Union of India & ANR. Vs M/s Intercontinental Consultants and Technocrats Ltd. (Supreme Court of India)The issue of taxability of out-of-pocket expenses has always been a matter of litigation. Before April, 2006 there was no specific provision to this effect. However, from April 19, 2006 onwards, with the introduction of the Service Tax (Determination of Value) Rules, 2006, (“the Valuation Rules”) Service tax is applicable on gross consideration including all expenses barring the expenses incurred as pure agent.
The matter of taxability of such expenses, which is reimbursed by the service recipient, came before various Courts from time to time.With the landmark judgment in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India [2013 (29) S.T.R. 9 (Del.)] (“Intercontinental Case”), the Hon’ble High Court of Delhi declared Rule 5(1) of the Service Tax Valuation Rules as ultra vires of erstwhile Section 66 and Section 67 of the Finance Act, 1994 (“the Finance Act”).
The Hon’ble High Court of Delhi, while allowing the Writ Petition, observed that Rule 5(1) of the Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging Service tax is ultra vires erstwhile Section 66 and Section 67 of the Finance Act and travels much beyond the scope of those sections. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him.
Thus, the Intercontinental Case had laid down clearly that a Rule can never exceed or go beyond the Section which provides for the chargeability of Service tax, thus Rule 5(1) of the Valuation Rules was held ultra vires erstwhile Section 66 and Section 67 of the Finance Act. At the same time, it had also laid down that Service tax is not exigible on reimbursements of expenses claimed on actual basis by service provider.
However, being aggrieved by the decision of the Hon’ble High Court of Delhi in the Intercontinental Case, the Department filed a Petition for special leave to appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court granted leave to appeal and petition was converted into civil appeal in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [(2014)49 taxmann.com 520 (SC)].
Now, with another landmark judgment, the Hon’ble Supreme Court of India in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [TS-72-SC-2018-ST], has upheld the decision of the Hon’ble Delhi High Court in Intercontinental case while dismissing the Revenue’s appeal. Further, while noting the amendment to Section 67 vide the Finance Act, 2015, whereby clause (a) which deals with ‘consideration’ was suitably amended to include reimbursable expenditure or cost, The Hon’ble Supreme Court has categorically held that only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost willform part of valuation of taxable services for charging of Service tax.
Important excerpts from the judgment of the Hon’ble Supreme Court:
We are summarising the important excerpts from the judgment of the Hon’ble Supreme Court, for your easy digest:
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