Treatment of reimbursement of expenses to service provider from service tax and Income Tax Perspective

Whenever we are appointing any professional (be it chartered accountant, lawyers, consultant etc) then in addition to payment of fees we also reimburse them expenses (like travel ticket cost, hotel bills, local conveyance etc) that has been incurred by them in the course of providing services.

A common question that arises from taxation perspective is

1) whether the service provider is required to charge service tax on such reimbursement amount (Service Tax Perspective) and

2) whether the TDS is required to be deducted on such reimbursement amount by service receiver including the amount of service tax (Income Tax Perspective).

Service Tax Perspective

Q. Whether the service provider is required to charge service tax on such reimbursement amount?

The above question from service tax perspective was examined by the Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt., Ltd Vs Union of India (2012), where the assessee has filed a writ petition before the high court for quashing the show cause notice issued by the service tax department for recovery of service tax on the amount received as reimbursement by him (assessee).

The high court decided in favour of the assessee and concluded that reimbursement of expenses received by the service provider in the course of providing taxable services can never be considered as a part of gross amount charged by the service provider for the service provided.

Against the order of Delhi High Court the service tax department has filed an appeal before the Honorable Supreme Court which is pending as on date.

In order to overcome the decision pronounced by Delhi High Court (which is pending with Supreme Court as on date), the CBEC has amended explanation to section 67 (w.e.f 14.05.2015 i.e the day on which Finance Bill has received the assent of president) as below:

“Consideration” includes:

(i) ………………….

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed.

(iii) ……………

Thus after the amendment there is no doubt that any amount received by the service provider in form of reimbursement from service recipient will form part of consideration and shall be liable to service tax.

Although payment to pure agent (like payment for stamp duty, taxes etc) will be out of the service tax net.

However the inclusion of reimbursable expenditure as consideration for the period prior to 14.05.2015 is yet to be decided by the Honorable Supreme Court.

Income Tax Perspective

Whether the TDS is required to be deducted on such reimbursement amount by service receiver including the amount of service tax ?

Case	Billing procedure	TDS applicability
1	Same bill consist of fees as well as reimbursement amount	TDS need to be deducted on whole amount including reimbursement (Circular No. 715 dated 08/08/1995)
2	Separate bills are raised for fees and reimbursement amount	TDS need to be deducted only on amount of fees and no TDS on reimbursement (Circular No. 720 dated 30/8/1995 )

As far as TDS on service tax part is concerned via CBDT Circular No. 1/2014 in F. No.275/59/2012-IT(B), Dated: January 13, 2014 it has been clarified that no TDS need to be deducted on the service tax portion of the bill provided the amount of service tax has been shown separately in the bill.