2025 (5) TMI 2096 - AT - Service Tax

Inclusion of warehousing charges collected by the appellant from their clients which were reimbursed expenses incurred in the course of providing Custom House Agent (CHA) services in the assessable value - pure agent services or not - HELD THAT - The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd 2018 (3) TMI 357 - SUPREME COURT which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax. The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants Technocrats Pvt Ltd v UOI 2012 (12) TMI 150 - DELHI HIGH COURT wherein Rule 5(1) of the Service Tax Valuation Rules 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services in the value of such taxable services was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections. Conclusion - The impugned order demanding service tax on reimbursed warehousing charges for the period 2006-07 set aside. Appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the warehousing charges collected by the appellant from their clients, which were reimbursed expenses incurred in the course of providing Custom House Agent (CHA) services, should be included in the gross taxable value for the purpose of charging service tax under Section 67 of the Finance Act, 1994 and Rule 5(1) of the Service Tax Valuation Rules, 2006.

2. Whether the appellant qualifies as a "pure agent" under Rule 5(2) of the Valuation Rules, thereby exempting the reimbursed warehousing charges from inclusion in the taxable value.

3. The validity and applicability of Rule 5(1) of the Service Tax Valuation Rules, 2006, particularly in light of judicial pronouncements striking down this Rule as ultra vires the Finance Act.

4. The temporal applicability of amendments to Section 67 of the Finance Act, 1994, which explicitly include reimbursable expenditure or cost incurred by the service provider as part of the taxable value, vis-`a-vis the period under consideration (2006-07).

Issue-wise Detailed Analysis

1. Inclusion of Reimbursed Warehousing Charges in Taxable Value under Section 67 and Rule 5(1)

The legal framework governing valuation of taxable services is primarily Section 67 of the Finance Act, 1994, read with Rule 5(1) of the Service Tax Valuation Rules, 2006. Section 67 mandates that service tax is payable on the "gross amount charged" for the taxable service. Rule 5(1) provided that any expenditure or cost incurred by the service provider in the course of providing taxable service, including reimbursable expenses, must be included in the value of the taxable service.

The adjudicating authority and the appellate authority upheld the demand of service tax on the warehousing charges by applying Rule 5(1), reasoning that these charges formed part of the expenditure incurred in providing CHA services and thus must be included in the gross value.

The appellant challenged this on the ground that these warehousing charges were merely reimbursed expenses paid to third parties, collected from clients without any markup or service tax, and thus did not constitute consideration for the taxable service. The appellant contended that only the service charges received as consideration for rendering the CHA service should be included in the taxable value.

The Tribunal examined the binding Supreme Court decision in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, which struck down Rule 5(1) as ultra vires Sections 66 and 67 of the Finance Act. The Supreme Court held that Section 67 requires valuation to be based strictly on the gross amount charged "for such taxable service" and does not permit inclusion of reimbursed expenses that are not consideration for the service itself.

The Court emphasized that the service tax is leviable only on the value of the actual service rendered, and reimbursed expenses paid on behalf of the client do not amount to consideration for the service. The Tribunal relied on this authoritative pronouncement to conclude that the warehousing charges reimbursed by the appellant to the client cannot be included in the taxable value under Section 67.

2. Applicability of the Pure Agent Concept under Rule 5(2)

The appellant also contended that they qualified as a "pure agent" under Rule 5(2) of the Valuation Rules, which would exclude reimbursed expenses from the taxable value if certain conditions are met, such as acting on behalf of the client, disclosing the amount separately, and not adding any markup.

The appellate authority rejected this plea, holding that the appellant did not fulfill the conditions of a pure agent. However, the Tribunal found it unnecessary to delve into this issue in detail because the primary legal position established by the Supreme Court decision renders Rule 5(1) invalid and restricts valuation strictly to consideration for the service rendered.

3. Validity of Rule 5(1) of the Service Tax Valuation Rules

The Tribunal extensively analyzed the Supreme Court's reasoning that Rule 5(1) went beyond the scope of the enabling provisions of Sections 66 and 67. The Court held that subordinate legislation cannot override or expand the statutory provisions, and any rule inconsistent with the statute must be ignored.

The Tribunal quoted the Supreme Court's observations that:

"Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed... As per these Rules, these reimbursable expenses also form part of 'gross amount charged'. Therefore, the core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5."

The Court concluded that Section 67 limits taxable value to the consideration for the taxable service, and Rule 5(1) exceeded this mandate. This principle was supported by precedents emphasizing that rules must conform to the statute and cannot impose additional liabilities beyond the legislative intent.

4. Temporal Applicability of Amendments to Section 67

The Tribunal noted that the Legislature subsequently amended Section 67 by Finance Act, 2015, effective May 14, 2015, to explicitly include reimbursable expenditure or cost incurred by the service provider as part of the taxable value. This amendment clarified the legislative intent to tax such reimbursements prospectively.

The Tribunal relied on constitutional principles of statutory interpretation, including the presumption against retrospective operation of substantive legislation, as explained in a Constitution Bench judgment. It held that the amendment to Section 67 could not be applied retrospectively to the period 2006-07 under consideration.

Therefore, the liability to pay service tax on reimbursed warehousing charges did not arise for the relevant period, as the law prior to the 2015 amendment did not support such inclusion.

Treatment of Competing Arguments

The appellant's argument that the warehousing charges were purely reimbursed expenses not constituting consideration for taxable service was upheld by the Tribunal based on the binding Supreme Court precedent. The Department's reliance on Rule 5(1) was rejected due to its invalidity.

The appellant's alternate contention that the warehousing activity did not fall within the scope of CHA services was not examined in detail, as the Tribunal found the primary issue dispositive.

Significant Holdings

The Tribunal, following the Supreme Court, held:

"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 taxable service cannot be anything more or less than the consideration paid as quid pro quo for rendering such a service."

"Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services in the value of such taxable services, was struck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections."

"The amendment to Section 67 by the Finance Act, 2015, which includes reimbursable expenditure or cost incurred by the service provider as part of the taxable value, is prospective in nature and cannot be applied retrospectively."

Accordingly, the Tribunal set aside the impugned order demanding service tax on reimbursed warehousing charges for the period 2006-07 and allowed the appeal with consequential relief.