Q.1 We are an engineering consultancy company and render such services to a variety of clients. We were under the impression that out-of-pocket expenses incurred by us towards boarding and lodging and similar costs related to travels of our engineers can be recovered by us from our clients without the levy of service tax. This is the practice that we have followed for the past several years. We are now informed that service tax is chargeable on these reimbursements and that we have to accordingly amend our invoicing pattern. We wish to know whether this is indeed correct. 
 
The Finance Act, 2006, has brought about major changes in the principles of determination of the value of taxable services. Valuation of taxable services is now governed by the newly substituted Section 67 of the Finance Act, 1994, read with the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as Valuation Rules). 
 
As per Rule 5 of the Valuation Rules, whenever any expenditure or costs are incurred by the service provider in the course of providing taxable services, all such expenditure or costs shall be treated as consideration for the taxable services so provided or to be provided and shall be included in the value for the purpose of charging service tax on the said services. 
 
This would mean that out-of-pocket expenses incurred by the service provider for the provision of services and charged to and recovered from the recipient of the services will be part of the value of taxable services and will be charged to service tax. 
 
The CBEC Instruction Letter (B1/4/2006-TRU), dated 19-04-2006, issued pursuant to the Valuation Rules, also provides that value, for the purpose of charging service tax, is the gross amount received as consideration for provision of service. All expenditure or costs incurred by the service provider in the course of providing a taxable service form an integral part of the value and are to be included therein. 
 
Several illustrations have been incorporated under the Valuation Rules to clarify the position in this regard. It is, therefore, now clear that all charges/recoveries from clients by service providers will form a part of the value of taxable services and charged to service tax. 
 
Q.2 We are a company engaged in manufacturing in India. We are a subsidiary of an overseas company for which we also carry out various sale promotion activities in relation to its products which are not manufactured by us here. For providing these services, we are compensated by way of commission, which is a specified percentage of the value of any orders that we are able to procure from customers in India. This commission is received by us from our parent company abroad in US currency. Are we liable to pay service tax in relation to these sale promotion activities or do these services constitute exports from India and are hence exempt from levy of service tax? Please advise. 
 
A It is true that if taxable services provided from India qualify as exports, they are exempt from service tax. Therefore, the services of sale promotion provided by your company would be exempt from tax if such services constitute exports under the Export of Services Rules, 2005. 
 
As sale promotion activities are covered under the taxable category of business auxiliary services, it is relevant to examine the export criteria for this category of service. Till 18-04-2006, business auxiliary services provided to a foreign recipient, which did not have an office in India, were considered as exports if the recipient was located outside India. 
 
Accordingly, there was no service tax liability on your company for these services provided till that date. However, the situation has changed thereafter, as the criteria to determine the fact of export of services have undergone changes. 
 
As per the new criteria, business auxiliary services would be considered as export from India if such services are in relation to business or commerce, the payment for the services is received in convertible foreign exchange and the services are delivered outside India and used outside India. 
 
All these conditions need to be met if such services are to qualify as exports. Although your company is in a position to satisfy the first two conditions mentioned above, the third condition, namely the delivery and use of service outside India, is not met. This is because sale promotion services are executory in nature. 
 
They are delivered at the place where the sale promotion is actually done. Therefore, such services cannot be considered as being delivered outside India. Consequently, services of sale promotion provided by your company to the parent company would not qualify as exports with effect from 19-04-2006 and your company will be liable to pay service tax thereon. 

S Madhavan
The writer is leader, indirect tax practice, PricewaterhouseCoopers