Service Tax Cannot Be Levied On Reimbursement Of Expenses Incurred By The Service Provider: Reiterates CESTAT Delhi

[21 June 2022] The Delhi Bench of CESTAT has reiterated that service tax cannot be levied on reimbursement of expenses incurred by the service provider.
The Bench, consisting of Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member), held that since Rule 5 of the Service Tax (Determination of Value) Rules, 2006 has been held to be ultra vires by the Supreme Court in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd. (2018), the nature of services does not make any difference and that no service tax can be levied on reimbursements.
The CESTAT observed that the taxable services are valued as per Section 67 of the Finance Act, 1994. The CESTAT noted that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 provides that where any expenditure or costs are incurred by the service provider in the course of providing a taxable service, all such expenditure or costs shall be treated as a consideration, and they shall be included in the value of the service for the purpose of charging service tax.
The CESTAT noted that Rule 5 (2) provides that the expenditure or costs incurred by the service provider as a pure agent of the recipient of the service, shall be excluded from the value of taxable service only if all the conditions specified therein are met.
The CESTAT observed that the Supreme Court in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd. (2018) had held that Rule 5 of the Service Tax (Determination of Value) Rules, 2006 was ultra vires Section 67 of the Finance Act. The Supreme Court had ruled that the value of a taxable service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service and that the service tax is to be paid only on the services actually provided by the service provider.
The CESTAT ruled that since Rule 5 of the Service Tax (Determination of Value) Rules, 2006 has been held to be ultra vires by Supreme Court, the nature of services does not make any difference to the taxability of reimbursements.
The CESTAT thus allowed the appeal and set aside the order of the Commissioner of Service Tax.