Legal principle

A Rule cannot travel beyond or whittle down the parent enactment — service tax under Section 67 of the Finance Act, 1994 is leviable only on the 'gross amount charged' as consideration for the service, so Rule 5 (to the extent it includes reimbursable expenses in the taxable value) is ultra vires, and the 2015 amendment bringing such expenses within Section 67 operates prospectively from 14.05.2015.

Court decision

The Supreme Court (A.K. Sikri, J.) dismissed the Department's appeals and affirmed the Delhi High Court, holding Rule 5, to the extent it includes reimbursable expenditure or costs in the value of a taxable service, ultra vires Sections 66 and 67 of the Finance Act, 1994. Reimbursable expenses, and the value of free supplies of diesel and explosives supplied free by the service recipient, are not part of the 'gross amount charged' or the consideration for rendering the service and cannot be included under Section 67. The Finance Act, 2015 amendment to Section 67 is a substantive change and therefore prospective, operative only from 14.05.2015. The transfer petitions were allowed and the transferred Madras High Court writs were disposed of in the same terms.

Facts

The respondents, led by M/s Intercontinental Consultants and Technocrats Pvt. Ltd., rendered services in four categories — consulting engineering, share transfer agency, custom house agent (clearing and forwarding agent), and site formation/clearance, excavation and demolition services — and, alongside service fees, received reimbursements for out-of-pocket expenses such as air travel and hotel stay, on which no service tax was paid. On audit for FY 2002-03 to 2006-07, the Superintendent (Audit) demanded service tax on the 'gross value' including reimbursables, with interest at 13% under Sections 73 and 75 of the Finance Act, 1994, and the Commissioner issued a show cause notice dated 17.03.2008 invoking Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 for the period October 2002 to March 2007. The assessees challenged the vires of Rule 5 in the Delhi High Court, which by judgment dated 30.11.2012 declared Rule 5 ultra vires Sections 66 and 67 of the Finance Act, 1994. The Union of India appealed to the Supreme Court against that judgment, along with connected appeals, including those concerning free supplies of diesel and explosives in site formation services.

Key provisions

• Section 3, Customs Act, 1962 — Classes of officers of customs
• Section 20, Customs Act, 1962 — Re-importation of goods