JANUARY 27, 2020

By CA Nikhil Agarwal, Senior Associate, Lakshmikumaran & Sridharan

DIVERGENT  decisions from Authority for Advance Rulings (AAR) on the taxability of reimbursement of expenses have thrown the industry into a conundrum. These rulings have added to the confusion, prompting to represent before the government seeking clarification on the issues grappling the industry.

In this article, I intend to highlight GST implication on reimbursement of expenses under GST laws.

The GST Advance Ruling in the State of Maharashtra for the applicant M/s. Maansmarine Cargo International LLP - 2019-TIOL-298-AAR-GST on the issue whether GST is applicable on the reimbursement of expenses relating to salaries of employees, rent of office expenses, other office expenses, travel and hotel stay expenses of employees by their related entity on actual basis has held that such reimbursement is nothing but additional consideration charged for the supply and therefore, GST is applicable.

While for the applicant M/s. DRS Marine Services Private Limited - 2018-TIOL-304-AAR-GST the GST Advance Ruling in the State of Maharashtra on the issue of reimbursement of salary by the applicant paid on behalf of foreign entity, it ruled that the applicant will be acting as a pure agent of foreign entity in as much as the entire amount received by them will be disbursed and therefore, applicant will not be liable to pay GST on salary amount reimbursed by foreign entity.

While in another GST Advance Ruling given by Authority in the State of Rajasthan, for the applicant M/s. Habufa Meubelen B.V. - 2018-TIOL-97-AAR-GST, authority ruled that reimbursement of expenses and salary paid by applicant's related entity to the liaison office established in India is not liable to GST.

Meaning of word reimbursement

The term reimbursement is not defined in the GST laws although references to the term can be found under the concept of 'pure agent'. The term reimbursement  comes from the Latin root, wherein the words  re, means again;  in, means into; and  bursa, meanspurse. So, the word  reimbursement literally means into a purse again. The term has been defined in various dictionaries, as given below:

-  Black's Law Dictionary, Sixth Edition defines the expression 'reimburse' to mean " To pay back, to make restoration, to repay that expended; to indemnify, or make whole."

-  In P. Ramanath Aiyer's The Law Lexicon, 2nd Edition at page 1641, the meaning of the expression 'reimburse' has been defined as " To reimburse is to pay back, and this primary meaning to the word is to be imputed to it, where the meaning is not controlled by context or contract stipulations."

In the case of Tata Iron and Steel Co. Ltd. v. Union of India, [MANU/SC/0745/2000], the Honourable Supreme Court interpreted the words "reimbursed to the exporter" in the context of the International Price Reimbursement Scheme. The Supreme Court held as follows:

In common acceptation, the word "reimburse" means and implies "to pay back or refund": As a matter of fact, it denotes restoration of something paid in excess; as regards the Respondent Union of India it cannot but mean to indemnify having regard to the common grammatical meaning of the word "reimbursement". Reimbursement has to mean and imply restoration of an equivalent for something paid or expended. Reimbursement presupposes previous payment.

It is clear from the above dictionary meanings and the judicial pronouncement that the term reimbursement means repayment or refund of money which has been already spent. With this background, let us explore the provisions under the GST laws and analyse the tax implications arising out of reimbursement of expenditure.

Pure reimbursement

When a person incurs certain expenditure on behalf of another person and claims reimbursement of such expenditure without adding any margin, then the same can be regarded as pure reimbursement. A typical example of pure reimbursement is where an employee of a company books a flight ticket for travelling for a business meeting and claims reimbursement of the expenses incurred to book such ticket, from the company.

Whether reimbursement is a supply?

As per Section 7 of the CGST Act, 'supply' inter alia includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person, in the course or furtherance of business. The term 'supply' also includes transaction in goods or services between related persons or distinct persons, whether or not for a consideration.

It would be relevant to note that the scope of supply includes supply of goods or services in different forms viz; sale, transfer, barter, exchange, license, rental, lease or disposal, made or agreed to be made for a consideration by a person in the course or furtherance of business.

While "goods" have been defined in terms of Section 2(52) of the CGST Act to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

In terms of Section 2(102) of the CGST Act "services" is defined to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Reimbursements can be made, subject to tax only if it can be established that these are made towards provision of goods or services. Moreover, reimbursements should qualify as a consideration, i.e. the payment should be in respect of, in response to or for inducement of supply in a contractual framework. Therefore, it can be said that reimbursement will be subject to tax only if the payment has been made in exchange for provision of supply of goods or services.

Inclusion of amount of reimbursement in the value of supply

In terms of Section 15(1) of the CGST Act the value of taxable supply is the transaction value (i.e., price paid or payable) provided, the supplier and recipient are not related persons and price is the sole consideration for the supply.

Section 15(2)(c) of the CGST Act provides for inclusion of incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services

In view of the above provision, any incidental expenses incurred by the supplier for provision of goods or services is required to be included in the value of supply. A typical example of this scenario would be where a Chartered Accountant incurs some expenditure in course of provision of service and claims reimbursement of expenses incurred by him from his client. In such scenario reimbursement of expenses claimed by a Chartered Accountant is required to be included in the value of supply for provision of services to the client and such value should be subject to tax.

Whether reimbursement is a transaction in money?

It can be seen that the word 'money' is excluded from the definition of "Goods" and "Services". The word "Money" has been defined under Section 2(75) of the CGST Act to mean "the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value."

As discussed supra, reimbursement is repayment or refund of 'money' which has already been spent. Therefore, it can be said that mere repayment of 'money' is neither supply of good nor services. What therefore follows is that 'pure reimbursement' cannot be considered as supply under the GST laws. It may however be noted that the Departmental Authorities may take entirely a different view and consider pure reimbursement as supply of service considering the fact that the scope of supply and the definition of service is very wide.

Parting Remarks

An early clarification from the Government with regard to GST implication on reimbursement of expenditure would give a sigh of relief to the tax payers. The trade and industry can also make appropriate representation to the Government seeking clarification on the applicability of GST on reimbursement of expenditure so that conundrum of reimbursement is put to rest in peace !

(The views expressed in this article are strictly personal.)