No Service Tax on Reimbursed Expenses prior to May 2015: Supreme Court [Read Judgment]

The Supreme Court, on Wednesday held that service tax cannot be levied on reimbursed expenses prior to 14^th May 2015.

A two-judge bench comprising Justice A K Sikri and Justice Ashok Bhushan was hearing an appeal against the order of the Delhi High Court wherein Rule 5 of the Service Tax (Determination of Value) Rules, 2006 was declared as unconstitutional.

The assessees were paying service tax under various heads. Apart from this, the assessees are 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.

Before the Apex Court, the assesses challenged the constitutional validity of the provisions of Rule 5 of the Service Tax (Determination of Value) Rules, 2006 according to which, the value of the said reimbursable activities is also to be included as part of services provided by these respondents.

In the year 2012, the Delhi High Court accepted this plea and declared that Rule 5 is ultra vires.

Against the order, the Revenue preferred an appeal before the Supreme Court.

Before the Court, J.K. Mittal, Advocate, appeared for M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. contended that the High Court order nullifying Rule 5 is perfect. According to the assessee, 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. This is beyond the purpose 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.

After analyzing the provisions of the Finance Act, 1994, the bench noted that the rules cannot go beyond the statute.

The bench said that “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 learned counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature.”