Service Tax (Determination of Value) Rules, 2006 – r.5 – If ultra vires the provisions of ss.66, 67 of 1994 Act – RespondentsAssessees, provider of various services receive payments not only for the services so rendered but are also reimbursed out of pocket expenses incurred by them such as air travel, hotel stay, etc.– Assessees paying service tax in respect of amounts received by them for services so rendered but not for the out of pocket expenses incurred by them, which was reimbursed by the clients – Under r.5, the value of said reimbursable activities are also to be included as part of services provided by the respondents – Challenge to – Writ petition allowed by High Court – On appeal, held: Section 66 of the 1994 Act is the charging section and refers to service tax, i.e. in respect of those services which are taxable and specifically referred to in various sub-clauses of s.65 of the 1994 Act – It is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon – Any other amount which is calculated not for providing such taxable service cannot be a part of that valuation – Thus, service tax is to be paid only on the services actually provided by the service provider – This is the plain meaning to be attached to s.67 which deals with valuation of taxable services for charging service tax – r.5 went much beyond the mandate of s.67 – High Court was right in interpreting ss.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 – Finance Act, 1994 – ss. 66, 67 and s.94.
Interpretation of Statutes – Conflict between statute (Act) and subordinate legislation (Rules) – Held: Rules are framed for achieving the purpose behind the provisions of the Act and thus, cannot go beyond the statute – A rule which comes in conflict with the main enactment has to give way to the provisions of the Act.
Dismissing the appeals and disposing of the transferred writs, the Court
HELD: 1.1 Rule 5 of the Service Tax (Determination of Value) 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’. 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 Finance Act, 1994. [Para 21] [343-E-F]
1.2 Section 67, Finance Act, 1994 refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65, Finance Act, 1994. Further, it also specifically mentions that the service tax will be @ 12% of the ‘value of taxable services’. Thus, service tax is in reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. In this hue, the expression ‘such’ occurring in Section 67 of the Act assumes importance. In other words, in 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 2006 Rules went much beyond the mandate of Section 67. The High Court was right in interpreting Sections 66 and 67, Finance Act, 1994 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 quo 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 sub-section (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. [Paras 23-26] [343-G-H; 344-A-G]
1.3 A rule which comes in conflict with the main enactment has to give way to the provisions of the Act. Rules are framed for achieving the purpose behind the provisions of the Act. [Paras 27, 28] [345-B]
CIT v. S. Chenniappa Mudaliar (1969) 74 ITR 41 – relied on.
1.4 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 Department that Section 67 is a declaratory provision, nor could it be argued so, as it is found that this is a substantive change brought about with the amendment to Section 67 and therefore, has to be prospective in nature. [Para 29] [345-D-F]
CIVIL APPEAL NO. 6865 OF 2014, CIVIL APPEAL NO. 6864 OF 2014, CIVIL APPEAL NO. 4975 OF 2016, CIVIL APPEAL NO. 5130 OF 2016 AND CIVIL APPEAL NOS. 4536-4537 OF
1.5 In the aforesaid appeals, the issue is as to whether the value of free supplies of diesel and explosives in respect of the service of ‘Site Formation and Clearance Service’ can be included for the purpose of assessment to service tax under Section 67 of the Act. These assessees had not availed the benefit of Notification Nos.15/2004 and 4/2005. Therefore, the issue has to be adjudged simply by referring to Section 67 of the Act. It has been already held above that the value of such material which is supplied free by the service recipient cannot be treated as ‘gross amount charged’ and that is not the ‘consideration’ for rendering the services. Therefore, value of free supplies of diesel and explosives would not warrant inclusion while arriving at the gross amount charged on its service tax is to be paid. Therefore, all these appeals are also dismissed. [Para 31] [347-C-E] TRANSFER PETITION (CIVIL) NOS. 1043-1045 OF 2017 TRANSFER PETITION (CIVIL) NOS. 1932-1934 OF 2017
1.6 These transfer petitions are allowed and the writ petitions mentioned in the prayer clause, which are pending before the High Court of Madras, are transferred to Supreme Court. The transferred writs are also disposed of in terms of the judgment rendered above in Civil Appeal No. 2013 of 2014 and other connected matters. [Paras 32, 33] [347-F] Union of India & Ors. v. Bengal Shrachi Housing Development Limited & Anr. (2018) 1 SCC 311 –
distinguished.
Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd. (1984) 2 SCC 50 : [1984] 1 SCR 767; CIT, Andhra Pradesh v. Taj Mahal Hotel (1971) 82 ITR 44 – relied on.
Jain Brothers v. Union of India (1970) 77 ITR 107; Central Bank of India & Ors. v. Workmen, etc. [1960] 1 SCR 200; State of U.P. & Ors. v. Babu Ram Upadhya [1961] 2 SCR 679; Bimal Chandra Banerjee v. State of M.P. & Ors. (1971) 81 ITR 105; Commissioner of Customs and Excise v. Cure and Deeley Ltd (1961) 3 WLR 788 (QB); Union of India & Ors. v. Bombay Tyre International Limited & Ors. (1984) 1 SCC 467 : [1984]
1 SCR 347; Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 : [1999] 4 Suppl. SCR 195; Govind Saran Ganga Saran v. Commissioner of Sales Tax & Ors. (1985) Suppl. SCC 205 : [1985] 3 SCR 985; Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited (2015) 1 SCC 1 : [2014] 12 SCR 1037– referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.