Mere reimbursement of actual cost and expenses are not taxable service, for payment of service tax thereon – Supreme Court dismisses appeal of Department
In a recent judgment, Hon’ble Supreme Court has affirmed the judgment of the Hon’ble CESTAT in holding that mere reimbursement of actual cost and expenses do not form a part of provision of any taxable service, for payment of service tax thereon.
ABCAUS Case Law Citation:
4391 (2025) (01) abcaus.in SC
In the instant case, the respondent company was, inter alia, engaged in the business of providing taxable services under the head of construction and other services. For provision of such services, the respondent initially registered with the Service Tax department and subsequently, obtained the centralized registration.
The respondent incurred certain expenditure such as insurance premium, advance tax payment, stamp paper/duty, hotel expenses etc. on behalf of their group companies. The said expenses did not relate to any supplies made to the respondent. Incurrence of such expenses were used to be reimbursed by the group companies at actual. The respondent also share cost of common expenditure that had been incurred by them, with their group companies in accordance with company’s group policy. To recover the said expenses, the respondent used to issue debit notes in favour of their group companies. The respondent did not pay any service tax on the transactions made by them with their group companies, owing to the reason that there was no provision of any taxable service between them and it was mere arrangement of accounting such reimbursable expenditure.
During the course of audit of the books of accounts, the officers of the service tax department observed that the respondent had recovered amounts from their related party by raising debit notes raised for reimbursement of various revenue expenses and for reimbursement of expenses incurred on behalf of group companies.
On the basis of such observation, the audit wing had alleged that the amount so recovered by the respondent should be considered as a taxable service under the category of ‘business support service’, defined under Section 65 (104c) of the Finance Act, 1994. Based on the audit report, the department had issued periodical Show Cause Notices (SCNs) proposing for recovery of the service tax demand.
The said SCNs were adjudicated vide Order-in-Original confirming the proposed demands against the respondent. On appeal against the said adjudication order, the CESTAT had set aside the adjudication order and allowed the appeals in favour of the respondent.
In continuation to the earlier show cause proceedings, the department again issued another SCN proposing for recovery of service tax demand for a subsequent period not covered by the CESTAT order. The said SCN was adjudicated in confirming service tax demand along with interest. Besides, the impugned order penalties were also imposed under Section 76 ibid and 77 ibid, respectively.
The respondent preferred appeal before the CESTAT. The Tribunal observed that previously, relying upon the judgement of the Hon’ble Supreme Court, it had set aside similar order. Whereas the period involved in the current SCN was for subsequent period.
The CESTAT observed that the phrase ‘service’ has been defined in Section 65B ibid to mean ‘any activity carried out by a person for another for consideration, and includes a declared service…..’. On reading of the said definition clause, it transpires that in order to constitute a service, there must be involvement of more than one person i.e., a service provider and a service receiver; and that there must be ‘consideration’ for provision of such service. The phrase ‘consideration’ explained in the Explanation, appended to Section 67 ibid has provided that ‘consideration’ includes any amount that is payable for the taxable services provided or to be provided.
The said explanation clause, providing the meaning of the phrase ‘consideration’ was substituted by the Finance Act, 2015 (20 of 2015), dated 14.05.2015 which in clause (ii) inter alia provided that “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”. The ttt However, in the present case, the respondent had not provided any taxable service to their group companies, which was evident from both the SCN and the impugned order. The nature of activities undertaken by the appellants were discussed by the original authority in the impugned order stating that the intention of sourcing the input service for and on behalf on their group of companies was with intent to have cost effectiveness.
The Tribunal noted that the impugned order had not specifically discussed as to how and which particular services were provided by the appellants to their group companies. Though, the original authority had stated that the act of sourcing of the service for the group companies would be categorized under ‘business support service’, but dnot dealt with the vital aspect regarding the manner of provision of a service, that too a taxable service. Rather, the facts of the case indicated that the mode of operation undertaken by the appellants in making payment for the services and getting the same reimbursed are not for provision of any service, but are only reimbursement for the services procured for their group companies. Thus, the reimbursement of the cost/expenses incurred by the respondent as per actual, cannot be regarded as consideration, flowing to the respondent towards the taxable services provided by it.
The Tribunal opined that the amount claimed in the debit notes were for the simple reimbursement of the cost/expenses incurred by the company in terms of the cost sharing arrangements with the group entities, with the only purpose of cost effectiveness, having no service element involved therein. Therefore, in absence of any provision of service by the respondent to their group companies, mere claim of reimbursement of actual cost and expenses should not form a part of provision of any taxable service, for payment of service tax thereon.
Accordingly, the CESTAT set aside the order.
Not satisfied with the quashing of order the Department challenged the final order of the CESTAT before the Hon’ble Supreme Court by filing an appeal.
However, the division bench headed by the Hon’ble Chief Justice dismissed the appeal of the Revenue observing as under;
“we do not find any good ground and reason to interfere with the impugned judgment; hence, the present appeal is dismissed.”
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