The Hindu Business Line : Out-of-pocket outgoings

FUNDAMENTALLY, reimbursement of expenses cannot be considered a business receipt, and incurring expenses on behalf of the client does not, and cannot, involve any rendering of service.

The expenses generally claimed as `reimbursement' are: Employee salary; staff incentives; staff costs (salary, and so on); photocopying, scanning and courier charges; travelling, lodging and boarding expenses; stationery; rent; and telephone expenses.

An important aspect to be considered is that the expenses claimed should have been incurred on behalf of the customer or client.

The expenses should be such that they can be classified as reimbursable. No definition is provided as to what constitutes reimbursable expense. A test which can be used is to ascertain whose is the actual liability for the expenditure. If it is that of the customer/client and if the expenses are reimbursed, then they can be said to be reimbursable. However, if the liability is that of the service provider, it cannot be termed as reimbursable expense.

Referring to Trade Notice No. 39-CE (ST -39)/97 of June 11, 1997, issued by the New Delhi Commissionerate, the Department has been more specific in the case of steamer agents, with regard to which it said that service charges will constitute the husbandry fee and agency commission on import-export cargo. Steamer agents pay certain statutory levies or port dues on behalf of their clients.

Certain other expenses, such as pilotage and berth charges, cargo expenses paid to the port authorities, ship handling expenses paid to stevedoring agents and so on, are also incurred on behalf of their clients. These expenses, which the shipping line reimburse the steamer agent, will not be subject to service tax. In the case of consulting engineering service, deduction is permitted in respect of reimbursement of expenses. If the consulting engineer bills his client on a lump-sum basis, deduction can be claimed on the basis of documentary evidence produced. (CBE&C circular No B 43/5/97-TRU dated July 2, 1997).

The Circular states that service tax on consulting engineer shall be on the gross amount charged to the client for services rendered in relation to the recruitment of manpower, excluding the amount incurred by the manpower recruitment agency on behalf of the client towards expenses which are reimbursed on actual basis.

In Trade Notice TN8/98-ST of October 13, 1998, issued by Pune I Commissionerate, the Department clarified that out-of-pocket expenses such as travelling, boarding and lodging on reimbursable basis are not subject to service tax.

The assessee will have to produce documentary evidence substantiating his claim from the gross amount. It is clarified that this is applicable in the case of all services.

The clarification given by the Mumbai Commissionerate vide Trade Notice No. 7/98-ST of October 13, 1998, in respect of reimbursement of out-of-pocket expenses in relation to a market research agency's services reads thus:

"Another concern that has been raised is whether service tax is payable on the reimbursable/out-of-pocket expenses charged to the client on actual basis. As regards charges billed to the client on account of out-of-pocket expenses which are reimbursable on actual basis, such as travelling, boarding and lodging expenses, is concerned, the same are not subject to service tax... the assessee may be required by the Commissioner of Central Excise to provide documentary evidence substantiating his claim for abatement from the gross amount received from the client from services rendered.

"Similar dispensation in respect of reimbursable/out-of-pocket expenses charged to the client on actual basis is also available in respect of other services."

Thus, the benefit of excluding out-of-pocket expenses from the value of taxable service is and should be admissible to all the service providers, subject to the satisfaction of the following conditions:

expenditure must first have been incurred by the service provider;

such expenditure must have been incurred on behalf of the client, customer, and so on.

the expenditure actually incurred (and nothing more) must have been reimbursed by the service receiver.

There should be documentary evidence in support of such actual reimbursement, subject to satisfaction of the assessing officer.

However, in the absence of express clarification, grey areas exist and the actions of revenue officers will not be uniform across the country.

If all the expenses reimbursed have been first incurred by assessee on behalf of the client and then, these expenses are reimbursed on actual basis for which assessees have sufficient documentary evidence in support of such actual reimbursement.

The same does not contain any margin or element of profit or value of service. Therefore, such expenses cannot be included in the value of taxable service, since no service element is involved.

The value of services may be indicated in the agreement and on which service tax may be paid.

(The author is a Jaipur-based chartered accountant.)