2012 (12) TMI 150 - DELHI HIGH COURT

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.