The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that reimbursed insurance premium and workmen compensation expenses incurred by a service provider on behalf of its client cannot be included in the taxable value of services for the purpose of levy of service tax. 

Relying on the Supreme Court’s landmark ruling in Intercontinental Consultants and Technocrats Pvt. Ltd., the bench of  Justice S. S. Garg (Member Judicial) and P. Anjani Kumar (Member Technical) set aside the service tax demands, interest and penalties raised against two assessees. 

The appellant/assessee has filed the appeal against separate orders passed by the Commissioner (Appeals), Central Excise & Service Tax, Chandigarh, which had upheld service tax demands along with interest and penalties.

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The dispute related to the period 2007-08 to 2010-11. During departmental audit, it was alleged that the appellants, who were engaged in providing Packaging Services and Manpower Recruitment or Supply Agency Services to ACC’s Gagal Cement Works at Barmana, Himachal Pradesh, had failed to pay service tax on amounts reimbursed by the principal towards insurance premium and workmen compensation expenses incurred on its behalf.

Show cause notices dated 24 February 2012 were issued invoking the extended period of limitation. The adjudicating authority confirmed part of the demand, which was later affirmed by the Commissioner (Appeals), prompting the assessees to approach the Tribunal. 

The appellants contended that the disputed amounts were merely reimbursements of expenses incurred on behalf of the service recipient and did not constitute consideration for the taxable services rendered.

The appellant argued that Section 67 of the Finance Act, 1994 permits levy of service tax only on the consideration charged for the taxable service. Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which sought to include reimbursable expenditure in the value of taxable services, had already been declared ultra vires by the Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India. The Supreme Court subsequently affirmed the Delhi High Court’s decision, making the legal position final. For the later period (2011-12 to 2013-14), the Commissioner (Appeals) had already dropped identical demands against them, and that order had attained finality as it was not challenged by the department. The invocation of the extended limitation period was also illegal because there was no suppression, fraud or wilful misstatement. The dispute was purely interpretational, and regular returns had been filed before the department. 

The Tribunal identified the sole issue as whether insurance premium and workmen compensation charges reimbursed by the principal formed part of the gross taxable value under Section 67 read with Rule 5(1) of the Valuation Rules, 2006.

The Bench noted that Rule 5(1), which mandated inclusion of expenditure incurred by the service provider while providing taxable services, had already been declared ultra vires Sections 66 and 67 of the Finance Act, 1994 by the Delhi High Court. That judgment had subsequently been affirmed by the Supreme Court.

Referring to the Supreme Court’s observations, the Tribunal reiterated that only the consideration charged for providing the taxable service itself can be subjected to service tax. Any amount recovered for purposes other than the taxable service cannot be included in the assessable value.

Accordingly, the Tribunal held that reimbursed insurance and workmen compensation expenses could not be treated as part of the value of taxable services, rendering the department’s valuation unsustainable. 

Apart from deciding the issue on merits, the Tribunal also rejected the department’s invocation of the extended limitation period.

It observed that the Revenue had failed to establish any ingredients such as fraud, suppression of facts or wilful misstatement that are mandatory for invoking the extended period. Consequently, the Tribunal held that the demand relating to the period prior to 30 September 2010 was also barred by limitation. 

Allowing both appeals, the Tribunal set aside the impugned orders in their entirety.

It held that the reimbursed insurance premium and workmen compensation expenses cannot be included in the taxable value of services. Rule 5(1) of the Valuation Rules cannot override Section 67 of the Finance Act. The extended period of limitation was wrongly invoked. The assessees were entitled to consequential relief in accordance with law. 

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