Delhi High Court Quashes Rule 5(1) of Service Tax Valuation Rules
THE Revenue winning spree is halted. It is a huge win for the assessees after the series of recent decisions in favour of the Revenue.
Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, reads as:
(1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.
Illustration 3 to this Rule reads as:
Illustration 3: A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.
In the present case, the Petitioner Company is engaged in providing consulting engineer services and receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients. Department issued Show Cause Notice demanding service tax on the expenses reimbursed by invoking the provisions of Rule 5(1) of the Service Tax (Determination of Value) Rules 2006. The Petitioner has challenged the provisions of Rule 5(1) in a Writ Petition.
The Delhi High Court, while allowing the petition, observed, "We have no hesitation in ruling 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 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. 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."
This may not be the end of litigation in this matter. The Budget is just round the corner and the Government would be tempted to retrospectively validate an invalid levy.
We bring you this landmark judgement today.