Reimbursable expenses incurred by a service provider on behalf of clients, recovered on an actual basis without mark-up, are not includible in the gross value of taxable service under Section 67 of the Finance Act, 1994, as Rule 5(1) of the Valuation Rules, 2006, is ultra vires the Act.

S. S. GARG :

These two appeals are filed by the Revenue against two different Orders-in-Original (‘OIOs’), dated 30.04.2012 and 30.11.2012 respectively, passed by the Commissioner of Service Tax, Delhi, whereby the learned Commissioner has dropped the demand of service tax raised in the four Show Cause Notices (‘SCNs’) for the period covering 2004-2009, 2009-2010, 2010-2011 and 01.04.2011 to 31.03.2012.

Briefly stated facts of the present case are that the Assessee Respondent, M/s Kuehne & Nagel Pvt Ltd, are a multinational corporation incorporated on 31st July, 1996 as a wholly owned subsidiary of KN Asia Pacific Holding AG Switzerland. The Respondent are registered with the Service Tax department under the centralized registration issued on 17th December, 2008. They are engaged in providing different taxable services viz. storage and warehousing, cargo handing service, business auxiliary service, intellectual property right service other than copyright, transport of goods by road service and customs house agent’s service under Section 65 of the Finance Act, 1994. They operate through a network of branches across India, while services rendered outside India are provided by the Respondent’s overseas business associates within the KN Group. During the audit conducted by the officers of the Central Excise department, Cochin, it was noticed that the Respondent had wrongly assessed the gross value of services provided by them which resulted in short payment of service tax. The Respondent acting as a Customs House Agent (‘CHA’) have provided different services to their customers. On these allegations, four SCNs were issued for the periods covering 2004-2009, 2009-2010, 2010-2011 and 01.04.2011 to 31.03.2012. The first three SCNs were adjudicated by a common OIO dated 30.04.2012 and the last SCN was adjudicated by OIO dated 30.11.2012, vide which the learned Commissioner has dropped the demand of service tax. Hence, aggrieved by the said two OIOs passed by the learned Commissioner, the Revenue has preferred these two appeals before us.

Heard both sides and perused the material on record.

The learned Special Counsel for the Revenue-Appellant submits that the impugned OIOs passed by the learned Commissioner are not sustainable in law as the same have been passed without properly appreciating the provisions of service tax applicable to CHA.

The learned Special Counsel further submits that prior to Service Tax (Determination of Value) Rules, 2006, i.e. before 18.04.2006, the value of taxable service was the gross amount charged under Section 67 of the Finance Act, 1994. He further submits that the CBEC Circular No. 43/1/97-TRU dated 06.06.1997 had already clarified that payments made by a CHA to third party on behalf of clients, for which the CHA is reimbursed, must be included when computing service tax liability. He further submits that after coming into effect from 18.04.2006, Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 mandated that any expenditure or cost incurred by the service provider in the course of providing a taxable service, shall be treated as consideration and be included in the taxable value. Therefore, service tax on CHA service must be computed on the gross service charges, regardless of the heads/nomenclature billed to the clients.

He also submits that the Respondent provided CHA service in India to overseas clients and received income collected by their overseas branch and forwarded to the Indian Office. The Respondent failed to pay service tax on this income, claiming reimbursement for “local expenses” and “overseas expenses” as non-taxable income. He further submits that as per the Revenue, the Respondent are liable to pay service tax on the amounts collected on account of the overseas billing for providing CHA service to their clients.

He also submits that the Adjudicating Authority failed to consider the CBEC Circular No. 119/13/2009-ST dated 21.12.2009 regarding service tax valuation issues