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 ... Valuation of taxable service as 'gross amount' - inclusion of salaries and statutory employer contributions in gross amount - constitutional validity of valuation provision - distinction between reimbursement of expenses and employer statutory obligations - agency characterisation of manpower/security supply agencies - liability of service receiver to discharge service tax under Section 68Valuation of taxable service as 'gross amount' - inclusion of salaries and statutory employer contributions in gross amount - constitutional validity of valuation provision - distinction between reimbursement of expenses and employer statutory obligations - Validity of Section 67 (valuation) and the inclusion of salaries and statutory employer contributions (ESI/EPF) within the 'gross amount' for computation of service tax. - HELD THAT: - The Court considered the challenge that Section 67 and the related Rules/Notifications are ultra vires Articles 14 and 19(1)(g) insofar as they treat the 'gross amount' without segregating salaries and statutory employer contributions. The Court observed that Parliament has provided for valuation on the basis of 'gross amount' and that individual assessments made by the Revenue have not been subjected to statutory challenge in the cases before the Court. The decision in Union of India v. M/s Intercontinental Consultants & Technocrats Pvt. Ltd. (relied upon by the appellants) dealt with reimbursement of expenses (such as travel and hotel) and held that reimbursements may be excluded in appropriate circumstances; the Court distinguished that authority on the ground that the present controversy concerns amounts inclusive of employer statutory obligations (ESI/EPF) and salaries, placing the security agencies on a different footing. Having regard to the statutory scheme and the fact that assessment remedies are available, the Court found no merit in declaring the valuation provision ultra vires.The constitutional challenge to inclusion of salaries and statutory employer contributions within the 'gross amount' under Section 67 is rejected; no interference with the valuation prescription was warranted.Agency characterisation of manpower/security supply agencies - liability of service receiver to discharge service tax under Section 68 - Whether security agencies operate merely as agents for collection and whether liability to pay service tax lies on the service receivers under Section 68. - HELD THAT: - The Single Judge's finding that security agencies act as agents in collection of service tax was upheld. The Court recorded that liability to pay service tax is cast on the service receivers under the statutory provision identified as Section 68, and that the writ petitions seeking to shift or challenge that liability did not disclose grounds for interference. The Court also noted earlier proceedings in which petitioners had been directed to claim reimbursement in specified manners, and that the present petitions failed to establish bona fide grounds to displace the statutory scheme. In these circumstances, the Court found no reason to disturb the conclusion that the agencies' role was agency-like and that the statutory liability rested on service receivers.The characterization of security agencies as agents for collection is affirmed and the statutory liability on service receivers to pay service tax remains effective; the writ petitions are dismissed on this basis.Final Conclusion: Writ appeals dismissed; the challenge to the valuation provision and the attempt to exclude salaries and statutory employer contributions from the 'gross amount' failed, and the finding that liability to pay service tax lies on the service receivers was upheld. No costs. 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.