Saturday, December 8, 2012

Reimbursement of Expenses not subject to Service Tax

Reimbursement of Expenses not subject to Service Tax

We are sharing with you an important  analysis of judgment  of  Hon’ble  Delhi High Court in the W.P. (C) 6370/2008 of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India & ANR (2012-TIOL-966-HC-DEL-ST) on the following issue:-
Issue:
♣  Whether reimbursement of expenses includible in gross consideration for the chargeability of Service Tax?
♣  Whether Rule 5(1) of Service Tax (Determination of Value) Rules is ultra vires Sections 66 and 67 of Finance Act, 1994?
Facts:
The Petitioner Company is engaged in providing consulting engineer services and receives payments not only for its service but also for 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. Department issued Show Cause Notice demanding service tax on the expenses reimbursed by invoking the provisions of Rule 5(1) of the Service Tax (Determination of value) Rules 2006. The Petitioner Company has challenged Rule 5(1) in a Writ Petition.
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”. Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, reads as:-
“(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.”
Illustration 3 to this Rule reads as: -
“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.”
Rule 5(2) of Rules state that 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 specified conditions are satisfied.
The contention of the Department was that as per the provisions of sub-rule (1) of Rule 5 of Rules, service tax was to be charged on the gross value including reimbursable and out of pocket expenses such as travelling, boarding and lodging, transportation, office rent, office supplies and utilities, testing charges, etc. which, were “essential expenses for providing the taxable service of consulting engineers”.
Held:
It was held that Section 67 authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money. It is only the value of such service 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.
The contention of the petitioner that Rule 5(1) of the Rules, in as much as it provides that all expenditure or costs incurred by the service provider in the course of providing the taxable service shall be treated as consideration for the taxable service and shall be included in the value for the purpose of charging service tax goes beyond the mandate of Section 67 merits acceptance. Section 67 as it stood both before 01.05.2006 and thereafter. This section quantifies the charge of service tax provided in Section 66 (Replaced by Section 66B w.e.f 1-7-2012), which is the charging section. Section 67, both before and after 01.05.2006 authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money.
The underlined words i.e. “for such service” are important in the setting of Section 66 and 67. The charge of service tax under Section 66 is on the value of taxable services. The taxable services are listed in Section 65(105). The service provided by the petitioner falls under clause (g). It is only the value of such service that is to say, the value of the service rendered by the petitioner to NHAI, 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 Finance 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.
Rule 5(1) of Rules, 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. 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.
Further, it was held that 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 clarifies 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 Section 67.
Furthermore, if the expenses such as 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 amount to double taxation.
Therefore, Hon’ble Delhi High Court, while allowing the petition, observed, “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.”
Food for Thought:
This judgement will open up new debate & litigation across the Country on following points:-
♣  Whether application of this judgement can travel beyond territorial jurisdiction of the High Court
♣  Whether the Govt. is going to accept this judgment in right spirit to extend benefits to the Trade and Commerce
♣ Retrospective Amendment: The Government would be tempted to retrospectively validate an invalid levy – Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 (Replaced by Section 66B w.e.f 1-7-2012) and 67 of the Finance Act and to that extent it is ultra vires – So many instances under the Direct Tax & Indirect Tax e.g. – Renting of immovable Properties, etc.
—————————
Bimal Jain
FCA, ACS, LLB, B.Com (Hons)
Mobile: +91 9810604563
E-mail: bimaljain@hotmail.com

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Reimbursements in Service Tax - Ramification of Delhi HC Decision

DECEMBER 14, 2012
By S Sivakumar, Advocate
THE decision of the Delhi Court, in the case of Intercontinental Consultants and Technocrats Pvt Ltd v. Union of India and Anr, reported in 2012-TIOL-966-HC-DEL-ST, is a truly landmark judgment.
As reported, the Delhi High Court has unequivocally held and reiterated the well accepted principle that the Rules cannot override the statutory provisions contained in the Act and that Rule 5(1) of the Service Tax (Determination of Valuation of Services) Rules, 2006 is ultra vires Sections 66 and 67 of the Finance Act, 1994. The relevant extract of the decision is reproduced below…
Quote :
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 the services. The illustration, therefore, says that these expenses are to be included in the value of the taxable service. The illustration clearly shows how the boundaries of Section 67 are breached by the Rule. Apart from travelling beyond the scope and mandate of the Section, the Rule 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….
Unquote:
Now… in the aftermath of this important judicial development, several questions could arise. This piece is an attempt to quickly address some of these…
Any possibility of refunds?
Most assessees have been collecting service tax on reimbursements and have been remitting the service tax so collected to the account of the Government. Is there a possibility for such assessees to claim a refund of the service tax paid on such reimbursements? If the service tax burden has already been passed on to the service recipients, the service providers would not be allowed to file the refund claims. Of course, the service recipient, assuming that he has not passed on the service tax burden to his own customers/service receivers, is entitled to file a refund claim, subject to the time limit specified in Section 11B of the Central Excise Act, made applicable to service tax related refunds.
From a purely legal perspective since the amounts paid by the assessees cannot be treated as ‘service tax' in the first place a view can be taken that the provisions of Section 11B cannot be invoked in respect of these refund claims.
Economic Impact of this decision on current cases being litigated
Several appeals have been filed before the CESTAT, on the levy of service tax on expenses reimbursed by the service receiver to the service provider. Orders passed by Commissioners confirming several crores of rupees of service tax liability on the levy of service tax on reimbursements such as electricity supplied by Developers of commercial complexes, amounts charged by Advertising Agencies, etc. are currently being litigated before the various CESTAT benches. The CESTAT, as we know, is not authorized to go into the legality of Rule 5(1) vis-à-vis Section 67. Having said so, the CESTAT Benches would now be duty bound to follow the law laid down by the Delhi High Court and the Government could end up losing these cases resulting in a significant loss of revenue.
Can the Government amend Section 67?
This would be a very interesting development that we would need to wait and see. Given the stakes involved, one would not be surprised to see the Government taking the most predictable route of amending Section 67, albeit, retrospectively, apart from challenging the Delhi High Court decision, in the Supreme Court.
We must bear in mind the fact that the methodology for valuation of services derives its legal sanctity from Section 67 of the Finance Act, 1994 even under the new service tax law. Hence, the pain arising out of this decision will affect the Government, under the new service tax, as well.
One should definitely expect some kind of a legislative action in the coming Budget to overcome the effects arising out of this decision.
Inter-Group billings for reimbursements at actuals will now come out of tax net
Thanks to this decision corporates recovering costs or expenses, at actuals, from sister companies, etc. will no longer be required to discharge service tax on the reimbursement of expenses. Charging sister companies for reimbursements, at actuals, is a practice, widely practiced, even between companies in India and their associated enterprises. Most of these transactions including import transactions could get out of the service tax net.
Income tax angle?
It is a well-recognized principle under the Income tax law that, only ‘income' can be subjected to tax, especially, in the case of provisions related to tax deduction at source. Thus, an importer, who is only reimbursing the expenses incurred by his parent company, let's say, is not required to deduct tax at source under Section 195 of the Income tax Act. One is happy that this principle has got indirectly confirmed, in the decision of the Delhi High Court, inasmuch as, service tax can be levied only on the value of ‘services' rendered and not on claims of ‘reimbursements', which cannot be treated as services rendered. So far so good.
"Pure Agent" concept - no longer a pre-requisite for exemption of service tax on reimbursements
In terms of Rule 5, at it has stood from 19-4-2006, reimbursements are exempted only if the eight golden conditions laid down therein, are fulfilled, cumulatively. In most practical situations, it would be impossible to fulfil all the eight conditions laid down, with the result, that, most reimbursements are now being subjected to service tax. In terms of this decision, the concept of ‘pure agent' being a pre-requisite for claiming exemption from levy of service tax on reimbursements would no longer be valid.
Implications on valuation of free supply of materials by service receiver
As we know, practice of the service receiver providing materials for use by the service provider, is a widely used concept, especially, in the Realty Sector. There have been judicial decisions for and against the value of the materials supplied free of cost, by the service receiver (popularly known as FOC materials). While the Madras High Court in the L & T case [ 2007-TIOL-176-HC-MAD-ST ], the Delhi High Court in the Era Infra Engg Ltd's case [2008-TIOL-386-HC-Del-ST] and the Calcutta High Court in the Simplex Infrastructures Ltd's case [ 2010-TIOL-899-HC-KOL-ST ] have taken a prima facie view that, the value of the FOC materials cannot be included under the ‘gross amount charged', we also have the final decision of the CESTAT in the Jaihind Projects Ltd's case [ 2010-TIOL-124-CESTAT-Ahm ], taking the view that service tax has to be paid on the free supply of materials. It would seem that the validity of Rule 5(1) has not been considered in these cases. With the Delhi High Court now striking down Rule 5(1), the whole question of taxability of FOC materials would need to be looked into afresh. It is felt that there is a possibility to take the view that the FOC materials are nothing but a ‘cost' in terms of the project being executed and consequently cannot form part of the ‘gross amount charged', so long as adequate documentation is maintained by both the service provider as well as the service receiver.
Any planning possible, post this decision
There can be little doubt that, this decision gives rise to a number of legally sustainable planning possibilities for Industry. It would now make sense for service providers to keep documentation to clearly show the different categories of costs and expenses and bill these separately on service receivers, under claims of ‘reimbursement' and raise separate bills for services charging service tax at the full rates.
Before concluding...
The ramifications arising out of this decision could be far and wide. In the Realty sector, as I know, flat buyers are charged service tax by Developers/Builders on a host of ‘reimbursements' and with no mechanism to avail of cenvat credit, the overall cost of buying an apartment goes up significantly. Hopefully, post this decision, apartment buyers can get flats at lesser overall prices.
Similarly, the recoveries made by employers from employees of expenses would no longer be taxable as it can be said that the employer is only claiming a reimbursement from the employee of these expenses. In fact, post this decision, the reach of ‘Reverse Charge Mechanism' would seem to get limited.
The Department, on the basis of Rule 5(1) has been taking the view that all the money that flows, whether related to the services or not, from the service receiver to the service provider is to be included under ‘gross amount charged'. This decision comes as a huge relief in these cases also and the whole concept of ‘gross amount charged' is bound to undergo a sea change to the advantage of the service provider.
As mentioned a retrospective amendment cannot be ruled out…which, when it happens, would give rise to a fresh round of litigation

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W.P. (C) 6370/2008                   Page 1 of 17


*                IN  THE  HIGH  COURT  OF  DELHI  AT  NEW  DELHI

Reserved on: 1st
 November, 2012
%                                         Date of Decision: 30th
 November, 2012

+  W.P. (C) 6370/2008

  INTERCONTINENTAL CONSULTANTS AND
TECHNORATS PVT. LTD.          .....Petitioner
Through:  Mr. J. K. Mittal, Mr. Arun Gulati and
Mr. V. K. Jha, Advocate.
versus
  
  U.O.I. & ANR.                   ......Respondents
Through:  Ms. Sonia Sharma and Mr. V. C. Jha,
Advocates.

CORAM:
MR. JUSTICE S. RAVINDRA BHAT  
MR. JUSTICE R.V. EASWAR

R.V. EASWAR, J.:


  In this writ petition, the petitioner challenges the constitutional validity of
Rule 5 of the Service Tax (Determination of Value) Rules, 2006 to the extent it
includes re-imbursement of expenses in the value of taxable services  for the
purposes of levy of service tax.  The petitioner also contends, in the alternative that
the said rule is ultra vires of the provisions of Section 66 and 67 of Chapter V of
the Finance Act, 1994.
2.  The petitioner is a company providing consulting  engineering services.  It
specialises in highways, structures, airports, urban and rural infrastructural projects
and is engaged in various road projects outside and inside India.  In the course of
the carrying on of its business, the 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 W.P. (C) 6370/2008                   Page 2 of 17

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 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 tax
along with interest @ 13% under section 73 and 75 respectively of
the Finance Act, 1994 within 15 days.
The matter may please be treated MOST URGENT/ TIME
BOUND.”

3.  In response to the above letter the petitioner provided monthwise details of
professional income as well as reimbursable out of pocket expenses for the period
mentioned in the letter.  On 17.03.2008, a show-cause notice was issued by the
Commissioner, Service Tax Commissionerate by which the petitioner was asked to
show-cause why service tax of  `3,55,80,738/-  should not be recovered from it
along with interest and penalty under Sections 76 to 78 of the Finance Act, 1994. 
The aforesaid figure of service tax was arrived at in the following manner in the
show-cause notice. W.P. (C) 6370/2008                   Page 3 of 17


Period
Reimbursable
Income
Rate of
Service
Tax
Service Tax Payable
Total
Service Tax
Edu.
Cess
Oct’02 to
April’03
99,42,433/-  5%  4,97,122/-  -  4,97,122/-
May’03 to
Aug’04
4,87,83,282/-  8%  39,02,662/-  -  39,02,662/-
Sep’04 to
March’06*
13,22,66,980/-  10.2%  1,32,26,698/-  2,64,534/-  1,34,91,232/-
April’06 to
March’07
14,45,23,874/-  12.24%  1,73,42,865/-  3,46,857/-  1,76,89,722/-
Total  33,55,16,569/-    3,49,69,347/-  6,11,391/-  3,55,80,738/-
*(Note: - For the period prior to April’06, the reimbursable income on account of
traveling lodging and boarding have not been taken into account).

4.  The basis of the show-cause notice was the provisions of sub-rule (1) of
Rule 5 of the Service Tax (Determination of Value) Rules, 2006.  It was the case of
the respondent that under the aforesaid rule, service  tax was to be charged on the
gross value including reimbursable and out of pocket expenses such as travelling,
boarding and lodging, transportation, office rent, office supplies and utilities,
testing 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. W.P. (C) 6370/2008                   Page 4 of 17

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) which is applicable to the petitioner.  Any service
provided to any person, by a consulting engineer in relation to advice, consultancy
or technical assistance in any manner in one or more disciplines of engineering
including the discipline of computer hardware engineering is defined to be a
taxable service under this clause.  The charge of service tax is effectuated in
Section 66 of the Act.  It says that “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”.  Section 67 of  the Act as it stood  before  being substituted by the
Finance Act, 2006, w. e. f. 01.05.2006 was as under: -
“67.  Valuation of taxable services for charging service tax
For the purposes of this Chapter, the value of any taxable service
shall be the gross amount charged by the service provider for such
provided or to be provided by him.  W.P. (C) 6370/2008                   Page 5 of 17

Explanation 1.- For the removal of doubts, it is hereby declared that
the value of a taxable service, as the case may be, includes,-
(a) the aggregate of commission or brokerage charges by a broker
on the sale or purchase of securities including the commission or
brokerage paid by the stock-broker to any sub-broker.
(b) the adjustments made by the telegraph authority from any
deposits made by the subscriber at the time of application for
telephone connection or pager or facsimile or telegraph 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 two
wheeled motor vehicles; 
(iv) the airfare collected by air travel agent in respect of  service
provided by him; W.P. (C) 6370/2008                   Page 6 of 17

(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 the taxable service before, during or after
provision of such service.”
8.  The new Section 67 which came into effect from 01.05.2006 is shorter and
it is as follows: -
  “67.  Valuation of taxable services for charging service tax
(1)  Subject to the provisions of this Chapter, where service tax
is chargeable on any taxable service with reference to its value,
then such value shall, -
(i)  in a case where the provision of service is for a
consideration in money, be the gross amount charged by
the service provider for such service provided or to be
provided by him;
(ii)  in a case where the provision of service is for a
consideration not wholly or partly consisting of money, be
such amount in money as, with the addition of service tax
charged, is equivalent to the consideration;
(iii)  in a case where the provision of service is for a
consideration which is not ascertainable, be the amount as
may be determined in the prescribed manner.
(2)  Where the gross amount charged by a service provider, for
the service provided or to be provided is inclusive of service tax W.P. (C) 6370/2008                   Page 7 of 17

payable, the value of such taxable service shall be such amount as,
with the addition of tax payable, is equal to the gross amount
charged.
(3)  The gross amount charged for the taxable service shall
include any amount received towards the taxable service before,
during or after provision of such service.
(4)  Subject to the provisions of sub-sections (1), (2) and (3),
the value shall be determined in such manner as may 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.”

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 W.P. (C) 6370/2008                   Page 8 of 17

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 agent of the recipient of service;
  the recipient of service is liable to make payment to the
third party;
  the recipient of service authorities the service provider
to make payment on his beahfl;
  the recipient of service knows that the goods and
services for which payment has been made by the
service provider shall be provided by the third party;
  the payment made by the service provider on behalf of
the recipient of service has been separately indicated in
the invoice issued by the service provider to the
recipient of service;
  the service provider recovers from the recipient of
service only such amount as has been paid by him to
the third party; and
  the goods or services procured by the service provider
from the third party as a pure agent of the recipient of
service are in addition to the services he provides on
his own account.
Explanation 1 : For the purposes of sub-rule (2), “pure agent”
means a person who –
  enters into a contractual agreement with the recipient
of service to act as his pure agent to incur expenditure
or costs in the course of providing taxable service; W.P. (C) 6370/2008                   Page 9 of 17

  neither intends to hold nor holds any title to the goods
or services so procured or provided  as pure agent of
the recipient of service;
  does not use such goods or services so procured; and
  receives only the actual amount incurred to procure
such goods or services.
Explanation 2 : For the removal of doubts it is clarified that the
value of the taxable service is the total amount of consideration
consisting of all components of the taxable service and it is
immaterial that the details of individual components of the total
consideration is indicated separately in the invoice.
Illustration 1 : X contracts with Y, a real estate agent to sell his
house and thereupon Y gives an advertisement in television. Y
billed X including charges for Television advertisement and paid
service 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 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. W.P. (C) 6370/2008                   Page 10 of 17

Illustration 4 : Company X provides a taxable service of rent-a-cab
by providing chauffeur-driven cars for overseas visitors. The
chauffeur is given a lump sum amount to cover his food and
overnight accommodation and any other incidental expenses such
as parking fees by the Company X during the tour. At the end of
the tour, the chauffeur returns the balance of the amount with a
statement of his expenses and the relevant bills. Company X
charges these amounts from the recipients of service. The cost
incurred by the chauffeur and billed to the recipient of service
constitutes part of gross amount charged for the provision of
services by the company X.”

10.  The contention of the petitioner that Rule 5(1) of the Rules, in as much as  it
provides that all expenditure or costs incurred by the service provider in the course
of providing the taxable service shall be treated as consideration for the taxable
service and shall be included in the value for the purpose of charging service tax
goes beyond the mandate of Section 67 merits acceptance.  Section 67 as it stood
both before 01.05.2006 and after  has been set out hereinabove.  This section
quantifies the charge of service tax provided in Section 66, which is the charging
section.  Section 67, both before and after 01.05.2006 authorises the determination
of the value of the taxable service for the purpose of charging service tax under
Section 66 as the gross amount charged by the service provider  for such service
provided or to be provided by him, in a case where the consideration for the
service is money.  The underlined words i.e. “for such service” are important in the
setting of Section 66 and 67.  The charge of service tax under Section 66 is on the
value of taxable services.  The taxable services are listed in Section 65(105).  The
service provided by the petitioner falls under clause (g).  It is only the value of
such service  that is  to say, the value of the service rendered by the petitioner to
NHAI, 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 W.P. (C) 6370/2008                   Page 11 of 17

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 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 the services.  The illustration, therefore,
says that these expenses are to be included in the value of the taxable service.  The
illustration clearly shows how the boundaries of Section 67 are  breached by the
Rule.  Apart from travelling beyond the scope and mandate of the Section, the Rule
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.  A
Constitution Bench of the Supreme court in Jain Brothers v. Union of India, (1970)
77 ITR 107 observed as follows, expounding the principles relating to double
taxation: -
“It is not disputed that there can be double taxation if the
legislature has distinctly enacted it.  It  is only when there are
general words of taxation and they have to be interpreted, they W.P. (C) 6370/2008                   Page 12 of 17

cannot be so interpreted as to tax the subject twice over to the
same tax (vide Channell J. in Stevens v. Durban-Roodepoort Gold
Mining Co. Ltd.).  The Constitution does not contain any
prohibition against double taxation even if it be assumed that such
a taxation is involved in the case of a firm and its partners after the
amendment of section 23(5) by the Act of 1956.  Nor is there any
other enactment which interdicts such taxation.  It is true that
section 3 is the general charging section.  Even if section 23(5)
provides for the machinery for collection and recovery of the tax,
once the legislature has, in clear  terms, indicated that the income
of the firm can be taxed in accordance with the Finance Act of
1956 as also the income in the hands of the partners, the
distinction between a charging and a machinery section 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
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.  The contention was that Rule 5
enlarged the meaning and content of Section 10.  The contention was repelled but W.P. (C) 6370/2008                   Page 13 of 17

not on  the ground that the rule can validly enlarge the content of the Section, but
on the ground that the Section itself used the word “remuneration” in the widest
sense.  It was however acknowledged by the Court that the Rule cannot go beyond
the statute.  The relevant observations are: -
“We do not say that a statutory  rule can enlarge the meaning of
S.10; if a rule goes beyond what the Section contemplates, the rule
must yield to the statute.  We have, however, pointed out earlier
that S.10 itself uses the word “remuneration” in the widest sense,
and R.5 and Form-I are to that extent in consonance with the
Section.”
It has not been suggested in the present case that the words “consideration in
money” or “the gross amount charged” themselves have been used in section 67 in
the widest sense of including the amounts collected by the service provider for his
travel, hotel stay,  transportation  and other out of pocket expenses.  These words
have been defined in the Explanation below the section and it is significant that the
out of pocket expenses such as travel, hotel stay, transportation etc. have not been
included in those expressions. 
13.  In  Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd.,
(1984) 2 SCC 50, the Supreme Court (Three-Judge Bench) observed as under: -
“Now if there is any conflict between a statute and the subordinate
legislation, it does not  require elaborate reasoning to  firmly state
that  the statute prevails over subordinate legislation and the bye-
law, 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 has precedence and must be complied with.”

14.  A learned  single Judge of this Court in Devi Datt v. Union 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 W.P. (C) 6370/2008                   Page 14 of 17

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 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 within the scope of Section 25 of that Act.  The rule-making authority,
which was the State Government, purported to levy duty on articles which did not
fall within the scope of the Section.  Holding this act of the State Government to be
ultra vires the Section, it was observed as under: -
“No tax can be imposed by any bye-law or  rule or  regulation
unless the statute under which the subordinate legislation is made
specially authorises  the  imposition even if it is assumed that the
power to tax can be delegated to the executive.  The basis of the
statutory power conferred by the statute cannot be transgressed by
the rule making authority.  A rule making authority has no plenary
power.  It has to act within the limits of the power granted to it.
16.  In CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44 it was held
by the Supreme Court that  W.P. (C) 6370/2008                   Page 15 of 17

“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.”
17.  In Commissioners of Customs and Excise v. Cure and Deeley Ltd., (1961) 3
WLR 788 (QB) the facts were these.  Section 33(1) of the Finance Act, 1940 of the
United Kingdom enacted  that the Commissioners might make regulations
providing for any method for which provision appeared to them to be necessary for
the purpose of giving effect to the provisions of the Act and of enabling them to
discharge  the  functions.  The Commissioners framed  Regulation  12 of the
Purchase Tax Regulations, 1945.   It stated that if any person failed to furnish a
return as required by the regulation or furnished an incomplete return, then the
Commissioners could determine the amount of tax appearing  to  them to be due
from such person, and demand payment thereof.  Such amount determined by the
Commissioners was to be deemed to be the proper tax due from such person 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 W.P. (C) 6370/2008                   Page 16 of 17

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 and harmoniously, it seems clear to us that in the valuation of the taxable
service, nothing more and nothing less than the consideration paid as quid pro quo
for the service can be brought to charge.  Sub-section (4) of Section 67 which
enables the determination of the value of the taxable service “in such manner as
may be prescribed”  is expressly made subject to the provisions of sub-section (1). 
The thread which runs through Sections 66, 67 and Section 94, which empowers
the Central Government to make rules for carrying out the provisions of Chapter V
of the Act is manifest, in the sense that only  the  service actually provided by the
service provider can be valued and assessed to service tax.  We are, therefore,
undoubtedly of the opinion that Rule 5 (1) of the Rules runs counter and is
repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires.  It
purports to tax not what is due from the service provider under the charging
Section, but it seeks to extract something more from him by including in the
valuation of the taxable service the other expenditure and costs which are incurred
by the service provider “in the course of providing taxable service”.  What is
brought to charge under the relevant Sections is only the consideration for the
taxable service.  By including the expenditure and costs, Rule 5(1) goes far beyond
the  charging provisions and cannot be upheld.  It is no answer to say that under
sub-section (4) of Section 94 of the Act, every  rule framed by the Central
Government shall be laid before each House of Parliament and that the House has
the  power to modify the  rule.  As pointed out by the Supreme Court in Hukam
Chand v. Union of India, AIR 1972 SC 2427: - W.P. (C) 6370/2008                   Page 17 of 17

“The fact that the rules framed under the Act have to be laid before
each House of Parliament would not confer validity on a rule if it
is made not in conformity with Section 40 of the Act.”
Thus Section 94 (4) does not add any greater force to the Rules than what they
ordinarily have as species of subordinate legislation.
19.  For the above reasons we quash the impugned show-cause notice and allow
the writ petition with no order as to costs.

 
(R.V. EASWAR)
                                                                      JUDGE



                                                                                      (S. RAVINDRA BHAT)
          JUDGE
NOVEMBER 30, 2012
hs