TMI Blog2018 (3) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice. The 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 subsection (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. In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with consideration is suitably 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, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by them which according to them is not includable to arrive at gross value charged from their clients. As per Rule 5 of the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the Rules ), the value of the said reimbursable activities is also to be included as part of services provided by these respondents. Writ petitions were filed by the assessees challenging the vires of Rule 5 of the Rules as unconstitutional as well as ultra vires the provisions of Sections 66 and 67 of Chapter V of the Finance Act, 1994 (hereinafter referred to as the Act ). The High Court of Delhi has, by the judgment dated November 30, 2012, accepted the said challenge and declared Rule 5 to be ultra vires these provisions. Other cases have met similar results by riding on the judgment dated November 30, 2012. This necessitates examining the the correctness of the judgment of the Delhi High Court and outocme thereof would determine the fate of all these appeals/transfer petitions. 4) This judgment was rendered by the High court in the writ petition filed by M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. out of which Civil Appeal No. 2013 of 2014 arises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Delhi challenging the vires thereof 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. 7) Rule 5, which provides for inclusion in or exclusion from the value of certain expenditure or costs , is reproduced below in order to understand its full implication: 5. Inclusion in or exclusion from 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. (2) Subject to the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent. Illustration 2 : In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 3 : A contracts with B, an architect for building a house. During the course of providing the taxable service, B incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be, includes, (a) the aggregate of commission or brokerage charges by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock broker to any sub broker. (b) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit; (c)the amount of premium charged by the insurer from the policy holder; (d) the commission received by the air travel agent from the airline; (e) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer; (f) the reimbursement received by the authorized service station from manufacturer for carrying out any service of nay motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; and (g) the commission or any amount received by the rail travel agent from the Railways or the customer. But does not include (i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. (4) Subject to the provisions of sub sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation: For the purpose of this section, (a) consideration includes any amount that is payable for the taxable services provided or to be provided; (b) money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value; (c) gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called Suspense account or by any other name, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the main enactment (Central Bank of India Ors. v. Workmen, etc., (1960) 1 SCR 200; Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd., (1984) 2 SCC 50; State of U.P. Ors. v. Babu Ram Upadhya, (1961) 2 SCR 679; CIT v. S. Chenniappa Mudaliar, (1969) 74 ITR 41; Bimal Chandra Banerjee v. State of M.P. Ors., (1971) 81 ITR 105 and CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44) . The High Court also referred to the judgment of Queens Bench of England in the case of Commissioner of Customs and Excise v. Cure and Deeley Ltd. (1961) 3 WLR 788 (QB) . 11) Mr. K. Radhakrishnan, learned senior counsel argued for the appellant, ably assisted by Ms. Nisha Bagchi, advocate who also made significant contribution by arguing some of the nuances of the issue involved. Submission of the learned counsel appearing for the appellant/Department was that prior to April 19, 2006 i.e. in the absence of Rule 5 of the Rules, the value of taxable services was covered by Section 67 of the Act. As per this Section, the value of taxable services in relation to consulting engineering services provided or to be provided by a consulting engineer to the client shall be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atters. Reliance was placed on paragraph 22 of the said judgment to support this proposition. However, we may point out at this stage itself that the context in which the observations were made were entirely different. The issue was as to whether service tax, which is an indirect tax, can be passed on by the service provider to the recepient of the service and, in this hue, the matter was discussed, as can be seen from the combined reading of paragraphs 21 and 22 which are to the following effect: 21. It is thus clear that the judgments of this Court which referred to service tax being an indirect tax have reference only to service tax being an indirect tax in economic theory and not constitutional law. The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax. It is important to bear this in mind, as the main prop of Shri Jaideep Gupta's argument is that service tax being an indirect tax which must be passed on by virtue of the judgments of this Court, would make the recipient of the service the person on whom the tax is primarily leviable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir goods in wholesale, semi-wholesale or in retail, whether they have a vast selling and marketing network or have none, whether they sell at depots and branches or sell at the factory gate, and whether they load the ex-factory price with post-manufacturing expenses and profits or do not do so. Because the value of the article rests on a conceptual base, it is urged, the result of the assessment under Section 4( a ) cannot be different from the result of an assessment under Section 4( b ). The contention is that the principle of uniformity of taxation requires the exclusion of post-manufacturing expenses and profits, a factor which would vary from one manufacturer to another. It is pointed out that such exclusion is necessary to create a direct and immediate nexus between the levy and the manufacturing activity, and to bring about a uniformity in the incidence of the levy. Learned counsel contends that the position is the same under the new Section 4 which, he says, must need be so because of the fundamental nature of the principles propounded earlier. Referring to the actual language of the new Section 4(1)( a ), it is pointed out that the expression normal price therein mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at at the very beginning we should briefly indicate the concept of a duty of excise. Both Entry 45 of List I of the Seventh Schedule to the Government of India Act, 1935, under which the original Central Excises and Salt Act was enacted, and Entry 84 of List I of the Seventh Schedule to the Constitution under which the Amendment Act of 1973 was enacted, refer to Duties of excise on... goods manufactured or produced in India . A duty of excise, according to the Federal Court in The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act , 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] is a duty ordinarily levied on the manufacturer or producer in respect of the manufacture or production of the commodity taxed. A distinction was drawn between the nature of the tax and the point at which it was collected, and Gwyer, C.J. observed that theoretically . . .there can be no reason in theory why an excise duty should not be imposed even on the retail sale of an article, if the taxing Act so provides. Subject always to the legislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage which the authority finds to be the mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 101 : AIR 1942 FC 33] and affirmed that when excise was levied on a manufacturer at the point of the first sale by him that may be because the taxation authority imposing a duty of excise finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale. But that method of collecting the tax is an accident of administration; it is not of the essence of the duty of excise, which is attracted by the manufacture itself. This Court had occasion to consider a similar question in R.C. Jall v. Union of India [AIR 1962 SC 1281 : 1962 Supp (3) SCR 436, 451] . In that case, the Central Government was authorised by an Ordinance to levy and collect as a cess on coal and coke despatched from collieries in British India a duty of excise at a specified rate. Rule 3 made under the Ordinance empowered the Government to impose a duty of excise on coal and coke when such coal and coke was despatched by rail from the collieries of the coke plants, and the duty was to be collected by the Railway Administration by means of a surcharge on freight either from the consignor or consignee. It was contended by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se levy and have considered the statutory construction of the Act, before and after its amendment, in view of the three propositions formulated, on behalf of the assessees, as principles constituting the essential characteristics of a duty of excise. It is apparent that the first proposition, that excise is a tax on the manufacture or production of goods, and not on anything else, is indisputable and is supported by a catena of cases beginning with The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act , 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] . As regards the second proposition. that uniformity of incidence is a basic characteristic of excise, we are inclined to think that the accuracy of the proposition depends on the level at which the statute rests it. We shall discuss that presently. As to the third proposition, that the exclusion of post-manufacturing expenses and post-manufacturing profit is necessarily involved in the first principle does not inevitably follow. The exclusion of post-manufacturing expenses and post-manufacturing profits is a matter pertaining to the ascertainment of the value of the excisable article, and not to the nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, examined in the context of the Act before and after its amendment. For the case of the assessees is that the amendment has made no material change in the basic scheme of the levy and the provisions for determining the value of the excisable article. 15) It was, thus, argued that the High Court had committed serious error in relying upon Section 66 of the Act (which is a charging section) while interpreting Section 67 of the Act, or for that matter, while examining the validity of Rule 5 of the Rules. The learned counsel also relied upon the dictionary meaning that is given to the word gross amount . At the end, it was submitted that Section 67 which uses the term any amount would include quantum as well as the nature of the amount and, therefore, cost for providing services was rightly included in Rule 5, which was not ultra vires Section 67 of the Act. 16) Mr. J.K. Mittal, Advocate, appeared for M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. He argued with emphasis that the impugned judgment of the High Court was perfectly in tune with legal position and did not call for any interference. At the outset, he pointed out that the Parliament has again ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards the taxable service before, during or after provision of such service. Thus, levy on taxable services were not levied at once, but tax was levied at different point of time, tax was levied on difference person and also values in many taxable services was substantially exempted. He demonstrated it from the following table: Sl. No. Taxable Services Sub-clause of 65 (105) Date of levy Tax Rate 1 Consulting Engineer Service (g) 7-7-1997 2 Rent-a-Cab services by a person engage in business of renting of cabs (o) 16-7-1997 * 3 Transport of Passenger by Air by an aircraft operator (a) International (b) Domestic (zzzo) 1-5-2006 1-7-2010 ** 4 Renting of immovable property (zzzz) 1-7-2007 5 Restaurant services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19) The learned counsel reiterated that such an ambiguity in law is now cured by amendment to Section 67 only w.e.f. May 14, 2015. 20) We have duly considered the aforesaid submissions made by the learned counsel for the Department as well as the counsel for the assessees. As can be seen, these submissions are noted in respect of Civil Appeal No. 2013 of 2014 where the assessee is providing consulting engineering services . In other appeals, though the nature of services is somewhat different, it doesn t alter the colour of legal issue, in any manner. In the course of providing those services, the assessees had incurred certain expenses which were reimbursed by the service recepient. These expenses were not included for the purpose of valuation, while paying the service tax. Thus, the question for determination which is posed in Civil Appeal No. 2013 of 2014, answer to that would govern the outcome of the other appeals as well. Still, for the sake of completeness, we may give a brief resume of all these cases. A. Consulting Engineering Services Assessee were providing consulting services to M/s. NHAI for highway projects. They were paying Service Tax on remunera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and for service/agency charged separately started after introduction of Service Tax on CHA s (wef 15.06.1997) in view of Circular dated 06.09.1997. Invoice issued for services/agency charges alone is used for payment of Service Tax. Sl. No. Civil Appeal details Facts Reimbursable claimed as not includible 1. 295-299/2014 CST v. Asshita International Period: 01.10.2003-31.03.2008 ([pre and post coming into effect of the impugned Rule 5] Demand: 4,66,607/- SCN dated 21.04.2009. O-I-A dated 30.11.2010 [pages 238-259] set aside demand prior to 18.04.2006 in view of circular dated 06.06.1997. Customs Examination Chages, Misc. Expenses, Sundry expenses, strapping and re-strapping charges, documentation charges. 2. 2021/2014 CST v. Sunder Balan Period: Apr.08 to Aug 08 [post coming into effect of impugned rule 5 on 01.06.2007] Demand:Rs.2,26,659/- SCN dated 24.07.2009. Customs Examination Charges, Misc. Expenses, Sundry expenses, strappi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st its validity after introduction of Rule 5. Hence the ST was recoverable thereafter. CMC charges, CONCOR, GSEC, Transportation charges, Air and sea freight, Custom Duty, Custom Cess, fumigation charges, bottom paper, wooden etc. handling charges, labour expenses, sundry charges, airport charges, documentation charges, photocopying charges etc. [page 181-182] 8. T.P.(C) 1932- 1934/2017 CST v. Green Channel Cargo Care Period: April 2006-March 2009 Harbour/Airport Authority of India/CFS/CCTL and delivery order charges, harbour dues, seal verification, warehouse/godown charges. D. Site Formation and clearance, excavation and earth moving and demolition services: Assessees conduct drilling, blasting, excavation, loading, transport etc. of overburdened at open cast Mines. Issue is whether value of Goods/material service u/s. 65(97a), is to be included in Gross Amount u/s 67 of Finance Act for the purpose of S.T. The impugned orders follow the decisions in Bhayana Builder Intercontinental. Sl.No. Civil Appeal details Fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 01.06.2007] Demand:Rs.24,70,790/- SCN dated 22.10.2008 Non-payment of Service Tax on the amount received as reimbursement by way of debit notes in addition to amount charged through invoices for providing Event Management Service , Section 65(40) and Section 65(90)(zu) [page 83] Hiring of venue, merchandise, artists, travel, courier, food and beverages, administrative expenses, [page 76 @78] 21) Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed, that is, for which the service receiver has made the payments to the assessees. 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. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act. 22) Section 66 of the Act is the charging Section which reads as under: there shall be levy of tax (hereinafter re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that rules cannot go beyond the statute. In Babaji Kondaji Garad , this rule was enunciated in the following manner: Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the byelaw, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision ahs precedence and must be complied with. 27) The aforesaid principle is reiterated in Chenniappa Mudaliar holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act . 28) It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel : 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. 29) In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1] , a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 29. The obvious basis of the principle against retrospectivity is the principle of fairness , which must be the basis of every legal rule as was observed in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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