Inclusion in or exclusion from value of certain expenditure or costs [Rule 5] :
(a) General provision: The expenditure or costs incurred by the service provider in the course of providing taxable service forms integral part of the taxable value of the service provided or to be provided. Therefore, they shall be included in the value for the purpose of charging service tax on the said service. It shall not be relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client.
This is a general rule which makes it clear that even when such expenditure or costs are recovered separately by service provider from the service receiver , the same are includible for discharging the service tax.
(b) Value of taxable service for the telecommunication service: For the telecommunication service, the value of the taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraph authority.
Hence, in case of service provided by way of recharge coupons or prepaid cards or the like, the value shall be the gross amount charged from the subscriber or the ultimate user of the service and not the amount paid by the distributor or any such intermediary to the telegraph authority.
(c) Individual components of total consideration even if indicated separately in invoice would also form part of value of taxable service: It is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.
Illustration 1 – In the course of providing a taxable service, a service provider incurs costs such as travelling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.
Illustration 2 – A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, s ervice tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.
Illustration 3 – Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the Company X.
(d) Amounts paid to the third party by the service provider as a “pure agent” of the client not to be included in the taxable value: There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases, such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as an agent, i.e. “pure agent” of the client. Amounts paid to third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and shall not be included in taxable value.
Conditions to be satisfied in this regard:- Subject to the provisions mentioned in point
(a) above, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service shall be excluded from the value of the taxable service if all the following conditions are satisfied:
(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
| “Pure agent” means a person who–
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; (b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; (c) does not use such goods or services so procured; and (d) receives only the actual amount incurred to procure such goods or services. |
Illustration – X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent on behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent.
Above illustration provides the distinction between payment made as “pure agent” and payment made as “principal”.
(e) Value of taxable service for Custom House Agent’s service: The principal job of a custom house agent (CHA) is to get the import/export consignments cleared through customs. However, at times they also provide services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers (i.e. importers or exporters). CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges. Similar arrangement can occur for payment of statutory levies like custom duties, port charges, cesses etc. leviable on the said goods.
The aforesaid reimbursable charges would be excluded from the value of taxable service if all the following conditions are satisfied, –
(i) The activity/service for which a charge is made should be in addition to provision of CHA service.
(ii) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to:-
(a) arrange for such activities/services for the customer; and
(b) make payments to other service providers on his behalf;
(iii) The CHA does not use the activities/services for his own benefit or for the benefit of his other customers;
(iv) The CHA recovers the reimbursements on „actual‟ basis i.e. without any mark -up or margin.
(v) CHA should provide evidence to prove nexus between such other than CHA services provided and the reimbursable amounts. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like.
(vi) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice.
Any other miscellaneous/out of pocket expenses charged by the CHA would not be excluded [Circular No. 119/13/2009 ST dated 21.12.2009].