Sri Bhagavathy Traders. Commissioner of Central Excise, Cochin

[2012] 48 VST 522(CESTAT) [CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL] (BANGALORE BENCH) Sri Bhagavathy Traders Commissioner of Central Excise, Cochin V. KANG S.S.(VICE-PRESIDENT) AND CHACKO P.G.(JUDICIAL MEMBER) AND VEERAIYAN M. (TECHNICAL MEMBER) HF August 8 2011 SERVICE TAX TAXABLE VALUE REIMBURSEMENT CHARGES RECEIVED BY SERVICE PROVIDER WHETHERINCLUDIBLE FINANCEACT(32OF1994),S.67(PRIORTOAPRIL18,2006). PRECEDENT RATIO DECIDENDI ARE DECISIONS WHICH REFER TO ISSUES IN DISPUTE, RECORD RIVAL SUBMISSIONS AND CONTAIN REASON THEREFOR. On the question whether reimbursement charges received by a provider of taxable service includible in the calculation of gross amount for discharge of service tax during the period prior to April 18, 2006: Held, that in the transaction between a service provider and the service recipient the costs for input services and inputs used in rendering services could not be treated as reimbursable costs. There was no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses. Only when the service recipient had an obligation legal or contractual to pay certain amount to any third party and the said amount was paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient would arise. Some decisions are leader decisions and others are mere followers. The leader decisions specifically refer to the issues in dispute, record rival submissions and contain the reasons for coming to the conclusions/decisions. Such decisions throw up ratios to be followed. MiscOrderNo.376of2011,ServiceTaxAppealNo.111of2008decidedonAugust82011 G. Natarajan and K. S. Ramesh, Advocates, for the appellant R.K. Singla, Joint Chief Departmental Representative, for the respondent Cases referred to: Agrawal Colour Advance Photo System v. Commissioner of Central Excise[2012] 48 VST 154 (CESTAT-Delhi) referred to Al-Baith Steel(P) Ltd. v. Commissioner of Central Excise [2008] 10 STR 554 (Tri.-Bang) referred to Alathur Agencies v. Commissioner of Central Excise [2007] 7 STR 402 (Tri.-Bang) referred to Apco Agencies v. Commissioner of Customs and Central Excise[2010] 33 VST 191 (CESTAT-Bang) referred to B.S. Refrigeration Ltd. v. Commissioner of Service Tax[2006] 4 VST 95(CESTAT-Bang) referred to Bhagyanagar Services v. Commr. of Central Excise [2006] 4 STR 22 (Tri.-Bang) referred to CCE C& ST v. Nilalohita Enterprises [2007] TIOL 680 (CESTAT-Kolkata) referred to

E.V. Mathai& Co. v. Commissioner of Central Excise [2006] 3 STR 116 (Tri.-Bang) referred to Harveen& Co. v. Commissioner of Central Excise[2012] 48 VST 515(CESTAT--New Delhi) referred to Jaylaxmi Enterprises v. Commissioner of Central Excise [2008] 9 STR 19 (Tri.-Bang) referred to K.D. Sales Corporation v. Commissioner of C. Ex. [2007] 6 STR 418 (Tri.-Bang) referred to Keralam Enterprises v. Commissioner of Central Excise, Customs and Service Tax [2008] 9 STR 503 (Tri.-Bang) referred to Kirloskar Pneumatics Co. Ltd. [2011] TIOL 453 (CESTAT-Mum) referred to Mahavir Generics v. Commissioner of Central Excise [2004] 170 ELT 78 (Tri.-Delhi) referred to Nandini Warehousing Corporation v. Commr. of C. Ex. [2007] 8 STR 511 (Tri.-Bang) referred to Naresh Kumar& Co. Pvt. Ltd. v. Commissioner of Service Tax [2008] 11 STR 578 (Tri.-Kolkata) referred to Rolex Logistics Pvt. Ltd. v. Commissioner of Service Tax [2009] 13 STR 147 (Tri.-Bang) referred to S&KEnterprisesv.CommissionerofCustoms&CentralExcise(Appeals)[2008]15VST219 (CESTAT-Bang) referred to Sangamitra Services Agency v. Commissioner of Central Excise[2007] 9 VST 590 (CESTAT-Chennai) referred to Sri Sastha Agencies Pvt. Ltd. v. Assistant Commissioner of Central Excise and Customs [2007] 6 STR 185 (Tri.-Bang) referred to U.M. Thariath& Company v. Commissioner of Central Excise[2008] 15 VST 217(CESTAT-Bang) referred to -------------------------------------------------- ORDER M. VEERAIYAN (Technical Member). By Miscellaneous Order No. 23 of 2011 dated January 18, 2011, the issue stands referred to the Larger Bench. Thefacts,inbrief,whicharerelevanttoconsidertheissue afreshareas follows: (a) The appellants are engaged in the business of rendering clearing and forwarding agency services to several persons including M/s. Indian Oil Corporation Ltd.("IOCL", for short). (b) Service tax was imposed on clearing and forwarding agency services with effect from September 1, 1999 and the appellants have taken registration and paying the service tax. (c) The officers, on the basis of investigation, found that the appellantswerenotpaying service taxonthecorrecttaxablevalueastheywere preparing two invoices, one for service charges and another for amounts claimed as reimbursement of expenses incurred towards transportation charges, loading and unloading charges, rent, salary to the staff, electricity, telephone charges, stationery charges, courier charges, etc. (d) Accordingly, a show-cause notice dated April 2, 2007 proposing recovery of service tax of Rs. 53,90,080 short-paid for the period from April, 2003 to March, 2006 on the clearing and forwarding services rendered by them along with interest and proposing imposition of penalty was issued. (e) The original authority, by order dated December 28, 2007, confirmed the demand as proposed and imposed penalty of equal amount

under section 78 in addition to penalties under sections 76 and 77. The Tribunal(referral Bench), while hearing the appeal, noted the decisions of the Tribunal in the following cases holding that reimbursementchargesshouldnotformpartofthegrossvalueforthedischargeof service liability. (i) Sri Sastha Agencies Pvt. Ltd. v. Assistant Commissioner of Central Excise and Customs, Palakkad[2007] 6 STR 185(Tri.-Bang). (ii) Bhagyanagar Services v. Commr. of Central Excise, Hyderabad [2006] 4 STR 22(Tri.-Bang). (iii) CCEC&ST,BBSR-1v.NilalohitaEnterprises[2007]TIOL680 (CESTAT-Kolkata). PageNo:524 (iv) Sangamitra Services Agency v. Commissioner of Central Excise, Chennai[2007] 9 VST 590(CESTAT-Chennai);[2007] TIQL 1335 (CESTAT-Mad). The Tribunal(referral Bench) also noted the decision of the Co-ordinate BenchinthecaseofNareshKumar&Co.Pvt.Ltd.v.Commissionerof Service Tax, Kolkata[2008] TIOL 116(CESTAT-Kolkata);[2008] 11 STR 578(Tri.-Kolkata) holding that the cost incurred on reimbursement of expenses ifany,needstobeincludedinthegrossvalueoftaxableservice rendered. Inview oftheabove,thereferralbenchfeltthattherewerecontrary decisions given by the Co-ordinate Benches as cited above on an identical issue and therefore referred the matter for constitution of Larger Bench by the honourable President. Accordingly the matter stands referred to Larger Bench. The learned advocate for the appellants referring to the agreements in the case of the appellants and IOCL, submits that the appellants were required to submit bills separately for both fixed operating expenses as well service charges incurred on operation of the clearing and forwarding agent. As per the agreement, expenses incurred towards electricity and water charges, communication expenses, stationery charges, security charges, manpower charges, transportation/freight charges, etc., are reimbursable on actual basis subject to maximum limits specified in the rate schedule annexed to the said agreement. He submits that similar agreements have been entered into with other parties during the relevant period. Accordingly, the appellants were preparing separate invoices for reimbursable expenses andtheywerenotincludingthesameinthevalueforthe purpose of paying service tax. The learned advocate referring to the Board's Circular F. No. B43/7/97- TRU dated July 11, 1997, submits that the activities of clearing and forwarding agent are as follows: (i) Receiving the goods from the factories or premises of the principal or his agents; (ii) Warehousing these goods;

(iii) Receiving despatch orders from the principal; (iv) Arranging despatch of goods as per the directions of the principal by engaging transport on his own or through the authorized transporters of the principal; (v) Maintaining of records or the receipts and despatch of goods and the stock available at the warehouse; PageNo:525 (vi) Preparing invoices on behalf of the principal. He submits that only the gross amounts of remuneration or commission paidtoclearingandforwardingagentbytheclientshallbethevaluefor the purpose of charging service tax as clearing and forwarding agent. Taking us through the provisions relating to valuation of taxable services under the Finance Act, 1994, 1996, 1997, 1998, 2001, 2002, 2003 and 2006, hesubmitsthatthevalueoftaxableservice isdefinedas"grossamount charged for the services rendered". Also referring to the provisions relating tovaluationintermsoftheservice TaxRules,1994,hesubmitsthatthe gross amount charged by the service provider should be only"for such services" and not other amounts which may be recovered as reimbursement of expenses incurred for other activities. In this regard, he submits that certain activities like loading and unloading became taxable under cargo handling service with effect from August 16, 2002, transportation became taxable under goods transport agency service with effect from January 1, 2005 and storage and warehousing service became taxable with effect from August 16, 2002. He submits that expenses incurred on activities on behalf of the principal and recovered as reimbursements cannot be treated as part of value of clearing and forwarding services. Referring to Board's Circular No. B43/1/97 dated June 6, 1997, he submits that value of customs house agent service and steamer agent service did not include several expenses incurred on account of exporter/ importer. Referring to Circular No. F. No. 343/5/97 dated July 2, 1997, he submits that the value of consulting engineering service and manpower recruitment service did not include amount incurred on behalf of the clients and which are reimbursed on actual basis. He also submits that even when the amounts are collected on lump sum basis, reimbursable expenses are permitted on the basis of documentary evidence adduced by the service provider. Referring to Circular No. B11/1/1998 TRU dated October 7, 1998, issued in the context of value of market research agency service and security agency services, he submits that expenses incurred on travelling, boarding and lodging which are reimbursed are not to be includedinthevalueoftaxableservice. InthelightoftheaboveBoard Circulars relating to various services, he submits that it is clear that expenses incurred on behalf of the client and claimed as reimbursement are to be excluded while arriving at the value of taxable services. OnlywitheffectfromApril19,2006,theprovisions ofsection67have undergone changes and the concept of"consideration" has been introducedandbyvirtue ofrule5oftheservice Tax(DeterminationofValue) PageNo:526 Rules, 2006 the consideration is defined to include reimbursement of

expenses also. He relies on the following decisions in support of his submissions claiming exclusion of reimbursable expenses from the value of taxable services: (i) Sri Sastha Agencies Pvt. Ltd. v. Assistant Commissioner of Central Excise & Customs, Palakkad[2007] 6 STR 185(Tri.-Bang). (ii) Bhagyanagar Services v. Commr. of Central Excise, Hyderabad [2006] 4 STR 22(Tri.-Bang). (iii) CCEC&ST,BBSR-1v.NilalohitaEnterprises[2007]TIOL680 (CESTAT-Kolkata). (iv) Sangamitra Services Agency v. Commissioner of Central Excise, Chennai[2007] 9 VST 590(CESTAT-Chennai);[2007] TIOL 1335 (CESTAT-Mad). (v) Apco Agencies v. Commissioner of Customs and Central Excise, Calicut[2010] 33 VST 191(CESTAT-Bang);[2008] 10 STR 169(Tri.-Bang). (vi) S&KEnterprisesv.CommissionerofCustoms&CentralExcise (Appeals), Calicut[2008] 15 VST 219(CESTAT-Bang);[2008] 10 STR 171. (vii) E.V.Mathai&Co.v.CommissionerofCentralExcise [2006]3 STR 116(Tri.-Bang). (viii) Keralam Enterprises v. Commissioner of Central Excise, Customs and Service Tax[2008] 9 STR 503(Tri.-Bang). (ix) U.M. Thariath& Company v. Commissioner of Central Excise [2008] 15 VST 217(CESTAT-Bang);[2007] 8 STR 161(Tri.-Bang). (x) Nandini Warehousing Corporation v. Commr. of C. Ex.[2007] 8 STR 511(Tri.-Bang). (xi) Al-Baith Steel(P) Ltd. v. Commissioner of Central Excise [2008] 10 STR 554(Tri.-Bang). (xii) Jaylaxmi Enterprises v. Commissioner of Central Excise [2008] 9 STR 19(Tri.-Bang). (xiii) Alathur Agencies v. Commissioner of Central Excise [2007] 7 STR 402(Tri.-Bang). (xiv) B.S. Refrigeration Ltd. v. Commissioner of Service Tax[2006] 4 VST 95(CESTAT-Bang);[2006] 4 STR 103(Tri.-Bang). (xv) Rolex Logistics Pvt. Ltd. v. Commissioner of Service Tax[2009] 13 STR 147(Tri.-Bang). The learned Joint Chief Departmental Representative referring to the provisions of section 67 of the Finance Act, 1994 during the relevant period,submitsthattheservice taxhasbeenleviedonthegrossamount PageNo:527

paid by service recipient and that the gross amount will include all expenses incurred towards provision of service till the same is consumed at the destination, since the service tax is a destination based consumption tax. Hesubmitsthatrule6(8)oftheService TaxRules,1994,asitexisted in the relevant time, provided that"the value of the taxable service in relation totheservices provided byaclearingandforwardingagenttoaclientfor rendering services of clearing and forwarding operations in any manner shallbedeemedtobethegrossamountofremunerationorcommission(by whatever name called) paid to such agent by the client engaging such Agent". Therefore, the argument that reimbursement of expenses incurred bytheappellantshallnotformpartofthevalueoftaxableservice isnot correct. He places reliance on the following decisions in support of his submissions: (i)nareshkumar&co.pvt.ltd.v.commissionerofservice Tax [2008] TIOL 116(CESTAT-Kolkata);[2008] 11 STR 578(Tri.-Kolkata). (ii) Kirloskar Pneumatics Co. Ltd.[2011] TIOL 453(CESTAT-Mum); and (iii) Harveen& Co. v. Commissioner of Central Excise [2012] 48 VST 515(CESTAT New Delhi);[2011] TIOL 848(CESTAT-Delhi). We have carefully considered the submissions of both the sides and perusedtherecords.attheoutset,itistobenotedthattheissue referred tothelargerbenchrelatesonlyto "includability or otherwise of the reimbursement charges received byaprovider oftaxableservice inthecalculationofgrossamountfor discharge of service tax." Inotherwords,thereferencedoesnotrelatetoscopeoftheclearingand forwarding agent services and, therefore, submissions relating to the same neednotbedealtwithinthisorder. The learned advocate has relied on several decisions in support of his various submissions. It would be appropriate to analyze the various decisions critically and chronologically so as to determine the ratios, if any, of the said decisions. (a)decision datedmay26,2003renderedbysinglememberbenchin thecaseofe.v.mathai&co.[2006]3str116(tri.-bang)isonthefact that there was separate agreement for transportation. (b)decision datedjune16,2006ofthetribunalinthecaseofb.s. Refrigeration Ltd.[2006] 4 VST 95(CESTAT-Bang);[2006] 4 STR 103 is PageNo:528 after appreciating the facts that the appellant entered into contract with M/s.BPLwhointurnusetheservices ofclearingandforwardingagentby sub-contracting the work to another party.

(c)decision datedjune22,2006ofthetribunalinthecaseofbhagyanagar Services [2006] 4 STR 22(Tri.-Bang) has been rendered after appreciating that there was separate contract for transportation and after relying thedecision ofthetribunalinthecaseofe.v.mathai&co.[2006]3str 116(Tri.-Bang). (d)decision datednovember6,2006inthecaseofsrisasthaagencies[2007]6str185(tri.-bang)merelyfollowsthedecision inthecasesof E.V.Mathai&Co.v.CommissionerofCentralExcise [2006]3STR116 (Tri.-Bang) and Bhagyanagar Services [2006] 4 STR 22(Tri.-Bang) and reads as under: "6. On a careful consideration, we notice that the issue is covered in assessees' favour by the above cited judgments. The elements required for adding to the service tax is restricted to the amounts received by them for carrying on the services of clearing and forwarding only. The other elements like loading, unloading charges arenotrequiredtobeaddedtotheservice taxasheldbythecited judgments. The issue is covered in assessees' favour. Hence the stay applications and appeals are allowed in terms of the above judgments with consequential relief, if any." (e)decision dateddecember20,2006ofthesinglememberbenchof the Tribunal in the case of K.D. Sales Corporation v. Commissioner of C.Ex.reportedin[2007]6STR418(Tri.-Bang)merelyfollowstheother decisions. There is no discussion with reference to the agreements or legal provisions. (f)decision ofthetribunaldatedjune5,2007inthecaseofu.m. Thariath& Company[2008] 15 VST 217(CESTAT-Bang);[2007] 8 STR 161merelyfollowsthedecisions inthecaseofe.v.mathai&co.[2006]3 STR 116(Tri.-Bang), B.S. Refrigeration Ltd.[2006] 4 VST 95(CESTAT- Bang);[2006] 4 STR 103 and Mahavir Generics v. Commissioner of Central Excise [2004] 170 ELT 78(Tri.-Delhi). (g)decision datedjuly24,2007ofthesinglememberbenchofthe Tribunal in the case of Sangamitra Services Agency[2007] 9 VST 590 (CESTAT-Chennai);[2007] TIQL 1335(CESTAT-Mad) follows the decision in the case of Sri Sastha Agencies[2007] 6 STR 185(Tri.-Bang). (h)decision ofthetribunaldatedaugust7,2007inthecaseof Jaylaxmi Enterprises[2008] 9 STR 19(Tri.-Bang) records that the said PageNo:529 decision had been taken following the earlier decision of the Tribunal without referring to any specific decision. It has been recorded that many decisions which hold the reduction should be given to all the reimbursable expenses. Analysis of the decisions relied upon by the assessee seeking exclusion of reimbursed expenses indicate that three of the decisions have been rendered by single Member Benches of the Tribunal though the issue involved relates to valuation. The other decisions relied upon by the assessee appeartohavebeenbasedonfactsofthesaidcaseswithoutdiscussion on the legal provisions on valuation of services. Some of the decisions have merely followed the earlier decisions without recording findings on the nature of agreements and contractual obligations of the assessee.

Itistobenotedthatsomedecisions are"leader"decisions andothers are mere"followers". The"leader" decisions specifically refer to the issues in dispute, record rival submissions and contain the reasons for coming to the conclusions/decisions. Such decisions throw up"ratios" to be followed. Thedecision ofthetribunalinthecaseofrolexlogistics Pvt.Ltd. [2009]13STR147(Tri.-Bang)hasheldthattheservice taxliabilityinterms ofsection67isonlyonthegrossamountreceived towardstheservices rendered. If the service provider in the course of rendering service has to make certain payment on behalf of the service receiver, they are known as reimbursements. Under these circumstances, abatement of reimbursement ofamountsincurredonbehalfoftheservice receiver wasallowedtobe deducted from the gross amount to arrive at"gross amount towards services rendered". InthecaseofNareshKumar&Co.Pvt.Ltd.[2008]TIOL116(CESTAT- Kolkata);[2008] 11 STR 578(Tri.-Kolkata), the Tribunal after taking into accounttheprovisions ofsection67oftheactandtheprovisions ofservice Tax(Determination of Value) Rules, 2006, came to the conclusion that the claim for deduction from the gross value of taxable services was not justified. Decision of the Tribunal in the case of Agrawal Colour Advance Photo System v. Commissioner of Central Excise [2012] 48 VST 154(CESTAT- Delhi)[2010] 19 STR 181, relied upon by the Department, after considering theprovisions ofsection67andtheservice TaxValuationRulesinthe context of exemption Notification No. 12/2003-ST and Notification No. 1/ 2006datedMarch1,2006heldthatthegrossamountchargedwould include the value of the goods and materials supplied or provided or used and the value of input services used for providing the taxable services. It wasalsoheldthatthoughwitheffectfromapril18,2006,anewsection67 PageNo:530 read with Service Tax Rules, 2006 came into effect, yet the main provision still remains and provides when the provision of service is for a consideration in money, the assessable value shall be gross amount charged by the service provider for such service provided by him. TheTribunalinthecaseofHarveen&Co.v.CommissionerofCentral Excise [2012] 48 VST 515(CESTAT New Delhi);[2011] TIOL 848(CES- TAT-Delhi) following the decision in the case of Naresh Kumar& Co. [2008] TIOL 116(CESTAT-Kolkata);[2008] 11 STR 578(Tri.-Kolkata) has heldthatifthegodownistakenonrentbytheservice provider for discharging his obligation under the contract, rent for godown will form partofthevalueevenifitisreimbursedseparatelybytheclient. Having analyzed the various decision cited on behalf of the assessee and on behalf of the Department, it would appropriate to consider the scope of the term"reimbursements" in the context of money realized by a service provider.apersonsellingthegoodstoanothercannottreatcostofraw materials or the cost of labour or other cost components for inputs services, which went into the manufacture of the said goods as reimbursements. If thebuyerentersintoacontractforsupplyofrawmaterialsafter negotiating prices from the supplier for the raw materials and the raw materials are received by the manufacturer and the manufacturer pays the amountstothesupplierofrawmaterialsandrecoversthesamefromthe buyer, it can certainly be considered as reimbursements. It is to be noted

thatinsuchacase,themanufacturerhasnoroleaboutchoosingthesource of the materials procured or the price at which the materials procured and the manufacturer is not under any legal or contractual obligation to pay the amount to the supplier. However, if the manufacturer procures raw materialsfromasourceofhischoiceatapricenegotiatedbetweenhimand supplier of the raw materials and uses the material for manufacture of the finalproductswhichhesells,thequestionofhiscollectingthecostofraw materials as reimbursement does not arise. The concept of reimbursement will arise only when the person actually paying was under no obligation to paytheamountandhepaystheamountonbehalfofthebuyerofthe goodsandrecoversthesaidamountfromthebuyerofthegoods. Similar is the situation in the transaction between a service provider and the service recipient. Only when the service recipient has an obligation legalorcontractualtopaycertainamounttoanythirdpartyandthesaid amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. For example, when rent for premises is sought to be claimed as reimbursement, it has to be seen whether there is an agreement PageNo:531 between the landlord of the premises and the service recipient and, therefore, the service recipient is under obligation for paying the rent to the landlord and that the service provider has paid the said amount on behalf of the recipient. The claim for reimbursement of salary to staff, similarly has tobeconsideredastowhetherthestaffwereactuallyemployedbythe service recipient at agreed wages and the service recipient was under obligationtopaythesalaryanditwasoutofexpediency, theprovider paid the same and sought reimbursement from the service recipient. The various circulars of the Board relied upon by the learned advocate for the assessee clearly referred to amounts payable on behalf of the service recipient. For example, the customs house agent paying the customs duty to the Customs Department, paying the charges levied by the port trust to the port trust, paying the fee for testing to the testing organization are clearly on behalf of the importer/exporter and the same are recoverable by the CHA as reimbursement, that too on actual basis. These circulars can notbeheldtobeinsupportoftheclaimoftheassessee thattheycansplit part of the amount as reimbursable expenses and the rest as towards service charges. The claim for reimbursement towards rent for premises, telephone charges, stationary charges, etc., amounts to a claim by the service provider thattheycanrendersuchservices invacuum.whatarecostsforinputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses. Thelearnedadvocatefortheassessee hasnotshownanydecision ofthe Division Bench of the Tribunal in their favour rendered after discussing the legal provisions and agreements. With the above findings on the concept of reimbursable expenses, we do not find any conflict in the decisions rendered by the co-ordinate Benches. Therefore,wereturnthefiletotheReferralBenchfordecision onthe merits after looking into account the relevant facts of the case.

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