2012 (12) TMI 150 - HC - Service Tax

Service Tax (Determination of Value) Rules 2006 - Constitutional validity of Rule 5 Re-imbursement of expenses in the value of taxable services for the purposes of levy of service tax - Company providing consulting engineering services - Petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel hotel stay etc - It was not paying any service tax in respect of the expenses incurred by it which was reimbursed by the clients Section 67 states that Service tax was to be charged on the gross value including reimbursable and out of pocket expenses Charging Section 66 states that the charge of service tax is on the value of taxable services - Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V which includes Section 66 - This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else - Rule 5 (1) 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 Section 66 and 67 Rule 5 may also result in double taxation - If the expenses on air travel tickets are already subject to service tax and is included in the bill to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation but it is equally true that it should be clearly provided for and intended; at any rate double taxation cannot be enforced by implication Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette such rules can only be made for carrying out the provisions of this Chapter i.e. Chapter V of the Act which provides for the levy quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax. The Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect. as decided in case of Taj Mahal Hotel (1971 (8) TMI 2 - SUPREME COURT) Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider in the course of providing taxable service . What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs Rule 5(1) goes far beyond the charging provisions and cannot be upheld. Sub-ordinate legislation - The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act. Quash the show-cause notice and allow the writ petition in favour of assessee.

Summary

The core legal questions considered by the Court were: (1) Whether Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which includes reimbursement of expenses incurred by the service provider in the value of taxable services for levy of service tax, is constitutionally valid and within the legislative competence under Sections 66 and 67 of the Finance Act, 1994; (2) Whether the inclusion of reimbursable expenses such as air travel, hotel stay, and other out-of-pocket expenses in the taxable value amounts to double taxation; and (3) Whether the impugned show-cause notice demanding service tax on reimbursed expenses is legal, valid, and sustainable.

Regarding the first issue, the Court examined the relevant statutory framework under the Finance Act, 1994, particularly Sections 65(105)(g), 66, and 67, which define taxable services, impose service tax, and prescribe valuation methodology respectively. Section 65(105)(g) defines taxable service as any service provided by a consulting engineer in relation to advice, consultancy, or technical assistance. Section 66 levies service tax at a prescribed rate on the value of taxable services. Section 67, both in its pre- and post-amendment forms, provides that the value of taxable services shall be the gross amount charged by the service provider for such services. The Court emphasized the phrase "for such service," underscoring that only the consideration for the actual service rendered is taxable.

The Court then analyzed Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which mandates that all expenditure or costs incurred by the service provider in the course of providing taxable services are to be included in the value for service tax purposes. The Rule also contains provisions excluding expenditure incurred by the service provider acting as a "pure agent" of the recipient, subject to specific conditions. The petitioner challenged the Rule's validity to the extent it includes reimbursed expenses in the taxable value.

The Court reasoned that Rule 5(1) exceeds the scope of Sections 66 and 67 because it seeks to tax not only the consideration for the service rendered but also the reimbursed expenses incurred in the course of providing the service. The Court held that the value of taxable service, as per Section 67, cannot exceed the gross amount charged "for such service" and that reimbursed expenses do not constitute consideration for the service itself. The Court noted that the Rule's Illustration 3, which treats reimbursed expenses such as travel and accommodation as part of the taxable value, clearly breaches the statutory mandate.

On the question of double taxation, the Court observed that if reimbursed expenses such as air travel are already subject to service tax, including them again in the taxable value would amount to double taxation. The Court cited a Constitution Bench decision which held that double taxation can only be sustained if expressly provided by the legislature, and cannot be imposed by implication. Since the Finance Act and its provisions do not expressly sanction such double taxation, the Rule's inclusion of reimbursed expenses is impermissible.

The Court further considered authoritative precedents establishing that subordinate legislation, including rules, cannot override or enlarge the scope of the parent statute. It referred to several Supreme Court decisions which held that rules must conform to the statute and cannot impose obligations or levy taxes beyond the statute's provisions. The Court emphasized that the charging section (Section 66) and the valuation section (Section 67) together circumscribe the permissible ambit of taxation, and any rule inconsistent with these provisions is ultra vires.

The Court also rejected the argument that the procedural safeguard of laying rules before Parliament under Section 94(4) confers validity on rules that contravene the statute. It cited Supreme Court authority confirming that parliamentary oversight does not validate rules made beyond the scope of the enabling statute.

Applying these principles to the facts, the Court found that the petitioner was liable to pay service tax only on the gross amount charged for the consulting engineering services rendered, excluding reimbursed expenses such as travel and lodging. The impugned show-cause notice demanding service tax on reimbursed expenses was therefore held to be illegal, arbitrary, and without jurisdiction.

Competing arguments by the respondent, asserting that reimbursed expenses are "essential expenses" and thus part of the taxable value, were rejected as inconsistent with the statutory scheme. The Court held that such expenses are merely costs incurred in providing the service and do not constitute separate consideration for the service itself.

The Court concluded by quashing Rule 5(1) to the extent it includes reimbursed expenses in the taxable value, and by setting aside the impugned show-cause notice demanding service tax on such reimbursements.

The significant holdings include the following verbatim observations: "Section 67...authorises the determination of the value of the taxable service for the purpose of charging service tax...as the gross amount charged by the service provider for the service provided by him. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him." Further, "Rule 5(1)...goes far beyond the charging provisions and cannot be upheld." And, "Double taxation cannot be enforced by implication." The Court also stated, "If there is any conflict between a statute and the subordinate legislation...the statute prevails over subordinate legislation...the statutory provision has precedence and must be complied with."

Core principles established are: (a) The value of taxable services for service tax purposes is limited to the gross amount charged for the service rendered; (b) Reimbursed expenses incurred by the service provider in the course of providing the service do not form part of the taxable value unless the service provider acts as a pure agent under strict conditions; (c) Subordinate legislation cannot enlarge or override the scope of the charging provisions in the parent statute; (d) Double taxation requires express legislative sanction and cannot be imposed by implication; and (e) Procedural requirements for rule-making do not validate rules that are ultra vires the enabling statute.

The final determinations are: Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, to the extent it includes reimbursement of expenses in the taxable value, is ultra vires Sections 66 and 67 of the Finance Act, 1994 and is struck down; the impugned show-cause notice demanding service tax on reimbursed expenses is quashed; and the petitioner is liable to pay service tax only on the gross amount charged for consulting engineering services, excluding reimbursed out-of-pocket expenses.