NO SERVICE TAX ON ‘REIMBURSABLE EXPENDITURE’ PRIOR TO MAY 2015: SUPREME COURT AFFIRMS THE DELHI HIGH COURT DICTUM
UNION OF INDIA & ANR VS. M/S INTERCONTINENTAL CONSULTANTS AND TECHNOCRAFTS PVT. LTD.
CIVIL APPEAL NO. 2013 OF 2014
COURT: Supreme Court
RATIO DECIDENDI: The gross amount charged for the purposes of Service Tax shall not include the reimbursable value as Rule 5(1) of Valuation Rules,2006 is ultra vires to the Section 67 to the extent it includes the reimbursable amount.
ISSUE INVOLVED:
Whether the reimbursed amount incurred by service provider for providing taxable services are included in the gross amount charged for the purpose of levy of Service Tax?
INTERPRETATION:
The Apex Court of the country finally settled the issue with regard to the inclusion of reimbursement under Rule 5(1) of Service Tax Valuation Rule. The Assesse provides consulting engineering services to the National Highway Authority of India (NHAI). The Assesse also received reimbursement of expenses incurred by them in respect of certain activities in addition to the payment for their services. The Assesse was paying service tax only on the amount received for their services and not on the reimbursed amount. As per Rule 5 of the Service Tax (Determination of Value) Rules, 2006, the reimbursement amount is also included as part of services rendered by service providers to their clients. Rule 5 was in existence from 1st June 2007 and Assessee was show caused for a period from October 2002 to March 2007.
The constitutional validity of the said Rule 5 was challenged by the Assesses through a writ petitions being ultra vires to the Section 66 and 67 of the Finance Act, 1994 to the extent it includes reimbursed amount. The High Court of Delhi declared Rule 5 as ultra vires to Section 66 and 67 of the Finance Act. The Department appealed against the order of the Delhi High Court before the Supreme Court.
The High Court of Delhi observed that Section 67 determines value of taxable services for charging service tax under Section 66 as the gross amount charged by the service provider for providing such services. The expenditure or cost incurred by service provider cannot be included in gross amount charged by service provider for such services provided by him. Therefore, Rule 5 is ultra vires to Section 66 and 67 to the extent it includes reimbursed amount.
The Supreme Court of India held that in the course of providing taxable services, the expenditures incurred by the Assessee (service provider) which were reimbursed by the service recipient were not included for the purpose of valuation while paying the service tax. The valuation of taxable services for charging service tax is the gross amount charged for providing ‘such’ taxable services and any other amount which is calculated not for providing such taxable services cannot a part of that valuation as that amount is not calculated for providing such ‘taxable services’. The Supreme Court upheld the view taken by High Court of Delhi while interpreting Section 66 and 67. Therefore, Rule 5 has to go to the extent it includes reimbursable expenditure as it is a settled position of law that Rules cannot go beyond the statute.
The Court further observed that Section 67 includes reimbursed expenditure or cost as a part of valuation of taxable services for charging service tax only with effect from May 14, 2015 (as reimbursement has been specifically included within the definition of “consideration” under Section 67 through amendment vide Finance Act, 2015 w.e.f 14.05.2015.).
IMPLICATION OF THE JUDGEMENT
Although, the judgment has limited applicability for the pre-2015 period (as the Finance Act, 2015 amendment Section 67 by specifically including reimbursement within the definition of “consideration”). Nonetheless, it is a big relief for the taxpayers who have been either denied the benefit mainly on the pretext that the matter is pending for final adjudication before the Apex Court or whose matter is pending at different judicial forums like High Courts.
By ARUN SHARMA (Managing Partner)
