Inclusion and Exclusion in Service Tax

  • Reimbursement of expenses or ‘Out of pocket’ expenses-

The service provider often claims reimbursement of certain expenses incurred by him (like travelling, boarding
and lodging, etc.) while providing a taxable service. These are often termed as ‘out of pocket’ expenses. These
are really charges for taxable services and are includible.

  • Reimbursement of expenses incurred on behalf of service receiver not includible –

Often, a service provider incurs some expenditure on behalf of service receiver and then recovers the amount from him. Such expenditure is not part of service provided by him to service receiver, but is incurred by him as per business practice or convenience. Following illustrations may clarify the provisions –
• Octroi/entry tax amount paid by Clearing & Forwarding Agent, CHA or Transporter on behalf of owner of goods/Principal.
• Customs duty, dock dues, demurrage, transport charges etc. paid by Customs House Agent on behalf of
client.                                                                                                                                                                                                   • Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
• Ticket charges paid by Travel Agent and recovered from his customer.
• Reimbursement of godown, salary and loading/unloading expenses by Principal to C & F Agent.

These are not part of service provided and hence are not includible. Rule 5(2) provides that the expenditure or
costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfils prescribed conditions.
The principle is also discernible from various exclusions as contained in rule 6(2).

  • Valuation in case of indivisible contracts-

In case of indivisible contracts involving sale of goods plus provision of service, it is difficult to identify service
In Bhatat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 282 ITR 273 = 3 VST 95 = 145 STC 91 = 3 STT 245 = AIR 2006 SC 1383 (SC 3 member bench), it has been clearly held that price of goods cannot be included in value of services.
In Imagic Creative Pvt. Ltd. v. CCT (2008) 2 SCC 614 = 12 STT 392 = 12 VST 371 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive. In case of a composite contract, Vat cannot be imposed on portion relating to value of service.As an obvious corollary, service tax cannot be imposed on value of material.

  • Exclusion of value of material –

Notification No. 12/2003-ST dated 20-6-2003 provides that if the amount charged includes value of goods and materials sold, service tax will not be payable on value of goods and materials sold. There should be documentary evidence showing value of goods and materials sold. This exemption is available only if Cenvat credit of such material is not taken. If such credit was taken, assessee should pay amount equal to the credit. Such payment should be before sale of such goods and materials. Many exemption notifications provide that exclusion under notification 12/2003-ST is allowable only when the service tax is paid at full rate and any abatement under any other exemption notification is not claimed. Hence, in such cases, notification No. 12/2003-ST is of no use.
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 282 ITR 273 = 3 VST 95 = 145 STC 91 = 3 STT 245 = AIR 2006 SC 1383 = 2 STR 161 (SC 3 member bench), it has been clearly held that price of goods cannot be included in value of services. Conclusion (E) of the judgment (para 92 of SCC and para 81 of STT and Taxman) reads as follows, ‘The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service’.

  • All expenditure and costs relating to provision of service incurred by service provider are includible-

Rule 5(1) provides that where certain expenditure or costs are incurred by the service provider in the course
of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable
services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on
the said service.
This is a general rule which makes it clear that, even when such expenditure or costs are recovered separately
by service provider from service receiver, such expenditure or costs must be included in the value of taxable
However, expenditure incurred by service provider as ‘pure agent’ of service receiver is not includible, as per
rule 5(2).



Leave a Reply