The finance bill 2015 has made amendment in section 67 regarding service tax on reimbursement expenses. In this article, you can get detailed explanation about the implication of this amendment on service tax value and service tax liability.

Service tax on reimbursement of expneses – 7 important points –  budget 2015 updated:

I am receiving lots of queries about service tax value and taxability of service tax on my blog. Determination of service tax taxable value requires understanding of service tax valuation rule 67.

  1. Service tax valuation rules.
  2. What is out of pocket or reimbursement expenses?
  3. What is pure agent service?
  4. Decision of delhi high court with regards to reimbursement of expenses.
  5. Budget 2015 update about reimbursement of expenses
  6. Effect of change in budget 2015 on service tax value

Service tax valuation rules:

Chargeablitiy of service tax is determined by negative list of services and exemptions. Once the service is not in those list, service becomes taxable. Once we decide that the service is taxable. Second step is to determine value of taxable service which is based on invoice. We are required to examine various elements like cenvat credit, value of sales on which vat is levied, out of pocket expenses, amount paid as pure agent to other party and after that taxable value of service tax is determined.

I am not writing here more details about service tax valuation rules because separate article will be published on this matter.

What is out of pocket or reimbursement expenses in service tax?

Hotel expenses, travelling expenses etc which are done by service provider in the course of providing taxable services are out of pocket or reimbursement expenses.


Mr. Patel is providing  construction service. He is hired by  Mr. jay to construct his plan for Rs. 2 crore and other reimbursement expenses done by Mr. Patel will be paid extra.

Now, Mr. Patel incurs Rs. 5000 for travelling for visiting of Plant. In this case, Rs.5000 amount is out of pocket or reimbursement expense.

What is pure agent service?

People are considering reimbursement expenses and pure agent service as same. Actually it is not. It is necessary to understand concept of pure agent service in service tax to determine right value of taxable service.

Pure agent definition :

“pure agent” means a person who –

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) has not hold or has not intention to  hold any title to the goods or services so procured or provided as pure agent of the recipient of service

(c) does not use goods or services received like this

(d) receives only the actual amount incurred to procure such goods or services.


As per Rule 5(2) of the valuation rules provides that

expenditure or cost that service provider incurs , as pure agent on behalf of the client, shall be excluded from the value , if service provider fulfill  prescribed conditions.

  1. the service provider is acting as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
  2.   service receiver receives and uses the goods or services.
  3.  the service receiver is liable to make payment to the third party and not service provider. It is better to include this in agreement.
  4.  the service receiver authorizes the service provider to make payment on his behalf
  5. the service receiver knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
  6. the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;( Separate indication is necessary)
  7. the service provider recovers from the recipient of service only such amount as has been paid by him to the third party ( No additional profit should be charged ) and
  8. the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Examples of Pure agents ;

  1. Octroi or entry fees paid by C&F agent, CHA or transporter on behalf of owner of goods.
  2. Expenses incurred by C&F agent and reimbursed by principal such as freight ,labour, godown charges and loading and unloading charges.
  3. Custom duty, dock dues, transport charges paid by CHA on behalf of client.

In view of the above prospective, one must have the following arrangement ;

  1.  Contractual arrangement : this does not mean in writing as the contract act does not requires that agreement should be in writing. However it is advisable to have simple agreement for the services to be rendered as agent on behalf of the client.
  2. Disclosure to Act as agent.
  3. Break up of consideration is not relevant.
  4. Do not charge profit on the expenses you incurred as pure agent.
  5. Disclose separately in the bill that the payment is made on behalf of principal and you are working as agent.

Decision of Delhi high court with regards to reimbursement of expenses:

case : intercontinental consultants and technorats ( P.) LTD vs. Unon of india,

the petitioner 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 amount received as reimbursement of expenses such as hotel accommodation and  travelling etc. under service tax Rule 5(1) , 2006.

The Hon’ble Delhi High Court while deciding the petition held as follows:

  1.  Rule 5 (1) of the Rules is ultra vires section 66 and section 67 of the Finance Act, 1994 since it travels beyond the scope of the aforesaid sections.

  2. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as part of the gross amount charged by the service provider for the services provided.

  3. The reimbursement of expenses for air travel tickets, hotel accommodation, etc. may also lead to double taxation.

 The Delhi High Court decision was in favour of the Assesse, the department has filed an appeal to the Supreme Court against the decision of the High Court which is pending for disposal.

Budget 2015 update about reimbursement of expenses:

Budget 2015 has amended section 67  to include reimbursement of expenses in the value of taxable service.

Extract of budget 2015 speech regarding above change:

109. In section 67 of the 1994 Act, in the Explanation, for clause (a), the following clause shall be amended:

‘(a) consideration will include

  1. the amount that is payable for the taxable services provided or  which is likely to be provided
  2. any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such prescribed conditions
  3. any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission or the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.’.

You can read budget speech from this link.- budget 2015 pdf.

Effect of change in budget 2015 on service tax value:

After amendment, it is clear that reimbursement of expenses in the provision of service should be included in the total value of taxable service except it is specifically excluded.

Is it requred to include Reimbursement of expenses  in the value before the amendment? It is still dependent on hon able supreme court’s decision and it is still pending.

As service provider, you need to include reimbursement expense like accomodation charges, travelling charges etc. in bill and charge service tax to its value. However, do not include the expenses which you have incurred as pure agent.


Mr. Pranay ( CHA service provider) has charged Rs. 120000 to Mr. Janak.Components of which are

Agency income20000
Travelling expenses and accommodation charges20000
Custom duty paid60000
EDI expenses20000


In this case, value of taxable service provided is Rs. 20000+Rs. 20000 = Rs. 40000.

The components are required to shown separately in bill and indicating pure agent services.

I have tried to cover all the points regarding service tax on reimbursement expenses. Still if you have questions or views, express through comments below. Don’t forget to share this post on social media to encourage me to write more.