2019 (2) TMI 94 - HC - Service Tax

Service Tax Valuation: Court Upholds Constitutionality of Including Expenses in 'Gross Amount'

The Court upheld the constitutional validity of Section 67 of the Finance Act, 1994, which includes expenses in the 'gross amount' for service tax ... Valuation - inclusion of expenses and salaries paid to the Security Guards and the statutory payments like contributions to ESI and EPF in gross value - Vires of Section 67 in Chapter V of the Finance Act, 1994 (Act 32 of 1994) and the amendments made in the Rules and Notifications therein - Held that:- In Union of India v. M/s Intercontinental Consultants & Technocrats Pvt.Ltd., [2018 (3) TMI 357 - SUPREME COURT OF INDIA], Hon'ble Supreme Court while considering the scope of Section 67 of the Act and the Rules made thereunder, and in particular the constitutional validity of Rule 5, held that the valuation of taxable service shall be 'gross amount' chargeable by the services provided 'for such services', to the extent it includes reimbursement of expenses in the value of taxable service for the purpose of charging service tax - In the said decision, the consideration was mainly concerned with the reimbursement of expenses incurred, such as air travel, hotel stay, etc; whereas, in the case in hand, we are concerned with the amounts, which is inclusive of the ESI, EPF and such other statutory payments to be paid by the employer for the persons employed. Therefore, the security agencies are totally on a different footing and the above-cited decision is not applicable to the case in hand. There are no merits or reasons to interfere with these findings of the learned Single Judge so as to hold that the provisions under Section 67 is ultra vires the Constitution - appeal dismissed. Issues:Challenge to the constitutional validity of Section 67 of the Finance Act, 1994 regarding the inclusion of expenses and salaries in the 'gross amount' for valuation of taxable service in computing service tax payable.Analysis:Issue 1: Constitutional Validity of Section 67The petitioners sought declarations to hold Section 67 of the Finance Act, 1994, and its amendments, as ultra vires the Constitution for including expenses and salaries in the 'gross amount' for service tax valuation. They argued that segregating salary and statutory payments from the 'gross amount' is necessary for taxation purposes, citing violation of Articles 14 and 19(1)(g) of the Constitution. On the contrary, the Revenue contended that individual assessments were made against the agencies, challenging the petitioners' claims. The Revenue argued that the inclusion of expenses in the 'gross amount' is reasonable as per Section 67, which provides for taxation based on the 'gross amount.'Issue 2: Reasonableness of Including Expenses in 'Gross Amount'The Court considered whether including expenses like salaries and statutory payments in the 'gross amount' for calculating taxable service under Section 67 is reasonable. The Revenue emphasized that the scope of 'taxable net' is determined by Parliament and cannot be questioned. The petitioners argued that the ambiguity in Section 67 makes it ultra vires to the Constitution. The Amicus Curiae cited a Supreme Court decision regarding the valuation of taxable services, emphasizing the reimbursement of expenses. However, the Court noted that the case at hand involves statutory payments like ESI and EPF, making it distinct from the cited decision.Issue 3: Role of Security AgenciesThe Court examined the role of security agencies in providing services and their liability for service tax. It was highlighted that the liability to pay service tax falls on the service receivers, not the agencies acting as agents for tax collection. Previous Writ Petitions were filed regarding service tax reimbursement, but the Court found no grounds to interfere with the Single Judge's decision dismissing the petitions. Consequently, the Writ Appeals were also dismissed.In conclusion, the Court upheld the constitutional validity of Section 67 of the Finance Act, 1994, regarding the inclusion of expenses in the 'gross amount' for service tax valuation. The judgment emphasized the distinction between expenses like salaries and statutory payments in determining taxable service, ultimately dismissing the Writ Appeals challenging the constitutional validity of the statutory provisions.