29)  STR  9  (Del.)].    In  this  case  the  Assessee  won  the  case,  against   section  5(1)  and  the  High  Court  said  “sec5on   5(1)  is  ultra  vires  the  Act”.  
  14. But  the  Govt  did  not  agree  And  Government  took  two  steps   : First,   the   Government   Filed   an   appeal   in   the   Supreme   Court   .   So,   there   is   no   relief   5ll   Supreme  Court  agrees  to  High  Court  order.    Second,   the   Government   Amended   the   Act   itself.   So,   now   even   the   Supreme   Court   cannot   do   anything  for  future  years  (  current  year  2015-­-16)  
  15. These  Changes  were  done  in  Budget  2015   Union  Budget  2015     Speci?cally,  changed  the  de?nition  of  Service  itself  
  16.  Source  :  Finance  Act  2015  
  17.  The  Finance  Act  2015  says   111.  In  section  67  of  the  1994  Act,  in  the  Explana1on,   for  clause  (a),  the  following   clause  shall  be  substituted,  namely:—   ‘(a)  “considera/on”  includes–    (i)  any  amount  that  is  payable  for  the  taxable  services   provided  or  to  be  provided;   •? (ii)  any  reimbursable  expenditure  or  cost  incurred  by   the   service   provider   and   charged,   in   the   course   of   providing  or  agreeing  to  provide  a  taxable  service,     except   in   such   circumstances,   and   subject   to   such   condi5ons,  as  may  be  prescribed;  
  18. Govt  internal  Note  to  its  officers    R e l e v a n t   E x t r a c t   f r o m   D.O.   Le_er   from   JS(TRU-­-II)–F.   No.   334/5/2015-­-TRU-­-   D.O.F.   No.   334/5/2015-­-TRU,      dated  February  28th,  2015   iv)  Sec/on  67  prescribes  for  the  valua/on  of  taxable   services.  It  is  being  prescribed  speci?cally  in  this  sec/on   that  considera/on  for  a  taxable  service  shall  include:    (a)   all   reimbursable   expenditure   or   cost   incurred   and   charged   by   the   service   provider.   The   inten/on   has   always  been  to  include  reimbursable  expenditure  in  the   value  of  taxable  service.  However,  in  some  cases  courts   have  taken  a  contrary  view.  Therefore,  the  inten/on  of   legislature  is  being  stated  speci?cally  in  sec/on  67.  ….”  
  19.  Now,  this  is  a  BIG  Problem  
  20. Service  tax  on  “Re-­-imbursement”  ?   Old  Position   •? No   Clarity,   Di?erent   opinions   New  posi5on   •?Made   clear.   Service   tax   is   YES.   But,  Cost  increases………,     •?if   you   don’t   get   Input   Credit   on   re-­-imbursement   services  
  21.  Based  on  this,  our  opinion  
  22.  Opinion  of  Legal  World  -­-1 “……….Thus,   aver   the   amendment   there   is   no   doubt   that  any  expenditure  incurred  by  the  service  provider   for  providing  any  taxable  services  has  to  be  included  in   the   value   of   taxable   services   unless   specifically   excluded  and  Service  Tax  would  be  chargeable  on  the   total   value   including   the   reimbursable   expenses   incurred  by  the  service  providers.  –  ………..”   S e e   m o r e   a t :   hhp://­-tax/analysis-­-service-­-tax-­- p r o p o s a l s -­- budget-­-20152016.html     2nd  Opinion  of  Legal  World  -­-2     •? That  opinion  draws  from  the  2006  Rules    Which   says,   that   “Pure   Agent”   Expenses   can   and  should  still  be  excluded   If  ALL  the  8  conditions  prescribed  are  ful?lled  
  23. Rule  5(2)  :    Exceptions,  see  them  again   (2)   Subject   to   the   provisions   of   sub-­-rule   (1),   the   expenditure  or  costs  incurred  by  the  service  provider   as  a  pure  agent  of  the  recipient  of  service,  shall  be   excluded  from  the    value  of  the  taxable  service  if  all   the  following  conditions  are  sa8s?ed,  namely:-­-    Editor  Note  1  :  “All  Condi5ons”  is  Highlighted.   Note  2  :    In  the  examples,  We  will  see  these  condi5ons  from   the  point  of  view  of  a  C  and  F  Agent,  say,  M/s.  CFA  
  24.  Condi5on  no  1  to  3   (i)                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;   (   OK,   yes,   Customs  duty  is  paid  by  CFA  )   (ii)              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;   (   OK,   yes,   this   is   the   case   at   CFA,   he   has   no   personal  interest  in  this  customs  duty  )    (iii)             the   recipient   of   service   is   liable   to   make   payment   to   the   third   party;   (yes,   actual   liability   is   of   the  end-­-customer  /  consignee)  
For complete details: