Reimbursements outside the reach of service tax

With revenue authorities pushing to garner greater taxes, Delhi High Court, in its recent decision in Intercontinental Consultants and Technocrats Pvt Ltd v Union of India & Anr, has ruled that taxing reimbursements for out-of-pocket expenses would lead to double taxation and such reimbursements cannot be taxed.

The court found that rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules), which seeks to include within the taxable value expenditures/costs incurred by the service provider “in the course of providing taxable service”, violates the taxing contours prescribed under sections 66 and 67 of the Finance Act, 1994, which only cover consideration received “for such service provided or to be provided by him”. The court ruled that expenditure or costs incurred by the service provider in the course of providing the taxable service could not be considered as the gross amount charged by the service provider “for such service”.

Distinction not mentioned

The distinction between reimbursements in relation to services that are used by the service provider for rendering the final service, as opposed to reimbursements in relation to pass-through services obtained by the service provider on behalf of and directly utilized by the service recipient, was apparently not pointed out or examined by the court. As the Supreme Court held in All India Federation of Tax Practitioners v Union of India, service tax is a value-added tax which is in the nature of a destination-based consumption tax. Conceptually, the value of the services that have been used to provide a service should be included to calculate the taxable value of the service, so that after the set-off of taxes paid for all such services, tax is in effect levied on the value addition provided by the service provider.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Stella Joseph is an associate.