No service tax applicable on reimbursements, rules Indian Supreme Court

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

No service tax applicable on reimbursements, rules Indian Supreme Court

Sponsored by

logo.png
The new instructions concern the imports of goods and services

The Apex Court in a recent judgment (Civil Appeal number 2013 of 2014) held that no service tax should apply on expenditures recovered as reimbursements before May 14 2015.

The Apex Court affirmed the Delhi High Court ruling which opined that the scope of Rule 5 went beyond the purview of Section 67 of the Service Tax Law and hence impermissible.

The taxpayers were rendering services in the following four categories:

  • Consulting engineering;

  • Share transfer agency;

  • Custom house agent covered by the head 'clearing and forwarding agent'; and

  • Site formation and clearance, excavation and earth moving, and demolition.

While rendering the aforesaid services, the taxpayers also received reimbursements for certain activities undertaken by them which in their view should not have been included in the 'gross amount charged' for the levying of service tax. As per Rule 5, the value of these reimbursable activities should also have been included as part of the services provided.

In terms of the service tax legislation, the rules have been formulated for carrying out the provisions of the law which provides for levying, quantification and collection of service tax.

Section 67 categorically mentions that service tax should apply only on the gross amount charged for providing such a taxable service. Therefore, any amount which does not apply in relation to providing the taxable service cannot be brought within the tax net. Once this interpretation was given, it was clear that Rule 5 went far beyond the mandate of Section 67. It is established law that rules cannot go beyond the statute. The aforesaid view is further strengthened by the manner in which the legislature itself was enacted. On realising that Section 67 did not include reimbursable expenses, the legislature suitably amended the law to include reimbursable expenditure or cost incurred by the service provider in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14 2015, by virtue of provisions of Section 67 itself, could such reimbursable expenditure or costs form part of the valuation of the taxable services for the purposes of charging service tax.

bagri.jpg

Niraj Bagri (niraj.bagri@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com

more across site & shared bottom lb ros

More from across our site

The enacted legislation, which introduces a suite of new indirect taxes, was ‘highly awaited’ but presents major concerns, advisers tell ITR
Recent ATO guidance on how companies can demonstrate arm’s-length funding highlights how it is ‘one of the most transparent tax authorities in the world’, one adviser tells ITR
The proposed Block TP Assessment could provide taxpayers with long-term arm’s-length price certainty and reduce admin headaches, Sanjay Sanghvi of Khaitan & Co writes
India’s budget changes goods and services tax rules; UK private school VAT challenge fast-tracked
It is understood that the US has vowed to oppose any outcome from talks taking place at the UN
It’s the second year in a row that RSM’s tax business has posted fee income growth above 10%
Recent guidance from the Indian tax authorities should provide confidence for investors, says Sanjay Sanghvi of Khaitan & Co
Grant Wardell-Johnson also suggests there could be solutions to the friction between the US and the OECD when it comes to pillar two
The president had so far avoided announcing tariffs on the US’s neighbours despite previous threats
The firm brought in three managing directors from EY and Deloitte in Europe; in other news, KPMG’s bid to practise law in US was delayed
Gift this article