Top Stories Reimbursements collected by Customs House Agents do not qualify as Taxable Service Income: CESTAT [Read Order] CESTAT observed that the appellant was not liable to pay service tax on reimbursed expenses since they were operating as a pure agent, and the charges collected merely covered the actual expenses paid to third-party service providers By Varda Marakkar – On November 4, 2024 10:48 am – 3 mins read In a recent judgment the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) in Ahmedabad ruled that reimbursements collected by customs house agents (CHAs) do not qualify as taxable service income. The dispute is between the appellant AK Biswas Logistics,  a logistics company, acting as a CHA, and the Commissioner of Service Tax, Ahmedabad, over whether reimbursements received by the agent from its clients for services provided on their behalf should be subject to service tax.

The appellant, a registered customs house agent, issued two types of invoices in the course of its business: one set for its own CHA service fees and another for expenses incurred on behalf of clients, such as transportation and space booking on vessels. Although the company paid service tax on the CHA service charges, it did not apply service tax to the reimbursements collected, arguing that these were purely reimbursements for costs paid to third-party service providers. However, the Commissioner of Service Tax issued show-cause notices, asserting that service tax should also apply to the reimbursed expenses, considering the mark-up charged by the CHA on these amounts as part of its taxable revenue. Get a Copy of The Future of Tax and Finance: Upskill with Us, Click here The tribunal reviewed the matter in light of established case law.

Citing previous Supreme Court and CESTAT rulings, the appellant-company’s counsel argued that the reimbursements were not part of the CHA’s taxable income, as they simply covered actual costs rather than generating additional profit. Important precedents included Intercontinental Consultancy and Technocrats Pvt. Ltd., a Supreme Court case that defined the concept of “pure agents,” and Tiger Logistics India Ltd., where it was established that margins collected on shipping expenses did not constitute taxable income under Business Auxiliary Services. The Tribunal in Ahmedabad also referenced the recent CESTAT decisions in Chinubhai & Kalidas Brothers and Balmer Lawrie & Co. Ltd., which reinforced the interpretation that reimbursements collected by CHAs, if merely covering actual costs, do not fall under the scope of taxable service income. The counsel for the appellant argued that these reimbursements represented expenses paid to third-party service providers on behalf of the appellant’s clients, including charges like transportation and space booking on ocean vessels. Since the appellant had already paid service tax to the original service providers, applying additional service tax on reimbursements collected would amount to double taxation, the counsel argued. The Department’s position was that any mark-up added to the reimbursed expenses should be considered part of the appellant’s taxable service income. Get a Copy of The Future of Tax and Finance: Upskill with Us, Click here

However, the tribunal bench of Mr Ramesh Nair and Mr CL Malhar  found that these mark-ups were minimal and did not alter the fundamental nature of the transactions as reimbursements. Following its review, the CESTAT held that such reimbursements did not constitute taxable revenue under the Business Auxiliary Services category, in line with established judicial precedent. The Tribunal observed that the CHA acted as a “pure agent,” merely passing along the cost of services arranged on behalf of its clients. Thus, CESTAT observed that the appellant was not liable to pay service tax on reimbursed expenses since they were operating as a pure agent, and the charges collected merely covered the actual expenses paid to third-party service providers. Thus, the tribunal set aside the service tax demand on these reimbursements and ruled in favor of the CHA.