Overview

Background

The Hon’ble Supreme Court vide its judgment dated 07.03.2018 has dismissed all the appeals filed by the Revenue and has upheld the judgment of the Delhi High Court dated 30.11.2012 vide which Rule 5 of the Service Tax (Determination of Value) Rules, 2006 (“ST Valuation Rules”) was declared to be ultra vires the provisions of Sections 66 and 67 of the Finance Act, 1994.

Accordingly, the Supreme Court has held that there can be no levy of Service tax on reimbursed expenses or costs incurred by the service provider since Section 67 of the Finance Act, 1994 which deals with valuation of taxable service does not include in its ambit the value of such reimbursable expenses or cost as permitted by Rule 5 of Rules, 2006 and thus Rule 5 of the ST Valuation Rules has gone beyond the mandate of Section 67 of the Finance Act, 1994.

The Supreme Court further noted that the Legislature has amended Section 67 w.e.f May 14, 2015 vide which such reimbursable expenses or costs has now form part of the value of taxable service for the purpose of charging Service Tax. However, it held that such an amendment brought a substantive change in Section 67 of the Finance Act, 1994 and therefore, the same will be prospective in nature.

Brief Facts of the Case

• That the Assessee M/s Intercontinental Consultants and Technocrats was providing consulting engineering services in respect of highway projects to National Highway Authority of India. In the course of providing such services, the assessee was incurring expenditure or costs such as air travel, hotel stay which was reimbursed by its clients.
• That the Assessee was paying Service Tax in respect of amounts received by it for services rendered to its client. However, the assessee was not paying service tax in respect of expenses incurred by it, which was reimbursed by its clients.
• That the Department issued a Show Cause Notice to the Assessee, demanding service tax on such reimbursed expenses or costs on the ground that the value of such reimbursable activities were included in the gross value as per the provisions of Rule 5 of the ST Valuation Rules.
• That against the said SCN, the Assessee filed a writ petition before the Delhi High Court challenging the vires of Rule 5 of the ST Valuation Rules as unconstitutional and ultra vires the provisions of Sections 66 and 67 of the Finance Act, 1994.
• That the Delhi High Court vide its judgment and order dated 30.11.2012 declared Rule 5 to be ultra vires the provisions of Section 66 and 67 of the Finance Act, 1994.
• That being aggrieved by the judgment of the Delhi High Court, the Department / Revenue went into an appeal before the Hon’ble Supreme Court. Similar Appeals were also filed by the Department in respect of other Assessees which were broadly engaged in services such as Share Transfer Agency Services, Customs housing agent services etc.

Contentions and Arguments of the Department

• The Department / Revenue contested that as per Section 67 of the Finance Act 1994, the value of taxable services in relation to consulting engineering services shall be the gross amount charged by the assessee for providing such services.
• It was further contested that the expression ‘gross amount charged’ denotes the total amount which is received in rendering those services and would also include the other amounts like transportation, office rent, office appliances, furniture and equipments
• The Department further submitted that it is undisputed that as per Rule 5 any expenditure or costs incurred by the service provider in the course of providing taxable services are treated as consideration for the taxable services provided or to be provided for the purpose of charging service tax.
• Accordingly it was submitted that since section 67 specifically lays down the principle of gross amount charged by a service provider for the services provided or to be provided, Rule 5 did not go contrary to Section 67 and therefore the judgment of the Delhi High Court suffers from serious infirmity and same needs to be struck down.

Contentions and Arguments of the Assessee

• The Assessee vehemently contested that the High Court was right in holding that as per Section 66 of the Finance Act, 1994 which was a charging section, service tax is to be charged only on the ‘value of taxable services”. Likewise, Section 67 which deals with valuation of taxable services categorically mentions that it was only on the gross amount charged for providing ‘such” taxable service.
• Accordingly, it was submitted that the “gross amount” as appearing under Section 67 of the Finance Act, 1994 would include in its canvass any amount received towards rendering such taxable services and does not include reimbursable expenditure or costs incurred by the service provider in the course of providing such taxable services.
• The Assessee further pointed out that w.e.f May 14, 2015, the Legislation made an amendment to Section 67 of the Finance Act, vide which such reimbursed expenses or costs have been brought within the tax net. However, during the period of dispute, such consideration was only in respect of providing taxable services and therefore, no service tax can be demanded on such reimbursed expenses or cost.

 Findings of the Hon’ble Supreme Court

• The Hon’ble Supreme Court held that the High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable services shall be the gross amount charged by the service provider ‘for such service’ and the valuation of taxable service cannot be anything more or less than the consideration paid as quid pro qua for rendering such service.
• Accordingly, the Hon’ble Supreme has held that Rule 5 of the ST Valuation Rules, 2006 which allows reimbursable expenditure or costs to be part of the gross amount charged for providing such taxable services has gone beyond the mandate of Section 66 and 67 of the Finance Act, 1994 which is not permissible under the law.
• The Hon’ble Supreme Court further noted that w.e.f May 14, 2015 by virtue of provisions of Section 67 such reimbursable expenditure or costs will form part of valuation of taxable services for charging service tax. However it held that such an amendment brought a substantive change in Section 67 of the Finance Act, 1994 and therefore the same will be prospective in nature.

Our Comments   

After detailed analysis of the Judgment passed by the Hon’ble Supreme Court, it is amply clear that re-imbursement of expenses was not subject to Service Tax prior to May 14, 2015. Such re-imbursement of expenses was liable to Service Tax between May 14, 2015 to June 30, 2017, since the term ‘Consideration’ was explained in the provisions of Section 67 itself and reimbursable expenses were specifically included therein.

It is imporant to mention here that under the Service Tax regime expenses incured by the Service Provider acting as a ‘Pure Agent’ were not liable to Service Tax, provided the prescribed conditions were fulfilled. In our view, the assessee who was before the High Court in the aforesaid Writ Petition was not acting as a Pure Agent. It is in these facts that the assessee challenged the Service Tax liability on reimursement of expenses.

That as we all know, w.e.f July 01, 2017, Goods & Services Tax Law has been implemented in India. Under the GST regime, Section 15 of the Central Goods & Services Tax Act, 2017 deals with the provisions of Valuation of taxable supply. The provisions of Section 15 provide that the value of a supply of goods or services or both shall be the transaction value. The term ‘value of supply’ includes inter-alia ‘incidental expenses’.

The concept of ‘Pure Agent’ has been brought under the GST regime as well. In this regard, the Valuation Rules provide that the cost or expenditure incurred by a supplier of service as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the prescribed conditions are fulfilled.

In a nutshell, under the GST regime a supplier of goods or services will be entitled to exclude the cost or expenses incurred on behalf of the recipient of supply only when the supplier is acting as a Pure Agent and fulfills all the prescribed conditions. Otherwise, the expenses incurred by a supplier of goods or services shall be included in the value of taxable supply in terms of the provisions of Section 15 of the CGST Act, 2017.