2025 (4) TMI 510 - AT - Service Tax

Tenability of service tax demand invoking rule 5(1) of the Service Tax (Determination of Value) Rules 2006 (Valuation Rules) - inclusion of reimbursed expenditures or costs incurred in the course of providing taxable services - tenability of demand of cenvat credit availed and utilized for payment of tax on non- taxable output service. Inclusion of reimbursed expenditures or costs incurred in the course of providing taxable services - HELD THAT - The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd 2018 (3) TMI 357 - SUPREME COURT which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax. The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants Technocrats Pvt Ltd v UOI 2012 (12) TMI 150 - DELHI HIGH COURT wherein Rule 5(1) of the Service Tax Valuation Rules 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services in the value of such taxable services was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections. The findings in the impugned order in appeal confirming the demand on non-inclusion of reimbursable charges cannot sustain and are liable to be set aside. Cenvat credit availed and utilized for payment of service tax on services that are non-taxable - HELD THAT - The said issue also stands decided in the appellant s favour in light of the Hon ble Apex Court decision in CCE Vadodara v Narmada Chematur Pharmaceuticals Ltd 2004 (12) TMI 93 - SUPREME COURT wherein the wrongly availed cenvat credit was utilized for payment of excise duty the Hon ble Apex Court has held that the consequences of payment of excise duty after availing modvat credit was revenue neutral and thus dismissed the appeal filed by the revenue. Thus the demands made on the appellant on this count too will not sustain. Conclusion - i) The reimbursed expenses should not be included in the taxable value of services. ii) The reversal of CENVAT credit for non-taxable services is not warranted. Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

• Whether the service tax demand invoking Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, requiring the appellant to include reimbursed expenditures or costs in the taxable value of services, was tenable.
• Whether the demand for reversal of CENVAT credit availed and utilized for payment of service tax on non-taxable output services was legally justified.

ISSUE-WISE DETAILED ANALYSIS

1. Inclusion of Reimbursed Expenses in Taxable Value

• Relevant Legal Framework and Precedents: The issue revolved around Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which required the inclusion of expenditures incurred by the service provider in the taxable value. The appellant relied on the Supreme Court's decision in UOI v. Intercontinental Consultants and Technocrats Pvt. Ltd., which struck down Rule 5(1) as ultra vires Sections 66 and 67 of the Finance Act, 1994.
• Court's Interpretation and Reasoning: The Tribunal found that the appellate authority erred in upholding the demand based on Rule 5(1), as the Supreme Court had already deemed the rule invalid. The Tribunal emphasized that reimbursed expenses should not be included in the taxable value of services.
• Application of Law to Facts: The Tribunal applied the Supreme Court's ruling to the appellant's case, concluding that the demand for service tax on reimbursed expenses was unsustainable.
• Conclusions: The Tribunal set aside the demand for service tax on reimbursed expenses, aligning with the precedent set by the Supreme Court.

2. Reversal of CENVAT Credit for Non-Taxable Services

• Relevant Legal Framework and Precedents: The issue pertained to the utilization of CENVAT credit for non-taxable services, with the department arguing that such credit was ineligible. The appellant cited the Supreme Court's decisions in CCE v. Narayan Polyplast and CCE v. Narmada Chematur Pharmaceuticals Ltd., which supported the view that the utilization of credit in such circumstances was revenue neutral.
• Court's Interpretation and Reasoning: The Tribunal agreed with the appellant, noting that the Supreme Court had previously held that the consequences of utilizing CENVAT credit for non-taxable services were revenue neutral, thus dismissing the department's appeal.
• Application of Law to Facts: The Tribunal found that the appellant's utilization of CENVAT credit did not warrant reversal, as it aligned with the Supreme Court's interpretation of revenue neutrality.
• Conclusions: The Tribunal ruled that the demand for reversal of CENVAT credit was unjustified and set aside the department's claim.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reaffirmed the principle that reimbursed expenses should not be included in the taxable value of services, following the Supreme Court's decision that Rule 5(1) of the Service Tax Valuation Rules was ultra vires.
• Final Determinations on Each Issue: The Tribunal set aside the orders of the appellate authority, ruling in favor of the appellant on both issues. It held that the service tax demand on reimbursed expenses was unsustainable and that the reversal of CENVAT credit for non-taxable services was not warranted.

The appeals were allowed with consequential reliefs, if any, as per the law.