2025 (6) TMI 7 - AT - Service Tax

Taxability - service tax on reimbursed warehousing charges for the period 2006-07 - CHA charges IAAI Charges Delivery Order charges/Air Freight Charges Booking Charges Survey Charges Warehousing Charges Steamer Agent Charges Container Freight Station Charges Repacking Charges Insurance Charges Godown rent etc. - whether the above charges collected from the clients are to be treated as expenditure or costs incurred by the appellant in the course of providing taxable service and all such expenditure or cost form part of the taxable service provided 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 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 - i) The amendment to Section 67 of the Finance Act 1994 effective from May 14 2015 including reimbursable expenditure in taxable value is prospective and does not affect the appellant s liability for earlier periods. ii) The demand of service tax interest and penalties on reimbursed expenses for the period prior to the 2015 amendment is unsustainable. Appeal allowed.

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

1. Whether the various charges collected by the appellant from clients-such as IAAI Charges, Delivery Order charges, Air Freight Charges, Booking Charges, Survey Charges, Warehousing Charges, Steamer Agent Charges, Container Freight Station Charges, Repacking Charges, Insurance Charges, Godown rent, etc.-constitute part of the taxable value for the purpose of service tax under the Finance Act, 1994.

2. Whether these charges, which were reimbursed by clients on actuals and supported by a Chartered Accountant's certificate, should be treated as consideration for taxable service or as pure reimbursements (pure agent expenses) not liable to service tax.

3. The validity and applicability of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 in including reimbursed expenses within the gross value of taxable services.

4. The effect of the Supreme Court's decision in UOI v Intercontinental Consultants and Technocrats Pvt Ltd on the valuation of taxable services and the inclusion of reimbursed expenses in taxable value.

5. The applicability of extended period of limitation and imposition of penalties under Sections 76 and 78 of the Finance Act, 1994, in the context of the above valuation issues.

Issue-wise Detailed Analysis:

1. Inclusion of Various Charges in Taxable Value:

Legal Framework and Precedents: The valuation of taxable services is governed by Section 67 of the Finance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006. Rule 5(1) of these Rules mandated inclusion of all expenditures or costs incurred by the service provider in the course of providing taxable services in the gross value charged. The issue was whether these reimbursed charges collected from clients form part of the 'gross amount charged' for taxable services.

Court's Interpretation and Reasoning: The appellate authority initially upheld the Department's demand relying on Rule 5(1), holding that all such charges are part of the taxable value. However, the Tribunal found this approach inconsistent with the Supreme Court's ruling in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, which struck down Rule 5(1) as ultra vires Sections 66 and 67 of the Act. The Supreme Court held that only the consideration received as quid pro quo for the taxable service forms part of the taxable value, and reimbursed expenses, being merely pass-through costs, do not constitute consideration for the service.

Key Evidence and Findings: The appellant produced a Chartered Accountant certificate affirming that these charges were reimbursed on actuals and did not form part of the service consideration. The adjudicating authority accepted this and dropped the demands, but the appellate authority reversed this without verifying the genuineness of the certificate.

Application of Law to Facts: The Tribunal applied the Supreme Court's interpretation that valuation must be confined to the gross amount charged for the taxable service itself, excluding reimbursed expenses. Since the appellant's charges were reimbursed on actuals and not consideration for service, they fall outside the taxable value.

Treatment of Competing Arguments: The Department argued for inclusion of all expenses under Rule 5(1). The appellant relied on the apex court ruling and the CA certificate to assert that these were pure reimbursements. The Tribunal favored the appellant's position, emphasizing the binding Supreme Court precedent and the principle that rules cannot override the statute.

Conclusion: The charges reimbursed by the appellant are not part of the taxable value for service tax purposes for the relevant period prior to legislative amendment in 2015.

2. Validity of Rule 5(1) of the Valuation Rules:

Legal Framework and Precedents: Rule 5(1) sought to include reimbursed expenses in taxable value. The Supreme Court in the Intercontinental Consultants case held this rule ultra vires the statutory provisions in Sections 66 and 67 of the Finance Act.

Court's Interpretation and Reasoning: The Supreme Court reasoned that Section 66 charges service tax on the value of taxable services, which means the consideration for the service rendered. Section 67 mandates valuation based on the gross amount charged for 'such' taxable service. Rule 5(1) attempted to extend this valuation to reimbursed expenses which are not consideration for the service itself, thereby exceeding the statutory mandate.

The Court underscored the principle that subordinate legislation cannot override or extend beyond the parent statute. It also noted that the legislature itself amended Section 67 in 2015 to explicitly include reimbursable expenditure as part of taxable value, indicating that prior to this amendment, such inclusion was not permissible.

Key Evidence and Findings: The Tribunal relied on the Supreme Court's detailed reasoning, including the statutory interpretation of Sections 66 and 67, and the principle of lex prospicit non respicit (law looks forward, not backward) to hold that Rule 5(1) could not be applied retrospectively.

Application of Law to Facts: Since the period under consideration was prior to the 2015 amendment, Rule 5(1) could not be invoked to include reimbursed expenses in taxable value.

Treatment of Competing Arguments: The Department maintained reliance on Rule 5(1), but the Tribunal rejected this in light of the apex court ruling, which had explicitly invalidated the rule's application for the relevant period.

Conclusion: Rule 5(1) of the Valuation Rules was not applicable for the period in question, and the inclusion of reimbursed expenses in taxable value was impermissible.

3. Liability for Service Tax, Interest, and Penalties:

Legal Framework and Precedents: The show cause notices invoked extended limitation and proposed penalties under Sections 76 and 78 of the Finance Act for non-payment of service tax on the reimbursed expenses.

Court's Interpretation and Reasoning: Since the Tribunal held that reimbursed expenses were not taxable during the relevant period, the demand of service tax, interest, and penalties on such amounts could not be sustained.

Key Evidence and Findings: The appellant's CA certificate and the Supreme Court's ruling negated the existence of any taxable consideration on the reimbursed amounts.

Application of Law to Facts: The absence of taxable value on reimbursed expenses nullified the basis for service tax demand, interest, and penalties.

Treatment of Competing Arguments: The Department's argument for extended limitation and penalties was contingent on the validity of the tax demand, which the Tribunal rejected.

Conclusion: The demand of service tax along with interest and penalties on reimbursed expenses was not sustainable.

4. Prospective Effect of Legislative Amendment:

Legal Framework and Precedents: The Finance Act, 2015 amended Section 67 to include reimbursable expenditure or cost as part of consideration for taxable services with effect from May 14, 2015.

Court's Interpretation and Reasoning: The Tribunal relied on the constitutional principle that legislation is presumed prospective unless expressly made retrospective. The amendment being substantive, it cannot be applied retrospectively to validate demands for periods prior to its commencement.

Key Evidence and Findings: The Tribunal cited the Constitution Bench judgment in Commissioner of Income Tax v Vatika Township Pvt Ltd, which emphasized fairness and the principle lex prospicit non respicit, underscoring that taxpayers have the right to arrange affairs based on existing law.

Application of Law to Facts: The appellant's liability was assessed for periods prior to the 2015 amendment; hence, the amendment could not be applied to impose tax on reimbursed expenses for those periods.

Treatment of Competing Arguments: The Department did not argue for retrospective application of the amendment, and the Tribunal found no basis to do so.

Conclusion: The amendment to Section 67 is prospective and does not affect the appellant's liability for the periods under dispute.

Significant Holdings:

"Rule 5(1) of the Rules went much beyond the mandate of Section 67. We, therefore, find 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 quo for rendering such a service."

"It is trite that rules cannot go beyond the statute. ... The statutory provision has precedence and must be complied with."

"Legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect."

"The service tax is to be paid only on the services actually provided by the service provider."

Final determinations on the issues are:

- The various reimbursed charges collected by the appellant do not form part of the taxable value for service tax purposes for the relevant period prior to May 14, 2015.

- Rule 5(1) of the Service Tax Valuation Rules, 2006 is ultra vires Sections 66 and 67 of the Finance Act, 1994 and cannot be applied retrospectively to include reimbursed expenses in taxable value.

- The demand of service tax, interest, and penalties on reimbursed expenses for the period prior to the 2015 amendment is unsustainable.

- The amendment to Section 67 of the Finance Act, 1994, effective from May 14, 2015, including reimbursable expenditure in taxable value, is prospective and does not affect the appellant's liability for earlier periods.

Accordingly, the appeal is allowed and the impugned appellate orders demanding service tax on reimbursed expenses are set aside.

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