Service Tax on Reimbursable Expenses: What CESTAT Ruled
When can a reimbursed cost be taxed as a service?
This was the core issue in a recent CESTAT case that offered much-needed clarity for taxpayers facing service tax disputes.
Background of the Dispute
- The taxpayer was a service provider who charged clients for actual expenses (like travel, conveyance, etc.) in addition to service fees.
- The Department raised a demand, alleging that these reimbursable expenses formed part of the taxable value under Section 67 of the Finance Act, 1994.
- The matter reached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).
🔍 CESTAT’s Key Observations
Here’s what the Tribunal said:
| Legal Provision | Tribunal View |
|---|---|
| Section 67 of Finance Act, 1994 | Taxable value must be for the service provided – not pure reimbursements. |
| Valuation Rules, 2006 | Only when expenses are part of service consideration can they be taxed. |
| Accounting Entries | Merely booking expenses or accounting entries does not trigger tax. |
| Reimbursement Bills | If bills/invoices show actual recovery from client without markup, not taxable. |
Expert View: How This Helps Service Providers
“Many genuine reimbursements were being wrongly taxed. This judgment offers a defensible precedent for service providers facing scrutiny,”
Key Takeaways for Indian Businesses
- Document everything clearly – invoices should separate service charges and reimbursements.
- No markup = no tax – If you’re not profiting from an expense, it’s unlikely to be taxable.
- Case law support – Use this CESTAT ruling if you’re contesting demands on reimbursed costs.
- Accounting entries ≠taxable service – Mere debit or credit in books doesn’t invite service tax.
Legal Reference
- Case Source: TaxManagementIndia.com Summary
- Finance Act, 1994 – cbic.gov.in
- Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 (Now rescinded post-GST)
FAQ – Service Tax on Reimbursed Expenses
Q1. Is GST applicable on reimbursed expenses now?
Yes, but only if the reimbursement is part of a composite supply or not excluded by contract.
Q2. Can I still use this ruling post-GST?
Yes, for pre-GST disputes or audits. The principle still helps in valuation matters under GST too.
Q3. What if my client insists I include everything in one invoice?
You must separate reimbursable costs clearly and support with bills, else risk tax exposure.
Final Word
This CESTAT ruling on service tax on reimbursable expenses protects genuine service providers from unfair tax demands.
CESTAT ruled that service tax is not applicable on actual reimbursed expenses without markup. This protects service providers from unfair tax demands under Finance Act, 1994.