Setting aside of Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 by High Court upheld: Supreme Court
By TIOL News Service
NEW DELHI, MAR 09, 2018: IN the impugned judgement - 2012-TIOL-966-HC-DEL-ST, the Delhi High Court held,
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 Supreme Court in a classic judgement had no hesitation in upholding the High Court Judgement in appeals filed by Revenue.
THE FACTS : While rendering the services, the assessees were also getting reimbursement in respect of certain activities undertaken by them which according to them is not includable to arrive at 'gross value' charged from their clients. As per Rule 5 of the Service Tax (Determination of Value) Rules, 2006, the value of the said reimbursable activities is also to be included as part of services provided by the respondents. Writ petitions were filed by the assessees challenging the vires of Rule 5 of the Rules as unconstitutional as well as ultra vires the provisions of Sections 66 and 67 of Chapter V of the Finance Act, 1994. The High Court of Delhi has, by the judgment dated November 30, 2012, accepted the said challenge and declared Rule 5 to be ultra vires these provisions. Other cases have met similar results by riding on the same judgment.
Rule 5 was brought into existence w.e.f. June 01, 2007. The respondent preferred Writ Petition No. 6370 of 2008 in the High Court of Delhi challenging the vires thereof with three prayers, namely:
1. for 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
2. for declaring the rule to be unconstitutional and ultra vires Sections 66 and 67 of the Finance Act, 1994; and
3. for quashing the impugned show-cause notice-cum-demand dated 17.03.2008 holding that it is illegal, arbitrary, without jurisdiction and unconstitutional.
Rule 5 provides for 'inclusion in or exclusion from the value of certain expenditure or costs. The plea by the respondent in the writ petition was that Rule 5(1) of the Rules, which provides that all expenditure or cost incurred by the service provider in the course of providing the taxable services shall be treated as consideration for the taxable services and shall be included in the value for the purpose of charging service tax, goes beyond the mandate of Section 67. It was argued that Section 67 which deals with valuation of taxable services for charging service tax does not provide for inclusion of the aforesaid expenditure or cost incurred while providing the services as they cannot be treated as element/components of service.
Section 67 was amended by Finance Act, 2006 w.e.f. May 01, 2006. The cases before the Supreme Court involved period prior to the amendment as well as post amendment period.
The High Court noted that the provisions both amended and un-amended 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 provided or to be provided by him, in a case where the consideration for the service is money. Emphasising on the words 'for such service', the High Court took the view that the charge of service tax under Section 66 has to be on the value of taxable service i.e. the value of service rendered by the assessee 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. On that analogy, the High Court has opined that scope of Rule 5 goes beyond the Section which was impermissible as the Rules which have been made under Section 94 of the Act can only be made 'for carrying out the provisionsof this Chapter' (Chapter V of the Act) which provides for levy,quantification and collection of the service tax. In the process, the High Court observed that the expenditure or cost 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, and illustration 3 given below the Rule which included the value of such services was a clear example of breaching the boundaries of Section 67. The High Court even went on to hold that it may even result in double taxation inasmuch as expenses on air travel tickets are already subject to service tax and are included in the bill. No doubt, double taxation was permissible in law but it could only be done if it was categorically provided for and intended; and could not be enforced by implication as held in Jain Brothers v. Union of India .
Appellant Revenue's Plea before the Supreme Court :
- Prior to April 19, 2006 i.e. in the absence of Rule 5 of the Rules, the value of taxable services was covered by Section 67 of the Act. As per this Section, the value of taxable services in relation to consulting engineering services provided or to be provided by a consulting engineer to the client shall be the gross amount charged for a consideration or in money from the client in respect of engineering services.
- The expression 'gross amount charged' would clearly include all the amounts which were charged by the service provider and would not be limited to the remuneration received from the customer. The very connotation 'gross amount charged' denotes the total amount which is received in rendering those services and would include the other amounts like transportation, office rent, office appliances, furniture and equipments etc. This expenditure or cost would be part of consideration for taxable services. Essential input cost had to be included in arriving at gross amount charged by a service provider.
- Section 67 of the Act was amended w.e.f. May 01, 2006 and this also retained the concept of 'the gross amount charged' for the purpose of arriving at valuation on which the service tax is to be paid. Sub-section (4) of amended Section 67 categorically provides that the value has to be determined in such a manner as may be prescribed and in pursuant thereto, Rule 5 of the Rules which came into effect from June 01, 2007, provided for 'inclusion in or exclusion from value of certain expenditure or costs'. There was no dispute that as per this Rule, all such expenditure or costs which are incurred by the service provider in the course of providing taxable services are to be treated as consideration for the taxable services provided or to be provided for arriving at valuation for the purpose of charging service tax, except those costs which were specifically excluded under sub-rule (2) of Rule 5.
- 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 as it only mentions what would be the meaning of gross amount charged.
- While dealing with the valuation of a taxable service, the provision which deals with valuation has to be taken into consideration and no assistance can be taken from charging section, as held in Union of India & Ors. v. Bombay Tyre International Limited &Ors.
- The High Court had committed serious error in relying upon Section 66 of the Act (which is a charging section) while interpreting Section 67 of the Act, or for that matter, while examining the validity of Rule 5 of the Rules.
- Section 67 which uses the term 'any amount' would include quantum as well as the nature of the amount and, therefore, cost for providing services was rightly included in Rule 5, which was not ultra vires Section 67 of the Act.
- The impugned judgment of the High Court was perfectly in tune with legal position and did not call for any interference.
- Parliament has again amended Section 67 of the Act by the Finance Act, 2015 w.e.f. May 14, 2015. By this amendment, explanation has been added which now lays down that consideration includes the reimbursement of expenditure or cost incurred by the service provider.
- For the first time, w.e.f. May 14, 2015, reimbursement of expenditure or cost incurred by the service provider gets included under the expression 'consideration', which legal regime did not prevail prior to May 14, 2015. Therefore, for the period in question, the 'consideration' was having limited sphere, viz. It was only in respect of taxable services provided or to be provided.
- For the period in question that is covered by these appeals, there could not be any service tax on reimbursed expenses as Section 67 of the Act did not provide for such an inclusion.
- Para 2.4 of Circular/Instructions F. No. B-43/5/97-TRU dated June 6, 1997 clarified that '...various other reimbursable expenses incurred are not to be included for computing the service tax".
- The High Court was right in holding that as per Section 66 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 service categorically mentions that it was only on the gross amount charged for providing 'such' a taxable service. Therefore, any amount collected which is not for providing such taxable service could not be brought within the tax net.
- Further, w.e.f. April 18, 2006, as per Explanation (c) to Section 67, "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." Whereas prior to April 18, 2006, as per Explanation 3 to Section 67, 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. Thus, levy on taxable services were not levied at once, but tax was levied at different point of time, tax was levied on difference person and also values in many taxable services was substantially exempted.
Supreme Court Observations :
- 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, 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. 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."
- The expression 'such' occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing 'such' taxable services. As a fortiori , any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such 'taxable service'. That is the plain meaning which is to be attached to Section 67 unamended, (i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67.
- High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider 'for such service' and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.
- This position did not change even in the amended Section 67 which was inserted on May 01, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of subsection (1). Mandate of sub-section (1) of Section 67 is manifest, viz., the service tax is to be paid only on the services actually provided by the service provider.
- It is trite that rules cannot go beyond the statute.
- 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."
- 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 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 counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature.
As a result, the Supreme Court did not find any merit in any of those appeals which are accordingly dismissed.
Before parting : While amending Section 67 in the 2015 Budget, the Government explained the amendment as:
Section 67 prescribes for the valuation of taxable services. It is being prescribed specifically in this section that consideration for service shall include: (a) all reimbursable expenditure or cost incurred and charged by the service provider. The intention has always been to include reimbursable expenditure in the value of taxable service. However, in some cases courts have taken a contrary view. Therefore, the intention of legislature is being stated specifically by this provision.