CA Manoj Nahata 
Recently, the Hon’ble Delhi High Court in case of Intercontinental Consultants and Technorats P.Ltd. v. Union of India and other [2013] 59 VST 487 (Delhi) held that rule 5 of the Service Tax (Determination of Values) Rules,2006 which provide 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 67and travels much beyond the scope of those sections. Therefore it was struck down as bad in law to that extent.
The facts of the case were:
- The petitioner received payments for its services and was also reimbursed expenses incurred by it such as air travel, hotel stay etc. While Service Tax was being paid on the service fee, no tax was paid in respect of cost reimbursed by the client (i,e air travel, hotel stay etc.)
- The Department issued Show Cause Notice to the petitioner demanding inter alia Service Tax on the out of pocket expenses reimbursed to them by their clients. The basis of the show cause notice was that all expenditure or costs incurred in the course of providing a taxable service are includible in the value of service as per rule 5 (1) of the valuation rules;
- Being aggrieved by the Show cause notice, the petitioner filed a writ petition in the Delhi High Court.
The Court held that section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of section subject to the 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 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. 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.
The Hon’ble Court further held that apart from travelling beyond the scope and mandate of section, the rule may also result in double taxation. The Court further affirmed various judgments wherein it is settled that the power to make rules can never exceed or go beyond the section which provides for the charge or collection of tax.
Author’s Comments: The issue of chargeability of service tax on out of pocket expenses has been a disputed matter since the introduction of the Service Tax (Determination of Values) Rules,2006.Prior to that there was no specific provision in law for taxability of the same. Though the said rules of 2006 is having a concept of ‘pure agent’ wherein no service tax was chargeable subject to fulfillment of certain conditions. But again, it was a matter of litigation and in fact not free from doubt whether the same expenses can suffer tax twice. It is for the first time the matter went to High Court and was ruled in favour of the assessee. The possibility that the Central Govt. may approach to the Supreme Court against this decision cannot be fully ruled out. Let us wait and see what will be course of action of the Government. While this decision was related to the period 2002-2007 but it will hold good in the current scenario of negative list also. Presently, section 66B is also similarly worded as those of earlier section 66. It would be really a tough decision for the service tax assessee especially for the interim period till the matter attains finality, whether to take risk of not charging service tax on the out of pocket expenses. However recently, the Delhi High Court once again in case of Sercon India (P.) Ltd. [2013] 32 taxmann.com 390 (Delhi) confirmed its earlier ruling.
