Reimbursed Staff Expenses Not Taxable: CESTAT

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of over Rs. 6.6 lakh holding that reimbursed expenses received from a client cannot be included in the taxable value for service tax purposes. The Bench of M. Ajit Kumar (Technical Member) and Ajayan T.V (Judicial Member) has observed that the show cause notice itself acknowledged that the disputed amounts were reimbursements. The entire demand was premised on Rule 5 of the Valuation Rules, which has since been struck down by the Supreme Court. Once the legal basis for including reimbursed expenses fails, the service tax demand cannot survive. The appellant/assessee, Translanka Air Travels (P) Ltd., registered under the categories of Airport Services and Air Travel Agent Services, had entered into an agreement with Sri Lankan Airlines Private Limited (SAPL) in December 2003. Under the agreement, Translanka was required to recruit and provide staff in various categories as per SAPL’s operational requirements. The appellant received a fixed service fee per employee, on which service tax was duly paid; and reimbursement of actual expenses such as salary, house rent allowance, conveyance, provident fund and other statutory payments, without any markup. During the audit, the Department took the view that the activity amounted to “Manpower Recruitment and Supply Agency Service” and that service tax should be levied on the entire amount received, including reimbursed expenses. A show cause notice issued in April 2010 demanded service tax of ₹6,60,631, invoking the extended period of limitation and proposing penalties. The demand was confirmed by the adjudicating authority and later upheld by the Commissioner (Appeals), prompting Translanka to approach the Tribunal. The core issue before the Tribunal was whether expenses reimbursed on an actual basis by the service recipient could be included in the “gross value” of taxable services under Section 67 of the Finance Act, 1994, read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006. Allowing the appeal, the CESTAT held that the demand was legally unsustainable. The Tribunal relied heavily on the Supreme Court’s landmark ruling in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., which affirmed that Rule 5(1) of the Valuation Rules, 2006 is ultra vires Sections 66 and 67 of the Finance Act insofar as it seeks to include reimbursed expenses in the taxable value. The Tribunal also referred to CBEC Circular No. B/43/5/97-TRU dated 02.07.1997 and Trade Notice No. 53-CE (ST)/97 dated 04.07.1997, which clarified that expenses incurred by a service provider on behalf of a client and reimbursed on an actual basis are excludable from the taxable value. In light of these clarifications, the Tribunal held that no mala fide intent or suppression of facts could be attributed to the appellant. CESTAT further ruled that the extended period of limitation was wrongly invoked, noting that the Department had already issued multiple show cause notices for the same period on different grounds. Relying on its earlier decision in Paro Food Products v. CCE, the Tribunal reiterated that the Department cannot initiate successive proceedings for the same period on different grounds, as this would be against public policy. There was no evidence of wilful suppression or misstatement with intent to evade tax. Consequently, the penalty under Section 78 and the demand for interest were also set aside. Setting aside the Order-in-Appeal dated 1 April 2015, the Tribunal allowed the appeal filed by Translanka Air Travels (P) Ltd. with consequential reliefs. Case Details Case Title: Translanka Air Travels (P) Ltd. Versus Commissioner of GST and Central Excise Case No.: Service Tax Appeal No. 41993 of 2015 Date: 03.02.2026 Counsel For Appellant: Radhika Chandra Sekhar, Advocate Counsel For Respondent: M. Selvakumar, Authorised Representative Click Here To Read Order Read More: Ahmedabad Customs Seize Rs. 1.52 Crore Gold Smuggled by Women at Airport

Reimbursed Staff Expenses Not Taxable: CESTAT

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