2019 (2) TMI 774 - HC - Service Tax

Court affirms constitutionality of Section 67 Finance Act '94 on service tax valuation

The court upheld the dismissal of the Writ Petitions challenging the constitutional validity of Section 67 of the Finance Act, 1994. It was ruled that the ... Vires of Section 67 in Chapter V of the Finance Act, 1994 (Act 32 of 1994) - Valuation - inclusion of expenses and salaries paid to the Security Guards and the statutory payments like contributions to ESI and EPF in the 'gross amount' charged for valuation of 'taxable service' in computing the 'service tax' payable - case of Revenue is that the scope and extent of the 'taxable net' has been provided by the Parliament in view of the policy of the Government and cannot be questioned by the writ petitioners - Held that:- Exts.R1 and R2 in W.P.(C) No.9591/2005 are the income and expenditure account and the bill produced by the writ petitioner, which would show that the salary and other benefits paid to the security personnel and Ext.R3, which is relevant agreement with the service receiver indicates that there is no master and servant relationship between the security personnel and the clients/service receiver. In the counter-affidavit filed by respondents, it is specifically contended in para 9 that this Court was approached earlier by filing W.P.(C) Nos.20017/2004 and 17045/2004 for a direction to reimburse the service tax, if they failed to collect from their clients due to non-inclusion of such provisions for realising service tax in the agreements with the clients. The Writ Petitions were disposed of directing the respondents to consider the claim of the petitioners and pass orders as specified. 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:The judgment involved Writ Appeals against the dismissal of two out of three Writ Petitions seeking declarations regarding the constitutionality of Section 67 of the Finance Act, 1994. The petitioners contested the inclusion of expenses and salaries in the 'gross amount' charged for the valuation of taxable service for computing service tax. The Security Agencies, including a registered Society and an agency providing security services, argued that the inclusion of salary and statutory payments in the 'gross amount' for taxation purposes was unreasonable and violated Articles 14 and 19(1)(g) of the Constitution.The Revenue, on the other hand, argued that individual assessments had been made against the Agencies, and challenging the constitutional validity of Section 67 was unwarranted. They contended that the 'gross amount' for taxation purposes should include all relevant expenses, as provided by the Act. The court had to determine whether including expenses like salary and statutory payments in the 'gross amount' for calculating taxable service under Section 67 was reasonable.During the hearing, the Revenue emphasized that the scope of 'taxable net' was defined by Parliament and should not be questioned. The petitioners, supported by the Amicus Curiae, argued that the ambiguity in Section 67 made it ultra vires to the Constitution. The Amicus Curiae referred to a previous Supreme Court decision to support their argument, highlighting the difference between reimbursement of expenses and statutory payments like ESI and EPF.The court examined the income and expenditure accounts of the petitioners and relevant agreements, noting the absence of a master-servant relationship between the security personnel and clients. Previous Writ Petitions regarding service tax reimbursement were also considered. The court upheld the dismissal of the Writ Petitions, stating that the liability to pay service tax lies with the service receivers, not the agencies acting as agents for tax collection. The judgment concluded that there was no basis to challenge the constitutionality of Section 67, and thus, the Writ Appeals were also dismissed.