Service Tax on Reimbursable Expenses and Accounting Entries Held Unsustainable: CESTAT Chennai in Sindhu Cargo Services Pvt. Ltd. vs Commissioner of CGST & Service Tax

1. Background and Nature of the Dispute

The CESTAT Chennai, vide Final Order Nos. 40490–40491/2025 dated 2 May 2025, decided two appeals filed by Sindhu Cargo Services Pvt. Ltd. against Order-in-Appeal No. 106/2015 (STA-I) dated 20 April 2015, which had upheld Orders-in-Original Nos. 11 and 12/2011 dated 31 January 2011. The proceedings before the Tribunal concerned service tax demands raised under two categories — Customs House Agent (CHA) Services and Business Auxiliary Services — covering financial years 2007-08 and 2008-09.

The appellant was a registered service provider under three categories: Customs House Agent service, Steamer Agent Service, and Business Auxiliary Service. The Department initiated the proceedings after scrutinising the appellant's trial balance, schedules, and records of reimbursable expenses and commission receipts. Two show cause notices were issued — SCN No. 84/2009 dated 25 March 2009 for the period 2007-08, and SCN No. 396/2009 dated 17 September 2009 for the period 2008-09.

2. The Department's Case and the Demands Raised

(i) Inclusion of Reimbursable Expenses in Taxable Value

The Department's position rested on Section 67(1) of the Finance Act, 1994, which provides that where a service is rendered for a money consideration, the taxable value is the gross amount charged by the service provider. Read alongside Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, the Department contended that all expenditure or costs incurred by the service provider in the course of providing taxable services must be treated as part of the consideration and included in the taxable value.

During scrutiny, it emerged that while computing the taxable value for CHA services, the appellant had excluded amounts paid to third parties and to the customs department — specifically, unloading charges, fumigation charges, harbour dues, documentation processing charges, vehicle charges, delivery order charges, and transportation charges — on the ground that these were recovered from clients on an actual cost basis and did not form part of the service consideration.

The Department held that the appellant had not established that it acted as a "pure agent" within the meaning of Rule 5(2) of the Valuation Rules read with Explanation 1 thereto. Since the pure agent conditions were not satisfied, the reimbursements were treated as costs forming part of the taxable value under Section 67 read with Rule 5(1), and service tax was demanded accordingly. Extended period of limitation was invoked under the first show cause notice on the ground that the receipt of such amounts was not disclosed in service tax returns or otherwise, amounting to suppression with intent to evade payment of duty.

(ii) Demand Under Business Auxiliary Services

The Department also sought to levy service tax under Business Auxiliary Services on receipts recorded in the appellant's profit and loss account under the headings of profit sharing, commission, and incentives. The Department proceeded on the basis that these amounts empirically represented consideration received for sales promotion activities, which fell within the scope of Business Auxiliary Services.

The adjudicating authority confirmed both sets of demands along with interest and imposed penalties under Section 76 and Section 78 of the Finance Act, 1994. The Commissioner (Appeals) upheld the orders, rejecting the chartered accountant's certificate produced by the appellant certifying that clients had been billed only the actual amounts, along with the bill-wise breakup of income and corresponding expenditure.

3. The Appellant's Contentions

The appellant, represented by Ms. Radhika Chandrashekar, submitted that service tax had been duly discharged on the actual consideration received for CHA services. The reimbursed amounts — paid to third parties and to the customs department — were not a component of the service consideration; they were pass-through costs recovered at actuals. No service tax liability could arise on such reimbursements because they did not constitute consideration for any service rendered by the appellant.