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2012 Supreme(Del) 2263
DELHI HIGH COURT
S.Ravindra Bhat, R.V.Easwar, JJ.
Intercontinental Consultants and Technorats Pvt.Ltd. - Appellant
Versus
U.O.I.& Anr. - Resopndent
W.P. (C) 6370 of 2008
Decided On : 30-11-2012
For the Petitioner:Mr. J. K. Mittal, Mr. Arun Gulati , Mr. V. K. Jha. Advocates.
For the Respondents:Ms. Sonia Sharma , Mr. V. C. Jha, Advocates.
The main legal point established in the judgment is that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which included all expenditure or costs incurred by the service provider in the value for charging service tax, was ultra vires Section 66 and 67 of the Finance Act, 1994.
Headnote:
Rule 5 - Constitutional Validity - Section 66, Section 67 of Chapter V of the Finance Act, 1994 - Summary of Acts and Sections: The court discussed the constitutional validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006 in relation to the inclusion of reimbursement of expenses in the value of taxable services for the levy of service tax. The court also analyzed the provisions of Section 66 and 67 of Chapter V of the Finance Act, 1994. The key legal provisions discussed were Section 66 and Section 67, which govern the levy and valuation of service tax. The court's decision was influenced by the interpretation of these provisions and their alignment with the charging and valuation of taxable services.
Fact of the Case:
The petitioner, a consulting engineering services company, challenged the constitutional validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006, regarding the inclusion of reimbursement of expenses in the value of taxable services for the levy of service tax. The petitioner also contested a show-cause notice issued for recovery of service tax, interest, and penalty.
Finding of the Court:
The court found that Rule 5(1) of the Rules, which included all expenditure or costs incurred by the service provider in the value for charging service tax, exceeded the mandate of Section 67 and was ultra vires. The court ruled in favor of the petitioner, quashing the impugned show-cause notice.
Issues: The issues involved the constitutional validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006, and the legality of the show-cause notice for recovery of service tax, interest, and penalty.
Ratio Decidendi: The court held that Rule 5(1) of the Rules, by including all expenditure or costs incurred by the service provider in the value for charging service tax, went beyond the scope of Sections 66 and 67 of the Finance Act, 1994. The court emphasized that only the consideration for the taxable service could be brought to charge, and the rule sought to extract something more from the service provider.
Final Decision: The court quashed the impugned show-cause notice and allowed the writ petition with no order as to costs.
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 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 Rs. 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 Rs. 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.
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 o
