Recently, in the landmark judgment, Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., the Hon’ble Supreme Court had resolved the existing controversy regarding whether reimbursement expenses provided by the service receiver are to be included in the value of taxable service for the purposes of charging to service tax. The Supreme Court upheld the decision of the Delhi High Court and held that the reimbursement expenses do not form part of the ‘gross amount charged’ for the purposed of the value of the taxable services chargeable to service tax. Further the Hon’ble court had again reiterated the well established principle that the rules cannot go beyond the statue by holding that Rule 5 of the Service Tax (Determination of Value) Rules 2006, is ultra vires to Section 66 and Section 67 of the Finance Act, 1994.
The assessee, M/s Intercontinental Consultants and Technocrats Pvt. is a provider and is engaged in various road projects. In the course of carrying on of its business, the assesse rendered the consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). In respect of the same, the assesse received payments not only for its services rendered but also reimbursed expenses incurred by it such as air travel, hotel stay etc. The assesse paid service tax only on the amount received by it in respect of services rendered to its clients and not on the amount received as reimbursement.
On 19.10.07, a letter was issued by the Department (hereinafter referred as Appellant) providing that the service tax was liable it be charged on the gross value including reimbursable and out of pocket expenses and the assessee/respondent was directed to deposit the due service tax along with interest @13% under Sec. 73 and 75 respectively of the Finance Act.
Thereafter a show cause notice dated 17th March 2018 was issued by the Commissioner, Service Tax vide which the respondent was asked to show cause as to why the service tax should not be recovered by including the amounts of reimbursable which were received by the respondent, pointing out these were to be included while arriving at the gross value as per provisions of Rule 5(1) of the Rules.
Aggrieved by the Show cause notice, respondent filed the Writ Petition in the Delhi High Court with three prayers namely:
(i) for quashing Rule 5 in its entirety of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax; and
(ii) for declaring the rule to be unconstitutional and ultra vires Sections 66 and 67 of the Finance Act, 1994; and
(iii) for quashing the impugned show-cause notice-cum-demand dated 17.03.2008 holding that it is illegal, arbitrary , without jurisdiction and unconstitutional.
The Delhi High Court had accepted all the contentions of the assesse/petitioner and decided the case in favour of assesse. Aggrieved by the decision the appellant files appeal before the Supreme Court.
1. Whether Rule 5 of the Service Tax (Determination of Value) Rules, 2006 is unconstitutional and ultra vires Section 66 and 67 of the Finance Act, 1994?
2. Whether the ‘gross amount charged’ would include the reimbursed expenses for the purposes of valuation of taxable service and levy of service tax?
Rule 5 of the Service Tax (Determination of Value) Rules, 2006 provides for:
“5. Inclusion in or exclusion from the value of certain expenditure or costs.
1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.”
Rule 5 clearly provides for the inclusion of all the expenditure incurred in the course of providing taxable service, in the value calculated for the purpose of charging service tax i.e., as per this rule reimbursement expenses in the instant case are chargeable to service tax.
However the same has to analysed keeping in mind the mandate of Section 67 of the Finance Act.
Section 67 deals with the valuation of taxable services for charging service tax and while providing for the same it does not provide for the inclusion of the aforesaid expenditure or cost incurred while providing the services as the same cannot be treated as components of service. Further it is to be noted that even after the amendment in 2006 in Section 67, the situation remained the same.
It has rightly been pointed out by the Delhi High Court that both the amended and unamended Section 67 authorised the determination of value of taxable services for the purpose of charging service tax under Section 66 as the ‘gross amount charged’ by the service provider for such services provided or to be provided by him, in a case where the consideration for the service is money. The word “such service” in Section 67 makes it clear that the service tax should be charged only on the taxable service provided by the service provider i.e., the value of consulting engineering service rendered by the assesse to the NHAI in the instant case and not on the expenditure incurred during the course of carrying out such services as the same can never be considered as the gross amount charged by the service provider. Further levying service tax on such expenditure or costs would amount to double taxation inasmuch as expenses on air travel tickets are already subject to service tax and are included in the bill.
The contentions of the Appellants/Department had rightfully rejected by the Supreme Court as the Appellants/Department did not provide any reasons as such as to why the ‘gross amount charged’ under Section 67 would include all the expenses incurred while providing services apart from the value of service being rendered and just relied on the dictionary meaning of ‘gross amount’.
The Supreme Court had correctly held that “High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service This position did not change even in the amended Section 67 which was inserted on May 01, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub section (1). Mandate of sub-section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.”
Further as rightly pointed out by the respondents, the intention of the Legislature can be easily gazed from the fact that the Legislature had amended Section 67 by Finance Act 2015, effecting from May 14 2015. Clause (a) which deals with ‘consideration’ has been amended to include “reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service.” Thus, only with effect from May 14, 2015, such reimbursable expenditure or cost would form part of valuation of taxable services for charging service tax, by virtue of Section 67 and not before 2015 as the said amendment had not been passed with retrospective effect.
RULES CANNOT BYPASS THE ACT
The Hon’ble Supreme Court had rightfully held that Rule 5 of the Rules 2006 is ultra vires to the Section 66 and 67 of the Finance Act, 1994 by holding that “It is trite that rules cannot go beyond the statute.” For this Supreme Court had relied on many of its previous decisions.
In Babaji Kondaji Garad, it was held that if there is any conflict between a statue and the subordinate legislation then statute will prevail over subordinate legislation. The same had been reiterated in Chenniappa Mudaliar case.
Further it is also a well-established principle that Rules are framed for achieving the purpose behind the provisions of the Act as held in Taj Mahal Hotel case.
Through this landmark judgment Supreme Court brought an end to the controversy between Rule 5 of the Service Tax (Determination of Value) Rules, 2006 and Section 67 of the Finance Act, 1994 by categorically holding that Rule 5 is ultra vires to the Section 66 and 67 of the Finance Act, 1994 and same is to be struck down as held by the Delhi High Court. Further the Supreme Court had made it very clear that the for the period prior to May 14, 2015, the value of the taxable service will not include reimbursement expenses, however the same will be included for the period after May 14 2015. Also the Supreme Court had again reiterated that the Rules cannot bypass the statue as the same are just for the purpose for carrying out the provisions of the Act.
 Babaji Kondaji Garad v Nasik Merchants Co-operative Bank Ltd. (1984) 2 SCC 50.
 CIT v S.Chenniappa Mudaliar (1969) 74 ITR 41 (SC).
 CIT v Taj Mahal Hotel (1971) 82 ITR 44 (SC).