Union of India vs. Intercontinental Consultants: Supreme Court on Service Tax and Reimbursable Expenses

The case of Union of India & Anr. vs. M/S Intercontinental Consultants and Technocrats Pvt. Ltd. focuses on the inclusion of reimbursable expenses in the valuation of taxable services for the purpose of levying service tax. This legal battle raises important issues regarding the scope of service tax under Section 67 of the Finance Act, 1994, and the applicability of Rule 5 of the Service Tax (Determination of Value) Rules, 2006.

Background of the Case

The petitioner, M/S Intercontinental Consultants, is a consulting engineering service provider specializing in infrastructure projects. In the course of providing services to clients such as the National Highway Authority of India (NHAI), the petitioner incurred reimbursable expenses such as air travel, hotel stays, and other related costs. The issue arose when the petitioner was asked to include these reimbursed amounts as part of the taxable value for service tax. The petitioner challenged this demand, arguing that the reimbursed expenses should not be included in the valuation for service tax purposes.

Key Arguments

Petitioner’s Argument (M/S Intercontinental Consultants)

• The petitioner argued that reimbursable expenses, such as travel and lodging, should not be included in the taxable service amount for the purpose of service tax.
• They contended that these expenses were incurred on behalf of their clients and were not part of the service provided, thus should not form part of the taxable service value.
• The petitioner claimed that Rule 5 of the Service Tax (Determination of Value) Rules, 2006, which mandated the inclusion of such reimbursable expenses, was ultra vires Section 67 of the Finance Act.

Respondent’s Argument (Union of India)

• The Union of India argued that under Rule 5 of the Service Tax (Determination of Value) Rules, all expenses incurred during the provision of a taxable service, including reimbursable ones, must be included in the gross value for service tax purposes.
• The respondents pointed out that the rule was a legitimate exercise of the power conferred by Section 67 of the Finance Act, which allows for the inclusion of any expense incurred in providing the service.
• The respondents also contended that the law was clear in its application, and the reimbursement of costs related to service delivery should not be excluded from the taxable value.

Supreme Court’s Judgment

A bench comprising Justices A.K. Sikri and Ashok Bhushan delivered the judgment, making the following key observations:

1. The Scope of Service Tax on Reimbursed Expenses

The court discussed the scope of service tax under Section 67 and concluded that the service tax is levied on the “gross amount charged” for providing a taxable service. The court also discussed the role of reimbursable expenses, noting that:

“The value of taxable service shall include all costs incurred by the service provider in the course of providing the taxable service, including reimbursable expenses, as they are part of the gross amount charged for the service.”

2. Rule 5’s Validity and Applicability

The court held that Rule 5, which mandates the inclusion of reimbursable expenses in the gross taxable value, is valid and aligns with the provisions of Section 67. The rule does not go beyond the mandate of Section 67, and the service tax is applicable to the total consideration charged for the service, including reimbursable expenses.

3. Amended Section 67 and Its Impact

The court referred to the amendments made to Section 67 of the Finance Act in 2015, which explicitly included reimbursable expenses in the definition of “consideration” for service tax. The court acknowledged that the inclusion of reimbursable expenses was made clear by this amendment but clarified that the ruling would apply to the period before the amendment as well, based on the existing legal framework.

4. Double Taxation Concerns

The court also addressed the concern of double taxation, specifically regarding expenses like travel and accommodation, which were already subject to service tax. The court ruled that while double taxation is permissible, it must be explicitly provided by law. Since the law did not explicitly permit double taxation for reimbursable expenses, the court emphasized the need for clarity in the application of tax rules.

5. The High Court’s Judgment

The Supreme Court reviewed the Delhi High Court’s judgment, which had ruled that Rule 5 was ultra vires and unconstitutional. The court disagreed with the High Court’s ruling, asserting that Rule 5 was within the legislative competence provided by Section 67 and did not violate the provisions of the Finance Act. The judgment of the High Court was, therefore, overturned.

Conclusion

The Supreme Court’s ruling upheld the inclusion of reimbursable expenses in the taxable service value for the purpose of levying service tax. The judgment clarified the scope of Section 67 of the Finance Act and validated Rule 5 of the Service Tax (Determination of Value) Rules, 2006. It also addressed concerns about double taxation and emphasized the need for legislative clarity in tax matters. The ruling is significant for businesses providing taxable services and highlights the importance of understanding the comprehensive nature of taxable service value.

Petitioner Name: M/S Intercontinental Consultants and Technocrats Pvt. Ltd.
Respondent Name: Union of India
Judgment By: Justice A.K. Sikri, Justice Ashok Bhushan
Place Of Incident: New Delhi
Judgment Date: 07-03-2018

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