CESTAT: Reimbursed Diesel Expenses on Actuals Not Taxable Under Service Tax – Penalty Reduced to 25%

In a noteworthy judgment, the Chandigarh Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) recently clarified that reimbursed diesel expenses, when paid on an actual basis, cannot be included in the assessable value for service tax purposes. The tribunal also reduced the penalty to 25% in the case of delayed payment of service tax by the appellant.

This case sheds light on how reimbursements—especially fuel and utility expenses—should be treated under service tax provisions and also provides some relief for service providers who may face similar circumstances.

⚖️ Case Background

The case was filed by TICS Projects Consultancy Pvt. Ltd., a company engaged in providing Consulting Engineering Services. For the period between April 1, 2009, and March 31, 2010, the company had not fully discharged its applicable service tax liability.

Following several reminders and official letters, the Central Excise Department requested the appellant to submit relevant financial documents such as balance sheets and ledger accounts and also demanded the outstanding service tax amount.

In response, the appellant deposited ₹44,17,569 along with applicable interest. However, the department proceeded to issue a Show Cause Notice demanding a total of ₹46,36,744 in service tax, in addition to penalties under:

• Section 78: Penalty equal to the tax amount for suppression of facts.
• Section 77: A penalty of ₹200 per day for failing to file returns.

This demand and penalty were confirmed by the Adjudicating Authority, and later upheld by the Commissioner (Appeals). Aggrieved by this, the appellant filed a second appeal before the CESTAT.

🧾 Appellant’s Arguments

The appellant, TICS Projects Consultancy Pvt. Ltd., submitted the following points in their defense:

1. Genuine Financial Difficulties: During the disputed period, the company was going through a rough financial patch. Adding to this, some senior officers who were handling tax compliance had resigned, leading to delays in tax payments.
2. Misclassification of Reimbursed Diesel Expenses: The service tax demand included ₹2,19,175, which was wrongly levied on reimbursed diesel costs. The company clarified that this diesel was used in generators (gensets) to maintain telecom towers and was not part of their service fee. These fuel expenses were reimbursed by the client on actuals, as per the service agreement.
3. Supporting Case Law: To reinforce their argument, the appellant relied on the landmark Supreme Court ruling in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. (2018), where it was held that reimbursable expenses cannot be included in the assessable value of services for service tax purposes.

🏛️ Department’s Counter-Arguments

The Revenue Department opposed the appeal with the following points:

• The payment of service tax was not voluntary, but a result of continuous follow-ups and summons.
• The appellant had collected service tax from clients but failed to deposit it with the government.
• Non-filing of service tax returns indicated non-compliance.
• Resignation of company officers did not justify or excuse the tax default.

⚖️ CESTAT’s Ruling

The CESTAT Bench, consisting of Justice S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member), analyzed the agreement between the appellant and their client. It was found that:

• The client did not pay any advance for diesel or other consumables.
• The agreement clearly stated that diesel expenses would be reimbursed on an actual basis, within 72 hours, and only after proper verification and approval.

Based on this, the tribunal concluded that such reimbursements are not liable for service tax and must be excluded from the assessable value.

🔻 Penalty Relief Granted

While upholding the liability for delayed tax payments, the CESTAT provided partial relief on the penalty front:

• The penalty under Section 78 was restricted to 25% of the tax amount, since the appellant had already deposited the tax, interest, and part of the penalty.
• This decision was also in line with the tribunal’s earlier Miscellaneous Order, acknowledging the partial compliance by the appellant.

Key Takeaways for Businesses and Taxpayers

1. Reimbursements on actuals (like fuel, travel, etc.) are not automatically taxable under service tax if supported by clear contract terms.
2. Proper documentation and agreements with clients can help protect service providers in disputes involving reimbursements.
3. While penalties for non-compliance are severe, timely cooperation and partial payment can help in getting relief on penalty amounts.
4. This ruling reinforces the significance of Supreme Court precedents in similar indirect tax matters.

Final Thoughts

This judgment provides much-needed clarity for service providers dealing with client reimbursements. It sends a strong message that not all recoveries from clients are taxable—only those directly tied to the value of taxable services.

Additionally, the reduction in penalties by the CESTAT offers hope for businesses that may have genuine difficulties in compliance but are willing to cooperate with tax authorities.

For professionals handling indirect tax matters, this case serves as a useful reference in understanding how contractual clauses, timing of payment, and intent of reimbursement can influence the taxability of a transaction.

📅 Published on: 07 July 2025
✍️ Author: CS Chhavi Goyal