9911796707
TMI Blog2012 (12) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients. On 19.10.2007, the Superintendent (Audit) Group II (Service Tax), New Delhi issued a letter to the petitioner on the subject "service tax audit for the financial year 2002-03 to 2006-07" and informed the petitioner as follows: - "During the scrutiny of the records it was observed that you have been charging and depositing service tax on remuneration income only in the case of invoices issued in the name of M/s. NHAI (National Highway Authority of India). As per the provision of sub-rule (i) of Rule 5 of the Service Tax (Determination of value) Rules, (Notification number 12/2006-ST, dated 19.04.2006) the service tax is liable to be charged on the gross value including reimbursable and out of pocket expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shall be the gross amount charged from the client in respect of engineering services. 5. The petitioner has filed the present writ petition with three prayers; (i) quashing rule 5 in its entirety of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax and (ii) declaring the rule to be unconstitutional and ultra vires Sections 66 and 67 of the Finance Act, 1994 and (iii) for quashing the impugned show-cause notice-cum-demand dated 17.03.2008 holding that it is illegal, arbitrary, without jurisdiction and unconstitutional. 6. There is no dispute that the petitioner obtained service tax code from service tax authorities for future payment of service tax w. e. f. 01.07.2002, nor is it in dispute that on 09.07.2007 the petitioner got itself registered with the service tax department as consulting engineering services and was paying service tax since 1997 regularly. 7. Service tax was introduced by Chapter V of the Finance Act, 1994. Section 65 (105) defined "taxable service". It contains several clauses but, herein we are concerned only with clause (g) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... storage devices, if any, sold to the client during the course of providing the service; (iii) the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles; (iv) the airfare collected by air travel agent in respect of service provided by him; (v) the rail fare collected by rail travel agent in respect of service provided by him; (vi) the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service; (vii) the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service; and (viii) interest on loan. Explanation 2 - Where the gross amount charged by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged. Explanation 3.- For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Value) Rules, 2006, hereinafter referred to as "Rules", was brought into effect from 01.06.2007. Rule 5 provided for "inclusion in or exclusion from value of certain expenditure or costs". It is necessary to reproduce the rule, which is as follows: - "5. Inclusion in or exclusion from value of certain expenditure or costs (1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. (2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely: - * the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; * the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 3 : A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B. Illustration 4 : Company X provides a taxable service of rent-a-cab by providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Chapter" i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax. 11. In the aforesaid backdrop of the basic features of any legislation on tax, we have no hesitation in ruling that Rule 5 (1) which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider "for such service" provided by him. The illustration 3 given below the Rule amplifies what is meant by sub-rule (1). In the illustration given, the architect who renders the service incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc. to enable him to effectively perform th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm has to be included in his total income and assessed to tax accordingly. If any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over." 12. There is ample authority for the proposition that the rules cannot override or overreach the provisions of the main enactment. In Central Bank of India v. Their Workmen, AIR 1960 SC 12, a Constitution Bench of the Supreme Court was concerned with the Banking Companies Act, 1949. Section 10 of the Act prohibit the grant of industrial bonus to bank employees in as much as such bonus is remuneration which takes the form of a share in the profits of the banking company. Rule 5 of the Banking Companies Rules, 1949, which were statutory rules, required a banking company to send periodically to the principle office of the Reserve Bank a statement in Form-I showing the remuneration paid during the previous calendar year to officers of the company. In a footnote to the Form, it was stated that remuneration includes salary, house allowance, dearness allowance, bonus, fees and allowances to Directors, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated exactly as if they were in the Act and are of the same effect as if contained in the Act. There is another principle equally fundamental to the rules of construction, namely, that the Rules shall be consistent with the provisions of the Act. Hence, Rule 102 has to be construed in conformity with the scope and ambit of Section 19 and it must be ignored to the extent it appears to be inconsistent with provisions of Section 19". In making these observations, the learned single Judge referred to and followed the judgment of the Supreme Court in State of Uttar Pradesh v. Babu Ram Upadhyay, AIR 1961 SC 751. 15. In the tax jurisprudence the position is no different and it has been held in CIT v. S. Chenniappa Mudaliar, (1969) 74 ITR 41 that if a rule clearly comes into conflict with the main enactment or if there is any repugnancy between the substantive provisions of the Act and the Rules made therein, it is the rule which must give way to the provisions of the Act. In Bimal Chandra Banerjee v. State of M.P. and Ors., (1971) 81 ITR 105, Hegde J. was examining the provisions of the M.P. Excise Act, 1915. The legislature levied excise duty only on those articles which came wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xactly what is the area over which powers are given by the section under which the competent authority is purporting to act." It was ultimately held by the Court that Regulation 12 was ultra vires on three grounds. One of the grounds, which is relevant for our purpose, was that the regulation rendered the subject liable to pay such tax as the Commissioner believed to be due whereas the charging Section imposed a liability to pay such tax as in law was due. 18. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus in built mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider "for such service". Reading Section 66 and Section 67 (1) (i) together a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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