Whether sum paid as a pure agent of service recipient can be includible in value of services?
Facts & background:
Raj Wines (“the Assessee”) was marketing and promoting various kinds of Indian Made Foreign Liquor/ Beer manufactured by Skol Beverages Limited (“SBL”), for which the Assessee received total payment of Rs. 2,84,34,153/- in the name of Primary claim/ Retail Scheme, Commission claim, Merchandise expenses, Fixed office expenses, Other expenses (label Reg. & Brand Reg. Courier, NOC & Excise on breakages) for the period July 1, 2003 to August 31, 2006. However, no Service tax was deposited by the Assessee.
The Adjudicating Authority confirmed demand of Service tax on the total amount of Rs. 2,84,34,153/- under the taxable category of ‘Business Auxiliary Services’ along with interest and penalty. However, on appeal being filed to the Ld. Commissioner (Appeals), it was held that Service tax could only be levied on Commission claim and not on the other components of reimbursement received by the Assessee. The Ld. Commissioner (Appeals) also reduced the amount of penalty.
Being aggrieved, the Department preferred an appeal before the Hon’ble Tribunal. The Hon’ble Tribunal held that the Assessee was further liable to pay Service tax on Merchandise expenses, fixed office expenses as well as on miscellaneous expenses of registration and transportation. However, the Hon’ble Tribunal upheld the order of the Ld. Commissioner (Appeals) excluding Service tax on the amount received towards Primary claim/ Retailer scheme on the ground that it was paid over by the Assessee to retailers on behalf of SBL for achieving certain quota of sales and later on reimbursed by SBL as a pure agent.
Later on, the Department filed an appeal before the Hon’ble High Court of Chhattisgarh challenging the Hon’ble Tribunal’s decision for exclusion of the amount received towards Primary claim/ Retailer scheme.
The Hon’ble High Court of Chhattisgarh after discussing provisions under Section 67 of the Finance Act, 1994 (“the Finance Act”) read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006 (“the Valuation Rules”), upheld the Order of the Hon’ble Tribunal holding that Primary claim/ Retailer scheme is the amount which the service provider (i.e. the Assessee) had given to the retailers on behalf of SBL for achieving certain quota of sales for which they were reimbursed by SBL as a pure agent. Accordingly, the said amount would be dealt in view of Rule 5(2) of the Valuation Rules which provides exclusion of expenditure or cost incurred by the service provider as the pure agent.
The issue of taxability of out-of-pocket expenses has always been a matter of litigation. Before April, 2006 there was no specific provision to this effect. However, from April 19, 2006 onwards, with the introduction of the Valuation Rules, Service tax is applicable on gross consideration including all expenses barring the expenses incurred as pure agent. The matter of taxability of such expenses, which is reimbursed by the service recipient, came before various Courts from time to time.
With the landmark judgment in the case of Intercontinental Consultants and Technorats Pvt. Ltd. Vs. Union of India [2013 (29) S.T.R. 9 (Del.)] (“Intercontinental Case”), the Hon’ble High Court of Delhi declared Rule 5(1) of the Valuation Rules as ultra vires of erstwhile Section 66 and Section 67 of the Finance Act.
The Hon’ble Delhi High Court, while allowing the Writ Petition, observed, “We have no hesitation in ruling that Rule 5(1) of the Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires erstwhile Section 66 and Section 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him.”
Thus, the Intercontinental Case has laid down clearly that a Rule can never exceed or go beyond the Section which provides for the charge or collection of Service tax, thus Rule 5(1) of the Valuation Rules is ultravires erstwhile Section 66 and Section 67 of the Finance Act. At the same time, it also laid down that Service tax is not exigible on reimbursements of expenses claimed on actual basis by service provider.
However, it would not be out of place here to mention that being aggrieved by the decision of the Hon’ble High Court of Delhi in the Intercontinental Case, the Department filed a Petition for special leave to appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court has granted leave to appeal and petition was converted into civil appeal in the case of Union of India Vs. IntercontinentalConsultants & Technocrats (P.) Ltd.[(2014) 49 taxmann.com 520 (SC)].
Therefore, in the interim, till the matter attains finality, it is advisable that service provider can exclude expenditures incurred on behalf of service recipient provided all prescribed conditions are satisfied as a pure agent in terms of Rule 5(2) of the Valuation Rules.