The issue of taxability of out-of-pocket expenses has always been a matter of litigation. Before April, 2006 there was no specific provision to this effect. However, from April 19, 2006 onwards, with the introduction of the Service Tax (Determination of Value) Rules, 2006, ('the Valuation Rules') Service tax is applicable on gross consideration including all expenses barring the expenses incurred as pure agent.
The matter of taxability of such expenses, which is reimbursed by the service recipient, came before various Courts from time to time. With the landmark judgment in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India [2013 (29) S.T.R. 9 (Del.)]('Intercontinental Case'), the Hon'ble High Court of Delhi declared Rule 5(1) of the Service Tax Valuation Rules as ultra vires of erstwhile Section 66 and Section 67 of the Finance Act, 1994 ('the Finance Act').
The Hon'ble High Court of Delhi, while allowing the Writ Petition, observed that Rule 5(1) of the Valuation Rules, 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 erstwhile Section 66 and Section 67 of the Finance Act and travels much beyond the scope of those sections. 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.
Thus, the Intercontinental Case had laid down clearly that a Rule can never exceed or go beyond the Section which provides for the chargeability of Service tax, thus Rule 5(1) of the Valuation Rules was held ultra vires erstwhile Section 66 and Section 67 of the Finance Act. At the same time, it had also laid down that Service tax is not exigible on reimbursements of expenses claimed on actual basis by service provider.
However, being aggrieved by the decision of the Hon'ble High Court of Delhi in the Intercontinental Case, the Department filed a Petition for special leave to appeal before the Hon'ble Supreme Court. The Hon'ble Supreme Court granted leave to appeal and petition was converted into civil appeal in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [(2014)49 taxmann.com 520 (SC)].
Now, with another landmark judgment, the Hon'ble Supreme Court of India in the case of Union of India Vs. Intercontinental Consultants & Technocrats (P.) Ltd. [TS-72-SC-2018-ST], has upheld the decision of the Hon'ble Delhi High Court in Intercontinental case while dismissing the Revenue's appeal. Further, while noting the amendment to Section 67 vide the Finance Act, 2015, whereby clause (a) which deals with 'consideration' was suitably amended to include reimbursable expenditure or cost, The Hon'ble Supreme Court has categorically held that only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost will form part of valuation of taxable services for charging of Service tax.
Important excerpts from the judgment of the Hon'ble Supreme Court:
We are summarising the important excerpts from the judgment of the Hon'ble Supreme Court, for your easy digest:
- Then chargeable Section 66 of the Finance Act, specifically mentions that the Service tax will be @12% of the 'value of taxable services'. Thus, Service tax is 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.
- Plain meaning which is to be attached to Section 67 of the Finance Act dealing with valuation of taxable services, unamended, i.e., prior to May 01, 2006 or after its amendment, with effect from, May 01, 2006, that for 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'.
- Once this interpretation is to be given to Section 67 of the Finance Act, it hardly needs to be emphasised that Rule 5 of the Valuation 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 taxable service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.
- Sub-section (4) of Section 67 of the Finance Act 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) 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 - Babaji Kondaji Garad Vs. Nasik Merchants Co-operative Bank Ltd. [(1984) 2 SCC 50], CIT Vs. S. Chenniappa Mudaliar [(1969) 74 ITR 41]
- It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Andhra Pradesh Vs. Taj Mahal Hotel, [(1971) 82 ITR 44].
- Realising that Section 67 of the Finance Act, 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.
Accordingly, the Revenue's appeal was dismissed for being devoid of merits.
Undoubtedly, this is one of its kind judgments which will resolve numerous pre-GST litigations pending before lower authorities on taxability of reimbursements in Service tax for the period prior to May 14, 2015, giving relief to mass taxpayers across the Country.
It would not be out of place to mention here that in GST regime, contours of Section 15 of the CGST Act, 2017, dealing with value of taxable supply has been kept wide enough to include any amount charged for anything done by the supplier in respect of supply of goods/services.
Section 15(2) of the CGST Act, 2017, covering amounts to be included in value of supply, inter alia, covers the following vide clause (b) and (c):
- Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;
- Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services
Further, the definition of 'consideration' under Section 2(31) of the CGST Act, 2017, is also indeed broad to, inter alia, cover any payments, whether in money or otherwise, in respect to, in response to, or for the inducement of the supply of goods/services.
Thus, it may be concluded that starting from May 14, 2015 in pre-GST era and continuing in GST regime, reimbursements are subject to tax unless incurred as a pure agent.