The Hindu Business Line : Consultants and litigations unabated

Since the inception of the Service Tax law, management consultants have figured prominently in cases related to the levy. The initial cases were understandable as the law was new and the eclectic nature of services provided by management consultants gave scope for interpretation issues. With the law becoming more complicated, management consultants' services are still at the top of the list of litigations. Two recent decisions confirm this.

McKinsey Case

CESTAT, Mumbai, gave a landmark decision in McKinsey and Co (MC) vs. Commissioner of Central Excise and Customs, Mumbai (2007-TIOL-583-CESTAT-MUM). The issue at dispute was the out-of-pocket expenses (OPE) incurred by MC on projects. For such projects, MC apparently incurred a lot of expenses on travelling, boarding and lodging. Abatements were allowed on these expenses as per circular issued by the CBEC vide F. No. B-II/03/98-TRU dated October 7, 1992. However, during the audit done by the revenue, MC could not produce the documentation in support of some of these claims. The Assessing Officer disallowed the entire expense.

On appeal, CESTAT held that rejecting the expenses entirely was not warranted and directed the Assessing Officer to look at the documentation and permit the abatement as per the Circular. CESTAT ruled that it has to be first established, that normally the services were required to be provided by the client and were rendered on behalf of the client as per the request and only then will the expenses be reimbursable. The distinction should be with respect to the liability of the client to incur such expenses. CESTAT sent the issue back to the Adjudicating Authority to ascertain if it was the liability of the client to provide the same.

Further, MC had bought some core documents from the head office and used services of other MC offices too for which payments had been made and this had not been passed on to the client. CESTAT ruled that the service tax had been demanded from the appellant as an agent of its principal in the US in respect of the charges paid to the Head Office and other subsidiaries. Obviously, an agent who acts on behalf of the principal cannot be charged to service tax for documents/services received from his principal as he is not rendering any service. CESTAT also defined OPE to be expenses which are sundry in nature, cannot be budgeted for and have to be incurred on the spot to meet immediate requirement and are therefore contingent in nature. These must be expenses incurred primarily by the clients and not the service provider.

DSP Merrill Lynch Case

In the case of DSP Merrill Lynch vs Commissioner of Central Excise, Mumbai (1 2007-TIOL-584-CESTAT- MUM), DSP was primarily registered as share-brokers but rendered some advisory services on mergers and acquisitions too. As it was not clear whether these services were taxable, DSP refrained from paying the Service Tax till the Board issued Circular F. No.177/2/01/CX-4 dated June 27, 2001, bringing these services under the taxable category. Litigation in abatements occur because there is no clarity as to what would be considered as reimbursable expenses. The charging Section under Service Tax defines value to be the gross amount charged to the client by the service provider. Even the Service Tax Valuation Rules provide limited guidance in this area. The definition of OPE given by CESTAT, Mumbai, could be an indicative definition. However, it would be ideal if the Service Tax Valuation Rules are amended to provide more clarity on the value of services.

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