The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore Bench, has held that reimbursable expenses such as workers’ wages and other employment-related benefits cannot be included in the taxable value for the levy of service tax for the period prior to the 2015 amendment to Section 67 of the Finance Act, 1994. 

The Bench of P. A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) set aside the service tax demands raised observing that the law prevailing during the disputed period did not permit taxation of reimbursable amounts. 

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The appellant/assessee was engaged in providing services falling under the category of Manpower Recruitment or Supply Agency Service and had been discharging service tax on the consideration received for the services rendered. However, the department took the view that the appellant was liable to pay service tax on the entire gross amount received from its clients, including the wages paid to workers and other employee-related benefits that were merely reimbursed by the service recipients. 

Based on this interpretation, the department issued show cause notices demanding differential service tax. The adjudicating authority confirmed the demands, and the Commissioner (Appeals) upheld the orders, holding that there was no statutory provision permitting deduction or exclusion of reimbursable expenses from the taxable value. The appellate authority also relied upon earlier Tribunal decisions supporting inclusion of such reimbursements in the assessable value. 

Before the Tribunal, the appellant argued that the controversy had already been conclusively settled by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., wherein it was categorically held that reimbursable expenses could not be included in the taxable value under Section 67 of the Finance Act, 1994, prior to its amendment in 2015. 

The appellant further pointed out that the Bangalore Bench of the Tribunal had already granted identical relief in its own earlier case concerning the period from November 2005 to March 2009 through Final Order Nos. 21765-21766/2024 dated October 16, 2024. Since the present dispute related to the subsequent period from April 1, 2009 to March 31, 2012, the same legal principle squarely applied. 

After considering the rival submissions, the Tribunal observed that the Commissioner (Appeals) had sustained the demand solely on the premise that the Finance Act did not expressly exclude reimbursable expenses from the valuation mechanism. However, the Bench noted that this legal issue was no longer open to debate following the authoritative pronouncement of the Supreme Court in Intercontinental Consultants. 

The Tribunal highlighted the Supreme Court’s ruling that prior to May 14, 2015, Section 67 did not include reimbursable expenditure within the scope of “gross amount charged” for valuation purposes. The amendment introduced by the Finance Act, 2015, which specifically brought reimbursable expenditure within the valuation provisions, constituted a substantive legislative change and therefore operated only prospectively. 

The Bench also referred to the Supreme Court’s reliance on the Constitution Bench judgment in CIT v. Vatika Township Pvt. Ltd., reaffirming the settled principle that statutes imposing new liabilities or obligations are presumed to operate prospectively unless the legislature expressly provides otherwise. 

The Tribunal further observed that it had already applied the Supreme Court’s decision in the appellant’s own earlier case involving an even earlier period. Since the present dispute also related to a period preceding the amendment to Section 67, there was no justification for taking a different view. 

The Bench concluded that the period under dispute—from April 2009 to March 2012—was entirely prior to the statutory amendment and, consequently, reimbursable expenses such as workers’ wages and other employee benefits could not be included in the taxable value for service tax purposes. 

Allowing both appeals, the Tribunal set aside the impugned orders confirming the service tax demands and granted consequential relief to the appellant in accordance with law.

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