2025 (2) TMI 628 - AT - Service Tax

Valuation of service tax - inclusion of expenses incurred by the appellant which were reimbursed by the clients - Section 67 of the Finance Act 1994 read with Rule 5(1) of the Service Tax (Determination of Value) Rules 2006 - Pure Agent under Rule 5(2) of the Valuation Rules - Extended period of limitation - 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. Conclusion - The reimbursed expenses are not part of the taxable value for service tax purposes in terms of Sections 66 and 67 of the Finance Act 1994. The impugned order is set aside - appeal allowed.

ISSUES PRESENTED and CONSIDERED

The primary legal questions considered in this judgment are:

1. Whether the expenses incurred by the appellant, which were reimbursed by the clients, should be included in the gross taxable value for the purpose of service tax under Section 67 of the Finance Act, 1994, read with Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

2. Whether the appellant qualifies as a "Pure Agent" under Rule 5(2) of the Valuation Rules, thereby excluding the reimbursed expenses from the taxable value.

3. Whether the extended period of limitation was correctly invoked under the proviso to Section 73(1) of the Finance Act, 1994, for non-disclosure of reimbursed expenses.

ISSUE-WISE DETAILED ANALYSIS

1. Inclusion of Reimbursed Expenses in Taxable Value:

Relevant Legal Framework and Precedents: The Finance Act, 1994, under Section 67, determines the value of taxable services as the gross amount charged by the service provider. Rule 5(1) of the Service Tax Valuation Rules, 2006, mandates the inclusion of expenditures incurred by the service provider in the taxable value. However, this rule was challenged in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, where the Supreme Court held that Rule 5(1) was ultra vires Sections 66 and 67 of the Act.

Court's Interpretation and Reasoning: The Tribunal relied on the Supreme Court's decision, which clarified that the value of taxable services should only include the consideration for services rendered and not reimbursable expenses. The Court emphasized that the statutory provisions under Sections 66 and 67 did not permit the inclusion of such expenses in the taxable value.

Application of Law to Facts: The Tribunal applied the Supreme Court's interpretation, concluding that the appellant's reimbursed expenses should not be included in the taxable value for service tax purposes.

Treatment of Competing Arguments: The appellant argued that reimbursed expenses are not consideration for services rendered and cited the Supreme Court's ruling. The Department maintained that these expenses should be included as per Rule 5(1). The Tribunal favored the appellant's argument, supported by the Supreme Court's decision.

Conclusions: The Tribunal concluded that the inclusion of reimbursed expenses in the taxable value was not justified under the current legal framework, as interpreted by the Supreme Court.

2. Qualification as a "Pure Agent":

Relevant Legal Framework: Rule 5(2) of the Valuation Rules allows exclusion of expenses incurred by a service provider acting as a "Pure Agent" from the taxable value, subject to specific conditions.

Court's Interpretation and Reasoning: The Tribunal did not delve deeply into this issue, as the primary focus was on the inclusion of expenses in the taxable value. However, it was noted that the appellant did not fulfill the conditions to qualify as a "Pure Agent" under Rule 5(2).

Conclusions: The Tribunal did not find it necessary to address this issue in detail, given the decision on the primary issue regarding the inclusion of expenses.

3. Invocation of Extended Period of Limitation:

Relevant Legal Framework: The proviso to Section 73(1) of the Finance Act, 1994, allows for an extended period of limitation in cases involving fraud, collusion, willful misstatement, suppression of facts, or contravention of provisions with intent to evade tax.

Court's Interpretation and Reasoning: The Tribunal found that the issue at hand was one of legal interpretation rather than deliberate evasion. The appellant's actions were based on their understanding of the law, which was later clarified by the Supreme Court.

Conclusions: The Tribunal held that the extended period of limitation was not applicable, as there was no evidence of malafide intent or suppression of facts by the appellant.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings are as follows:

Preserve verbatim quotes of crucial legal reasoning: The Tribunal quoted the Supreme Court's decision extensively, emphasizing that "the valuation 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."

Core Principles Established: The Tribunal reaffirmed the principle that reimbursed expenses are not part of the taxable value for service tax purposes, as per the Supreme Court's interpretation of Sections 66 and 67 of the Finance Act, 1994.

Final Determinations on Each Issue: The Tribunal set aside the impugned order in appeal, ruling in favor of the appellant by excluding reimbursed expenses from the taxable value and disallowing the invocation of the extended period of limitation.

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