MARCH 15, 2018

By S Sivakumar, LL.B., FCA, FCS, ACSI (London), Advocate

LEVY of service tax on reimbursements was perhaps, one of the most contested issues, under the service tax law. Recently, the Apex Court has dismissed the revenue appeal against the well-known decision rendered by the Delhi High Court in Intercontinental Consultants case.

As is known, the Supreme Court has in UOI v Intercontinental Consultants and Technocrats Private Ltd reported in - 2018-TIOL-76-SC-ST has upheld the decision, rendered by the Delhi High Court - 2012-TIOL-966-HC-DEL-ST wherein, the Delhi High Court had held that Rule 5(1) of the then existing Service Tax (Determination of Value) Rules, 2006 was ultra vires Section 67 of the then existing Finance Act, 1994. Many CESTAT decisions, based on the Intercontinental decision, have held that reimbursements cannot be subjected to the levy of service tax. Now that, Intercontinental has been upheld by the Apex Court, certain apparently contrary CESTAT decisions including the one rendered in Rolex Logistics v CST - 2009-TIOL-270-CESTAT-BANG could now be held to be unsustainable. As we know, in Intercontinental , the Delhi High Court had held that, the charge of service tax is only on the value of the such services that are rendered by the service provider and that, the expenditure or costs that are incurred by the service provider in the course of providing such taxable service cannot be considered as the 'gross amount' charged by the service provider for such services.

It would be worthwhile to note that the Apex Court has indeed considered the statutory amendment brought in Section 67(4) of the Finance Act, 1994, by way of insertion of the Explanation with effect from 14-5-2015, in terms of which, the said Section was amended, specifically, to include reimbursements. The Apex Court has rightly held that, the amendment can only be prospective in nature.

Let's now take this discussion into the GST regime. A comparison of the definition of 'consideration' as appearing in the Explanation to Section 67(4) of the Finance Act, 1994 and Section 2(31) of the CGST Act, 2017 could possibly help.

Under Service tax law:

Explanation–For the purposes of this section, -

(a) consideration includes

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.

(c)  gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called Suspense account or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.

Under the CGST Act :

(31) “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

Section 15(1) of the CGST Act, 2017 reads as under:

15. Value of taxable supply

(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.    

(2) The value of supply shall include–––

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e) subsidies directly linked to the price excluding subsidies provided by Central Government and State Governments.

On the face of it, it would seem that, both being 'inclusive' definitions, the definition of 'consideration' under the GST law is not significantly expansive as compared to that which existed under the service tax law, except for the specific mention of non-monetary consideration. Of course, some might argue that, by the usage of the words 'in relation to the supply of goods or services or both', the definition of 'consideration' under the GST law is indeed expansive. The other view would be that, unlike the service tax law, wherein, clause (a) to the Explanation to Section 67(4) was inserted with effect from 14-05-2015, the term 'reimbursement' has not been specifically mentioned in the CGST Act, in the valuation provisions contained in Section 15.

My humble view is that, the controversy related to the levy of tax under GST, on reimbursements, is bound to continue, especially, in the light of the recent judgment of the Apex Court upholding Intercontinental. A possible view could still be taken that Rule 33 of the CGST Rules, 2017 which provides for exemption from the levy of tax under GST, under certain specified circumstances, could be held to be ultra vires Section 15(2) read with Section 2(31) of the CGST Act, 2017.

Before concluding…

From a practical perspective, though, it would seem that the whole concept of not charging tax on reimbursements would push up the overall cost of the supply. We can consider the example of a supplier incurring certain expenses to the tune of let's say, Rs 1,00,000/- and paying GST to his suppliers, let's say, to the tune of Rs 18,000/-, and adding his margin of, let's say, Rs 15,000/-. In this case, such a supplier would raise an invoice on his customer for Rs 1,33,000/-. If he chooses not to charge GST on the reimbursement component of Rs 1,00,000/- and charges GST only on his value addition of Rs 15,000/-, the input tax credit on the GST component of Rs 18,000/- would be lost to the outward supplier as the outward activity involving claiming of the reimbursement is not subject to GST. The outward supplier, in this case, might have to increase his basic cost to be charged to his customer, to cover the loss of ITC to the tune of Rs 18,000/-. On the other hand, assuming that supplier's customer is entitled to avail ITC, it would make economic sense for the supplier to charge GST on the entire amount of Rs 1,33,000/- and allow ITC to be availed by his customer. To this extent, from an economic perspective, the concept of pure agent may not be practically viable under the GST law.

(The views expressed are strictly personal.)