2018 (3) TMI 357 - SC - Service Tax

Valuation - reimbursement of expenses - includibility - Rule 5 of the Service Tax (Determination of Value) Rules, 2006 - whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5? Held that - The plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67 - 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 qua for rendering such a service. 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 also form part of valuation of taxable services for charging service tax. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Inclusion of reimbursable expenses in the valuation of taxable services under Rule 5 of the Service Tax (Determination of Value) Rules, 2006.
2. Validity of Rule 5 in light of Section 67 of the Finance Act, 1994.
3. Impact of amendments to Section 67 by the Finance Act, 2015.
4. Inclusion of free supplies (diesel and explosives) in the valuation of taxable services for "Site Formation and Clearance Service."

Issue-wise Detailed Analysis:

1. Inclusion of Reimbursable Expenses in the Valuation of Taxable Services:
The core issue was whether reimbursable expenses incurred by service providers, such as transportation, lodging, and other out-of-pocket expenses, should be included in the gross amount charged for the purpose of calculating service tax. The respondents argued that these expenses should not be included as they are not part of the service rendered but are merely reimbursed by the clients.

2. Validity of Rule 5 in Light of Section 67 of the Finance Act, 1994:
The High Court of Delhi had declared Rule 5 of the Service Tax (Determination of Value) Rules, 2006, ultra vires the provisions of Sections 66 and 67 of the Finance Act, 1994. The Supreme Court upheld this decision, stating that Rule 5 went beyond the mandate of Section 67. The Court emphasized that the valuation of taxable services should be limited to the gross amount charged for providing "such" services and should not include reimbursable expenses.

3. Impact of Amendments to Section 67 by the Finance Act, 2015:
The Finance Act, 2015, amended Section 67 to include reimbursable expenses in the valuation of taxable services. The Supreme Court noted that this amendment was substantive and could not be applied retrospectively. Therefore, for the period before May 14, 2015, reimbursable expenses could not be included in the valuation of taxable services.

4. Inclusion of Free Supplies (Diesel and Explosives) in the Valuation of Taxable Services for "Site Formation and Clearance Service":
The Court also addressed whether the value of free supplies like diesel and explosives provided by the service recipient should be included in the valuation of taxable services. The Court held that such free supplies could not be considered part of the "gross amount charged" as they were not part of the consideration for the service rendered.

Summary of Judgments:

Consulting Engineering Services:
The Court examined the case of M/s. Intercontinental Consultants and Technocrats Pvt. Ltd., which provided consulting engineering services and received reimbursements for expenses like air travel and hotel stays. The Court upheld the High Court's decision that these reimbursable expenses should not be included in the valuation of taxable services.

Share Transfer Agency Services:
In cases involving share transfer agency services, the Court ruled that reimbursable expenses such as postage and stationery charges should not be included in the valuation of taxable services.

Custom House Agent Services:
For custom house agent services, the Court held that reimbursable expenses like customs examination charges and documentation charges should not be included in the valuation of taxable services.

Site Formation and Clearance Services:
The Court ruled that the value of free supplies of diesel and explosives provided by the service recipient should not be included in the valuation of taxable services for "Site Formation and Clearance Service."

Transfer Petitions:
The Court allowed the transfer petitions and transferred the writ petitions pending before the High Court of Madras to the Supreme Court. These transferred writ petitions were disposed of in terms of the judgment rendered in Civil Appeal No. 2013 of 2014 and other connected matters.

Conclusion:
The Supreme Court upheld the High Court's decision that Rule 5 of the Service Tax (Determination of Value) Rules, 2006, was ultra vires Sections 66 and 67 of the Finance Act, 1994. The Court clarified that reimbursable expenses should not be included in the valuation of taxable services for periods before the amendment to Section 67 by the Finance Act, 2015. The Court also ruled that free supplies provided by the service recipient should not be included in the valuation of taxable services.