2024 (7) TMI 384 - HC - Service Tax

Shortfall for payment of the service tax on the basis of the Rule 5 (1) of the Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 - HELD THAT - It is not in dispute that the show cause notice refers to differential value or amount of taxable service of Rs. 165,82,77,786/- pertaining to unbilled revenue of expenses or additional expenses incurred by the petitioner assessee which was treated as part of consideration as per Rule 5 and Rule 2 (c) of the Rules read with Section 67 of the Finance Act, 1994. The Hon ble Supreme Court. in the case of Intercontinental Consultants and Technocrates Pvt Ltd 2018 (3) TMI 357 - SUPREME COURT , referring to the provisions of Rule 5 of the Rules 2006, Rule 2(c) of the Rules, 2006 and Section 67 of the Finance Act, 1994, has held 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. Though, it was not argued by the learned counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature. The impugned show cause notice would not be tenable in law as the same is without jurisdiction. Therefore, the contention raised on behalf of the respondent No. 3 relying upon the decision of the Hon ble Supreme Court that the impugned show cause notice issued by the respondent No. 3 is within jurisdiction and therefore, this petition is not maintainable under Article 226 of the Constitution of India, cannot be accepted - In the facts of the case, as the impugned show cause notice is contrary to the law laid down by the Hon ble Supreme Court, by holding Rule 5 of the Rules 2006 as ultra vires to Section 67 of the Finance Act 1994 and admittedly, the period involved in the impugned show cause notice is prior to 13th May 2015 and therefore, the decision of the Hon ble Supreme Court would be squarely applicable in the facts of the present case. The impugned show cause notice dated 31st October 2017 is hereby quashed and set aside - petition allowed.

Summary

Issues Involved:

1. Validity of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.
2. Jurisdiction of the respondent to issue the show cause notice.
3. Maintainability of the petition under Article 226 of the Constitution of India.

Issue-Wise Detailed Analysis:

1. Validity of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006:

The petitioner challenged the validity of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, arguing that it was ultra vires Section 67 of the Finance Act, 1994. The petitioner cited the Supreme Court's decision in Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd., which held that Rule 5(1) was beyond the mandate of Section 67 and therefore invalid. The Supreme Court in this case emphasized that the value of taxable service should be the gross amount charged by the service provider for such service, and any additional expenses or costs incurred could not be included in the valuation for service tax purposes.

2. Jurisdiction of the respondent to issue the show cause notice:

The respondent issued a show cause notice to the petitioner, alleging non-payment of service tax on certain expenses and additional costs. The petitioner argued that the show cause notice was without jurisdiction as it relied on Rule 5(1), which had been declared ultra vires by the Supreme Court. The respondent countered by citing a recent Supreme Court decision in Commissioner of Central Excise and Service Tax, Rohtak vs. Merino Panel Product Ltd, arguing that the methodology for arriving at the assessable value was immaterial as long as the power to issue the notice existed. However, the court found that since the show cause notice was based on an invalid rule, it was without jurisdiction.

3. Maintainability of the petition under Article 226 of the Constitution of India:

The respondent argued that the petition was not maintainable under Article 226 of the Constitution of India, suggesting that the petitioner should be relegated to the competent authority to file a reply to the show cause notice. However, the court held that since the impugned show cause notice was issued based on a rule declared ultra vires by the Supreme Court, the petition was maintainable under Article 226. The court emphasized that the impugned show cause notice was contrary to the law laid down by the Supreme Court and was therefore without jurisdiction.

Conclusion:

The court concluded that the impugned show cause notice dated 31st October 2017 was without jurisdiction and thus quashed and set it aside. The petition was allowed, and the rule was made absolute to the extent of quashing the show cause notice. No order as to costs was issued.