Valuation issues pertaining to Customs House Agents Service - TRU Clarifies
THE services provided by Custom House Agent were brought into the service tax net with effect from June 15, 1997. Custom House Agents Service is defined in terms of Section 65(105) (h) of the Finance Act, 1994 as any service provided or to be provided to any person, by a custom house agent in relation to the entry or departure of conveyance or the import or export of goods and the term ‘service provider' shall be construed accordingly.
While the principal job of a CHA is to undertake formalities for clearance of import or export of consignments through the Customs, they also at times arrange for services like packing, unpacking, loading, unloading, bringing or removing the goods to or from the Customs area, Vessels or Aircrafts for their customers viz., importer or exporters. These services are provided by different agencies such as Port Trust, Steamer Agents, Cargo Handlers, Warehouse-keepers, Packers, Goods Transport Agents. Normally the CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges CHAs. Similar arrangements are also undertaken for payment of statutory levies like Custom Duties, Port charges, Cesses etc leviable on the said goods.
The issue is whether the charges which are paid by the CHAs for arranging these services and later recovered from their customers (reimbursable charges) should be included in the value of taxable service for the purpose of charging service tax from CHAs. In terms of Board Circular F.No.B-43/1/97-TRU, dated 06.06.1997, Board had clarified that service tax would be charged on the ‘service charges only' and statutory levies and other reimbursable charges would not be included in the taxable value. It was also clarified that in cases where lump sum payments are made to CHAs which includes both reimbursable charges as well as service charges, service tax would be charged on 15% of such gross value.
After introduction of Service Tax (Determination of Value) Rules, 2006 with effect from April 19, 2006, all previous Circulars relating to valuation were withdrawn (Para 4.1.13 of TRU Circular F.No. B1/4/2006-TRU dated April 19, 2006). As per Rule 5(2) of Service Tax Valuation Rules, 2006, the concept of ‘pure agent' was introduced and explained (Explanation 1 thereof defines ‘pure agent'). The expenditure or costs incurred by a service provider as a ‘pure agent' of the recipient of service were allowed to be excluded from the value of taxable service subject to the conditions prescribed therein.
It was reported to the Board/TRU that disputes arose on the issue of inclusion of reimbursable charges. In this regard certain field formations have also issued communications directing that charges on certain activities undertaken by CHAs are not covered under the exclusions available to ‘pure agent'. Since divergent practices with regard to records & documentations are being followed by CHAs in relation to the services received from other service providers and their billings to the customers for such receipt of services, this has given rise to more conflict and litigation.
Refer Chennai Commissioner's letter dated 07.12.2007, covered in our -14.12.2007 – Friday.
Agitated CHAs have been representing to the Board to clarify the issue. Finally Board has clarified that the exclusion should be allowed to such charges from the taxable value of CHA services, where all the following conditions are satisfied,-
a) The activity/service for which a charge is made, should be in addition to provision of CHA service;
b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to (i) arrange for such activities/ services for the customer; and (ii) make payments to other service providers on his behalf;
c) The CHA does not use the activities/services for his own benefit or for the benefit of his other customers;
d) The CHA recovers the reimbursements on ‘actual' basis i.e. without any mark-up or margin. In case of CHA includes any mark-up or profit margin on any service, then the entire charge (and not the mark-up alone) for that particular activity/ service shall be included in the taxable value;
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided and the reimbursable amounts. It is not necessary such evidence should bear the name or address of the customer. Any other evidence like BE No./Container No./BL No./packing lists is acceptable for the establishment of such nexus. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like;
f) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice (showing the charges against each entry separately) issued by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions mentioned herein, the charges against those entries alone should be added back to the taxable value;
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable in the taxable value for the purposes of charging tax on CHA services.
The above mentioned conditions would be applicable for services provided with effect from April 19, 2006, i.e. after the introduction of the Valuation Rules. For the earlier period, the taxable value should be determined in accordance with the prevailing instructions issued by the Board i.e. Circular dated 06.06.1997. Any communication issued by any of the subordinate offices [must be referring to the Chennai Commissioner ] which are contrary to the conditions listed above, or as the case may be, the previous Board's Circulars stands superseded to the extent of the contradiction. Pending disputes may be settled in accordance with this latest Circular.
CBEC Circular No. 119/13/2009-ST Dated: December 21, 2009