No service tax applicable on reimbursements, rules Indian Supreme Court

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

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 Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Gift this article