Tribunal rules that Service tax is not leviable on expenses reimbursed by the group companies in terms of cost sharing arrangement

This Tax Alert gives an update on the decision of the CESTAT, Mumbai which deals with the issue on applicability of Service tax on cost / expenses incurred by the appellant company on cost sharing basis and reimbursed by the participating group companies (‘group companies’).

Appellant is a Guarantee Company and has entered into contractual agreements with its group companies to procure certain services on their behalf so as to share the cost amongst such companies. Such expenses were reimbursed by the group companies to the appellant on actual basis.

Tribunal held that reimbursement of cost incurred by the group companies cannot be regarded as consideration flowing to the appellant towards the taxable service provided by it. Activity of incurring cost as a service, is not in the nature of an outsourced activity, which is contemplated in the definition of ‘Business Support Services’ and hence it would not be taxable under the said category.

Appellant completely satisfies all the conditions of a ‘pure agent’ as set out in rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. Accordingly, reimbursement of expenses incurred (on cost sharing arrangement) by the appellant on behalf of the group companies is not liable to Service tax.