Back
2026 Supreme(Guj) 212
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
A.S. SUPEHIA, VAIBHAVI D. NANAVATI, JJ.
Linde Engineering India Pvt. Ltd & Anr. - Petitioners
Versus
Union of India & Ors. - Respondents
R/Special Civil Application No. 19342 of 2018
Decided On : 12-06-2026
For the Petitioner: Mr. Mihir Joshi, Senior Counsel with Mr. Parth Contractor.
For the Respondents: Mr. Ankit Shah.
The valuation of taxable services is strictly limited to the gross amount charged as consideration for services rendered. Rules attempting to include non-received expenditure or losses in the taxable value are ultra vires the parent statute, and any demand based on such rules prior to statutory amendment is invalid.
Headnote:(A) Finance Act, 1994 - Section 67 - Valuation of taxable services - Service Tax (Determination of Value) Rules, 2006 - Rule 5(1) - Inclusion of reimbursable expenditure in value of taxable services - Scope and validity - Rule 5(1) held ultra vires Section 67 by judicial pronouncements - Amendment to parent statute is prospective - Reimbursable expenditure or costs incurred as losses cannot be treated as consideration received from service recipient - Demand for tax on such losses is unsustainable in law. (Paras 8, 9, 10)
(B) Show Cause Notice - Validity - Issuance of notice based on rules declared to be ultra vires the parent statute - Absence of jurisdictional authority - Notice travels beyond statutory framework - Quashing of notice is warranted where foundation of demand is legally non-existent. (Paras 6, 10, 11)
Facts of the case:
A service provider challenged a show cause notice issued by tax authorities demanding service tax on losses incurred during the financial years 2012-13 to 2014-15. The authorities sought to include these losses in the value of taxable services by relying on a specific rule that had been declared ultra vires by the highest court.
Findings of Court:
The court determined that the rules utilized by the tax authorities to justify the demand were ultra vires the parent legislation during the relevant period. As the legislative amendment expanding the valuation scope was prospective, it could not be applied to the period in question.
Issues: Whether a show cause notice demanding tax on unrecovered losses based on a rule struck down by the judiciary is sustainable in law, and whether retroactive application of statutory scope extension is permissible.
Ratio Decidendi: Rules framed under an act cannot widen the scope of the parent statute. Reimbursable costs or expenditure not received as consideration cannot be included in the valuation of taxable services prior to legislative amendment. Judicial precedents confirming the ultra vires nature of the rule render the notice issued on that basis fundamentally flawed and without jurisdiction.
Result: Petition allowed; show cause notice quashed.
| Table of Content |
|---|
| 1. petitioner challenges service tax demand on business losses. (Para 1 , 2 , 3 , 4 , 5) |
| 2. rule 5(1) of 2006 rules is ultra vires section 67. (Para 6 , 7) |
| 3. service tax valuation must relate to consideration for service. (Para 8 , 9 , 10) |
| 4. ultravires show cause notice is quashed and set aside. (Para 11) |
JUDGMENT :
VAIBHAVI D. NANAVATI, J.
1. Heard Mr. Mihir Joshi, learned Senior Counsel appearing with Mr. Parth Contractor, learned advocate appearing for the petitioners and Mr. Ankit Shah, learned Senior Standing Counsel appearing for the respondent No.3. Though served, none appeared for the respondent Nos.1 and 2.
2. Rule returnable forthwith. Mr. Ankit Shah, learned Senior Standing Counsel waives service of notice of Rule for and on behalf of the respondent No.3.
3. Having regard to the controversy in narrow compass, with the consent of learned advocates appearing for the respective parties, the matter is taken up for final hearing.
4. By way of present petition, the petitioners herein have prayed for the following reliefs:
“a) This Hon’ble Court may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or direction quashing the Show Cause Notice (F.No.V ST(Adj.)11/Linde/Commr-I/2017-18/II) dated 31.10.2017 issued by the Respondent No.3 to the Petitioner No.1;
b) Pending the present petition, this Hon’ble Court may be pleased to stay further proceedings against the Petitioner No.1 pursuant to the Show Cause Notice (F.No.V ST(Adj.)11/Linde/Commr-I/2017-18/II) dated 31.10.2017 issued by the Respondent No.3 to the Petitioner No.1;
c) Ex-parte ad-interim relief in terms of prayer (C) may kingly be granted
d) Such other and further reliefs as may be deemed appropriate by this Hon’ble Court.”
5. Brief facts leading to the filing of the present petition read thus:
5.1 The petitioner No.1 herein is engaged in the business of providing taxable output services under the category of consulting engineer services, erection, commissioning and installation service, construction services other than residential complex, including commercial/industrial buildings or civil structures and works contract services etc. to various entities located in and outside India. The petitioner No.1 has been periodically filing its Service tax returns and has been paying appropriate Service tax as ascertained in accordance with law.
5.2 The petitioner herein is aggrieved by the issuance of the impugned show cause notice dated 31.10.2017 issued by the respondent No.3 calling upon the petitioner No.1 to show cause as to why an amount of Rs.15,80,81,535/- along with applicable interest and penalty should not be recovered under Section 73(1) of the Finance Act, 1994 (for short ‘the Act’), effectively seeking payment of Service tax from the petitioner on the losses (excess expenditure over the contract revenue) incurred by the petitioner during the period between Financial Year (F.Y.) 2012-13 to 2014-15, by relying upon Rule 2(c) of the Service Tax (Determination of Value) Rules, 2006 (for short ‘Rules, 2006’) read with Rule 5(1) of the Rules without appreciating the relevant facts.
(i) for the period under consideration, Rule 5(1) of the Rules, 2006 has been held ultravirus Section 67 of the Act and;
(ii) liability to collect and pay Service tax, at the very threshold, arises on the consideration or amounts which are received/to be received from the service recipient, and not on the losses (which are never recovered from the service recipients), which are incurred by the service provider.
5.3 Along with the impugned show cause notice, another show case notice dated 31.10.2017 also came to be issued by the respondent No.3 on a similar issue of alleged non-payment of Service tax on losses suffered by the petitioner No.1, which was also subject matter of challenge by way of Special Civil Application No.19341 of 2018.
6. Mr. Mihir Joshi, learned Senior Counsel appearing for the petitioners, at the outset, submi
