The Hindu Business Line : Time to pay up

It has been a trend in India to report on companies that are due to pay large amounts of service tax to the Government, irrespective of whether this non-payment was detected by the anti-evasion wing or due to sheer negligence of the assessee. The anti-evasion wing appears to have stepped on a goldmine by detecting non-payment of Rs 77 crore from nine companies, major amounts being from Coca-Cola (Rs 8.55 crore), Lufthansa (Rs 6.16 crore) and Era Infra Engineering (Rs 35 cr ore). It is apparent that most of these companies will be fighting their battles at the appellate levels.

Coca-Cola

The demand from Coca-Cola is for non-payment of service tax on reimbursement of expenses. The Department has termed out-of-pocket expenses to mean expenses over and above the contract amount, which is not inclusive of reimbursements for man and machinery supplied while providing consultancy and other services. Valuation has always been a contentious issue both under Central Excise as well as Service tax laws. The Service Tax Valuation Rules, 2005 (as amended) does not help much, apart from stating that in case there is a monetary compensation, the value would be the gross value charged inclusive of expenses.

However, the decision of CESTAT, Delhi in M/s RKBK Ltd, vs CCE, Allahabad 2008-TIOL-781-CESTAT-DEL seems to suggest that in case there is an agreement that provides for reimbursement of expenses and invoices are shown and claimed, service tax would not be leviable. The necessity to charge a service tax on reimbursement of expenses per se should be questioned. Most tax laws do provide for some deductions from the gross value — deduction for repairs on income from house property being a case in point. Since the tax is on the service, actual amounts spent to render the service that is spent and reimbursed by the service receiver could be placed outside the scope of the levy.

Lufthansa

Lufthansa got the notice for not paying service tax on the full fare received in the category “passenger embarking by air in India for an international journey in a call other than economy class”. The airline has apparently paid service tax on the basic fare and not the entire amount received. The argument here could be the same as the one for Coca-Cola since airport taxes collected go into the coffers of the airport authority. Collecting service tax only on classes other than economy puts a bit of unfairness into the levy. It would not be foolhardy to assume that Department insists that in case a passenger gets a free upgrade to business class on an international journey, he is asked to cough up the equivalent service tax amount!

Era

Era Infra Engineering topped the list since it was wrongly availing the benefit of abatement since it had not included the value of free supplies material. Entities availing abatements have never had a roller-coaster ride under Service tax since many conditions need to be fulfilled prior to availing the abatement. Coupled with all this, there have also been reports that the Department is gearing up its infrastructure to ramp up service tax collections and take it well beyond the Rs 67,000 crore it is contributing now.

Valuation rules, reimbursement of expenses and abatement continue to be contentious issues under Service tax and litigation is mounting. Measures need to be taken to simplify many of these provisions lest the Act, Rules, Valuation Rules and cases decided under Service tax would match those of the Central Excise Act which would then be too unwieldy to correct.

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