Facts

Appellant was, inter alia, engaged in providing consulting engineer service. The appellant was discharging service tax in respect of amount received from customer  on provision of service. Apart from above, appellant received reimbursement of expenses incurred by them for provision of service from the customer. Show cause notice was issued alleging that under Rule 5 of the Service Tax  (Determination      of Value) Rules, 2006, 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 are “essential expenses for providing the taxable service of consulting engineers”. Writ petitions were filed by the assessees challenging the vires of Rule 5 of the Rules. The High Court of Delhi declared Rule 5 to be ultra vires. Hence, appeal before the Supreme Court.

Issues

Challenge 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 as being ultra vires provisions of Section66 and 67 of Chapter V of the Finance Act, 1994.

View

The Court held that Section 67(1) of Finance Act, 1994 can include in the value of taxable services only and nothing else (to be read in consonance with Section 66). It was, further observed that it is inbuilt mechanism to ensure that  only taxable service shall be evaluated under Section 67, where under value of taxable service is gross amount “charged” by service provider ‘for such service’. Accordingly, it was concluded that expenditure/costs such as air travel, hotel stay, etc. incurred for service provider shall not be includible in gross amount charged under taxable head of “consulting engineer” service. Further, it was also held 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 of the Finance Act, 1994 and travelsmuch beyond the scope of those sections.

Held

The Hon’ble Supreme Court examined the amended to section 67 post 14th May, 2015 which amended section 67 to provide for inclusion of reimbursements in the value of the taxable service. The Court held that, prior to the said amendment, the rule would fall foul of the parent provision (section 67). (CA Nos. 2013, 295-299, 2021, TP(C) Nos. 1043-1045 of 2017 & Ors dt. 7-3-2018)

Editorial: Section 15(2) does not provide for inclusion of reimbursable expenditure. No provision similar to explanation to section 67 exists. Reimbursements are expenses incurred for supplies made to the recipient. The supplier is a  payer only.  Such expenses would not form a  part of the value   of supply. Thus, according to me, the above ruling would continue tohave application under the GST regime as well.

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