Reimbursement Of Expenses Not Subject To Levy Of Service Tax :
Delhi High Court (Division Bench)
Rule 5(1), Service Tax (Determination of Value) Rules, 2006 – Ultra Vires Section 66 and 67 of the Finance Act, 1994
Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India and Anr., W.P. (C) 6730/2008
A division bench of the Delhi High Court (the “Court“) vides its judgment dated November 30, 2012 in the matter of Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India and Anr., has held that Rule 5(1) of the Service Tax Determination of Value Rules, 2006 (“Rules“) is ultra vires of the Section 66 and Section 67 of the Finance Act, 1994.
Intercontinental Consultants and Technocrats Pvt. Ltd. (“Petitioner”) is a company providing consulting engineering* services. Petitioner like any other service provider received reimbursement of expenses for air travel, hotel stay, etc. along with the payment for service provided by it. Petitioner paid service tax only on amount received in respect of services provided by it and not on amount received as reimbursement of expenses.
The petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for the period October, 2002 to March, 2007 for recovery of service tax on amount received as reimbursement of expenses (hotel, flight, etc.) under Rule 5(1) of the Service Tax Determination of Value Rules, 2006.
Hon’ble Court while deciding the petition by the petitioner held the following:
– Rule 5 (1) of the Rules is ultra vires section 66 and section 67 of the Finance Act, 1994 since it travels beyond the scope of the aforesaid sections.
– The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as part of the gross amount charged by the service provider for the services provided.
– The reimbursement of expenses for air travel tickets, train, hotel, etc. may also lead to double taxation.
The Court while striking down the provisions of Rule 5(1) of the Rules held, “Reading Section 66 and Section 67 (1) (i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge.
Sub-section (4) of Section 67 which enables the determination of the value of the taxable service “in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax.
We are, therefore, undoubtedly of the opinion that 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.”
*Section 65(31) of the Finance Act, 1994 [deleted vide Notification No. 20/2012 – S.T. dated June 5, 2012] Consulting engineer means any professionally qualified engineer or any body corporate or any other who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering.