Service tax on reimbursable expenses was held beyond the charging provision, and valuation rules could not expand taxable value.

Service tax could not be levied on reimbursable or out-of-pocket expenses recovered by a consulting engineer, because the tax applies only to the consideration for the taxable service and not to expenditure incurred in rendering it. Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 was held ultra vires to the extent it included such reimbursable expenses in the assessable value, since a delegated valuation rule cannot enlarge the charging provision. The analysis also noted the risk of double taxation if actual expenses such as deputation costs, transport, site office rent and accommodation were taxed again as part of service value, and the demand on those amounts was held unsustainable.

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Issues: Whether service tax was leviable on reimbursable or out-of-pocket expenses recovered by a consulting engineer in the course of providing taxable services, and whether Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 could validly include such expenses in the taxable value.

Analysis: The demand arose only on amounts recovered as actual expenses, including deputation-related costs, transportation, site office rent and accommodation. The governing provisions restricted service tax to the value of the taxable service, and the valuation mechanism could not travel beyond the charging provisions. The Tribunal followed the binding view that expenditure incurred in the course of providing the service is not the same as the consideration for the service, and that a delegated rule cannot enlarge the charge by including reimbursable expenses in the taxable value. It also accepted that such inclusion would run the risk of double taxation and would exceed the scope of the statutory charging and valuation provisions.

Conclusion: Rule 5(1), to the extent it brought reimbursable expenses into the assessable value, was held to be ultra vires. The service tax demand on reimbursable expenses was unsustainable, and the impugned orders were set aside.

Final Conclusion: The appeals succeeded and the assessee obtained relief against the demand and consequential penalties and interest.

Ratio Decidendi: Service tax can be levied only on the consideration for the taxable service, and a valuation rule cannot enlarge the charging provision by treating reimbursable expenses incurred in the course of rendering the service as part of the taxable value.

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