Valuation of services has emerged as a moot point under GST Regulations. Under the erstwhile Service Tax regime the value of servicewas determined as the gross amount charged for the supply of service. Section 67 of the Finance Act, 1994 provided for 'valuation of taxable services for charging service tax' and formed the basis of dispute before the Supreme Court in the case of UOI &Anr. V. M/S Intercontinental Consultants & Technocrats Pvt Ltd. (decided on March 07th, 2018).
In this case, the Respondent was rendering 'consulting engineering services' in respect of highway projects to the National Highway Authority of India (NHAI). Besides payment for services, the Respondent was being reimbursed by NHAI for expenses incurred by it in the course of such services. These expenses were in the nature of air travel, hotel stay etc.
The question of law involved was whether the reimbursement of expenses incurred by the service provider would be included in the total value of service for the purpose of charging service tax? Since these expenses did not represent the actual value of service provided, the Respondent contended that they do not form part of the service and thus be excluded from the value of supply.
The Supreme Court held that 'out of pocket expenses' cannot be included in the total value of such service and thus are not chargeable to service tax. The SC upheld the decision of the Delhi High Court which stated that under the mandate of Section 66 & 67 of the Finance Act, 1994, value of taxable service shall be the 'gross amount charged' by the supplier/service provider "for such service" and the valuation of service for tax purposes cannot be anything more or less than the consideration paid for rendering such a service. Therefore, the ruling was in favour of the respondent.
However, with effect from May 14th, 2015, Section 67 was amended and since then the term 'consideration' provided under Section 67 specifically includes 'reimbursable expenses or costs incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service'.
Position under GST Regulations
Valuation rules under GST cover a wider ambit compared to Service Tax regime. Value of supply of goods or services under GST has to be determined in accordance with Section 15 of the Central Goods and Services Tax Act, 2017 ('CGST') and the rules provided there under.
Section 15(2)(c) of the CGST states that value of supply shall include:
"Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect ofthe supply of goods or services or both at the time of, or before delivery of goods or supply of services"
The term 'incidental expenses' though not been defined under GST Regulations is expected to cover all such expenses which are incurred by the supplier while providing goods or supplying services. Further, the term 'consideration' has also been broadly defined under Section 2(31) of the CGST and specifically includes the monetary value of any act in respect of the supply of goods or services, whether by the recipient or by any other person.
Exception of Pure Agent
It has to be noted that the expenses incurred by a person as 'pure agent' cannot be included in the value of supply by considering them to be 'incidental expenses'. A pure agent is also reimbursed for expenses incurred by him in connection to the supply of service. However, a pure agent does not add to such expenses any additional value on account of service provided by him. Neither does he intend to hold any title to the goods or services procured or supplied. These expenses are merely incurred on behalf of the service recipient and are claimed at actual.
Thus, unlike the service tax regime GST law does not specifically include the term 'reimbursable expenses' in the valuation provision. However (subject to the exception of pure agent) it appears that the inclusive nature of the provision enlarges its scope to cover each such expense that is charged by the supplier of goods or services in relation to the transaction.
Originally published October 2018
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