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TMI Blog2012 (12) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rule 5 may also result in double taxation - If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made “for carrying out the provisions of 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. “The Rules were meant only for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 like travelling, lodging and boarding etc. As per records, it was found that you have short paid Service Tax amounting to ₹ 1,30,26,572/- for the financial year 2006-07. You are hereby directed to deposit the due service ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g charges, etc. which, according to the respondent, were essential expenses for providing the taxable service of consulting engineers . It was stated in the show-cause notice that prior to 19.04.2006, under Section 67 of the Finance Act, 1994, the value of taxable services in relation to consulting engineer services provided or to be provided by a consulting engineer to the client 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. 01.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such manufacturer; and (g) the commission or any amount received by the rail travel agent from the Railways or the customer, But does not include- (i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telephone or telex or for leased circuit; (ii) the cost of unexposed photography film, unrecorded magnetic tape or such other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called Suspense account or by any other name, in the books of accounts of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise. 9. The Service Tax (Determination 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 cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent. Illustration 2 : In the course of providing a taxable 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 tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made for carrying out the provisions of 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is of no consequence. Both the sections have to be read together and construed harmoniously. It is significant that similar provisions have also been enacted in the Act of 1961. Sections 182 and 183 correspond substantially to section 23(5) except that the old section did not have a provision similar to sub-section (4) of section 182. After 1956, therefore, so far as registered firms are concerned the tax payable by the firm itself has to be assessed and the share of each partner in the income of the firm 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 remunerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of India, AIR 1985 Delhi 195 held that though the language of Rule 102 of the Displaced Persons (Compensation and Rehabilitation) Rules, 1955 was wider in its ambit and covered the properties comprised in the compensation bill and entrusted to a managing officer for management, but obviously the said rule has to be construed in the light of the parent Section and it cannot be construed as enlarging the scope of Section 19 itself. It is a well settled canon of construction that the Rules made under a statute must 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson and the tax had to be paid within 7 days of the demand. The regulations did not provide for any appeal or for taking up the decision of the Commissioners to any Court of law. The validity of the regulation came up for consideration before the Court. Sachs J., observed as follows: - To my mind a Court is bound before reaching a decision on the question whether a regulation is intra vires to examine the nature, objects, and scheme of the piece of legislation as a whole, and in the light of that examination to consider exactly 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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