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TMI Blog2024 (7) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost incurred was higher than the contract price. [5.3] In response to the aforesaid letter, the petitioner No. 1, vide its letter dated 26th May 2016, submitted as under: (i) that the methodology of accounting adopted by the petitioner No. 1 was in consonance with Accounting Standard 7 issued by the Institute of Chartered Accountants of India and which was mandatorily required to be adhered to by the petitioner No. 1. (ii) that the said methodology adopted by the petitioner No. 1, would have no bearing on the determination of the value of service rendered by the petitioner No. 1, in a particular year as the same would only be governed by the provisions of Section 67 of the Finance Act, 1994 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006. (iii) that the entire premise to levy and collect service tax from the petitioner No. 1, purportedly on the revenue never to be billed is absurd and alien to service tax law. The petitioner No. 1 categorically submits and represents that there is no such revenue never to be billed . (iv) that the petitioner No. 1 collects and pays service tax on all the amounts bills to the service recipient, in accordance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act, 2015 with effect from 14th May 2015, whereby Clause (a) deals with consideration includes any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. It was, therefore, submitted that with effect from May 2015, by virtue of Section 67, such reimbursable expenditure or cost would form part of the valuation of taxable service for charging service tax. [7] It was, therefore, submitted that the impugned show cause notice is, therefore, liable to be quashed and set aside. [8] On the other hand, learned advocate Mr. Utkarsh Sharma for the respondent No. 3 relied upon the recent decision of the Hon ble Supreme Court in the case of Commissioner of Central Excise and Service Tax, Rohtak vs. Merino Panel Product Ltd [Civil Appeal No.6891 of 2018 decided on 5th December 2022] reported in 2022 (0) AIJEL-SC 70194 . It was submitted that in the said decision, while interpreting the provisions of Section 4 (1) of the Central Excise Act, 1944 read with Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (CEVR) similar to Rule 5 of the Rules 2006 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng service tax; and (ii) for 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. 7. Rule 5, which provides for inclusion in or exclusion from the value of certain expenditure or costs , is reproduced below in order to understand its full implication: 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graph or telex or for leased circuit; (c) the amount of premium charged by the insurer from the policy holder; (d) the commission received by the air travel agent from the airline; (e) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer; (f) the reimbursement received by the authorized service station from manufacturer for carrying out any service of nay motor car, light motor vehicle or two wheeled motor vehicle manufactured by 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be prescribed. Explanation : For the purpose of this section, (a) consideration includes any amount that is payable for the taxable services provided or to be provided; (b) money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value; (c) gross amount 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. 10. The High Court, after taking note of the aforesaid provisions, noted that the provisions both amended and unamended Section 67 authorised the determination of value of taxable services for the purpose of charging service tax under Section 66 (which is a charging section) as the gross amount charged by the service provider for such services pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Deeley Ltd. [(1961) 3 WLR 788 (QB)]. [12] The Hon ble Supreme Court, in the aforesaid decision, after considering the submissions made by the parties, has held as under: 21. Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed, that is, for which the service receiver has made the payments to the assessees. As per these Rules, these reimbursable expenses also form part of gross amount charged . Therefore, the core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act. 22. Section 66 of the Act is the charging Section which reads as under: there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses of Section 65 and collected in such manner as may be prescribed. 23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision ahs precedence and must be complied with. 27. The aforesaid principle is reiterated in Chenniappa Mudaliar holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act. 28. It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel: the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect. 29. In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1], a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 29. The obvious basis of the principle against retrospectivity is the principle of fairness , which must be the basis of every legal rule as was observed in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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