2019 (12) TMI 890 - HC - Service Tax

Court rules service tax only on service fee, not reimbursable expenses like PF & ESI. Rule 5 not aligned with Finance Act.

The High Court ruled in favor of the appellant, holding that service tax should only be charged on the consideration for the service provided, excluding ... Valuation - inclusion of reimbursable expenses - contribution towards Provident Fund and ESI of the labour provided by the appellant to his clients - whether included in the gross amount or not - Rule 5 of the Service Tax (Determination of Value) Rules, 2006 - Section 67 of the Finance Act, 1994 - Non-speaking order - principles of natural justice - HELD THAT:- The controversy involved in the present case duly stands answered by the decision of the Hon’ble Apex Court in UNION OF INDIA AND ANR. VERSUS M/S. INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. [2018 (3) TMI 357 - SUPREME COURT] and the judgment of the Division Bench of Kerala High Court in SECURITY AGENCIES ASSOCIATION, M/S. RELIANCE SECURITY AGENCY VERSUS UNION OF INDIA REPRESENTED BY THE SECRETARY TO GOVERNMENT, MINISTRY OF FINANCE, DEPARTMENT OF REVENUE, NEW DELHI, THE CENTRAL BOARD OF EXCISE AND CUSTOMS, NEW DELHI, THE CHIEF COMMISSIONER OF CENTRAL EXCISE, ERNAKULAM AND THE ASST. COMMISSIONER OF CENTRAL EXCISE, PALAKKAD [2019 (2) TMI 774 - KERALA HIGH COURT], relied upon by learned counsel for the respondent, fails to advance the case of the respondent. The Kerala High Court was dealing with a situation prior to amendment of Section 67 of the Act effected on 01.05.2006, whereas, in the present case we are considering the case of the appellant after the amendment - Hence, the service provider (appellant) was liable to be charged service tax qua service rendered by him and the valuation of taxable service could not be anything more or less than the consideration paid for rendering such a service. Appeal allowed. Issues Involved:1. Demand of service tax on Provident Fund (PF) and ESI contributions.2. Application of Rule 5 of the Service Tax (Determination of Value) Rules, 2006.3. Limitation period for issuing show cause notice.4. Interpretation of Section 67 of the Finance Act, 1994.5. Applicability of Supreme Court and Kerala High Court judgments.Detailed Analysis:1. Demand of Service Tax on Provident Fund (PF) and ESI Contributions:The appellant challenged the demand of service tax on contributions towards Provident Fund and ESI for the labor provided to clients. The Tribunal confirmed the demand beyond the normal period of limitation. The appellant argued that these contributions, being reimbursable expenses, should not be included in the assessable value for service tax, as per the Supreme Court ruling in Union of India Vs. Intercontinental Consultants and Technocrats Pvt. Ltd. The respondent countered that such contributions should be included in the gross amount for service tax calculation under Section 67 of the Finance Act, 1994.2. Application of Rule 5 of the Service Tax (Determination of Value) Rules, 2006:The appellant contended that Rule 5, which includes reimbursable expenses in the taxable value, was struck down by the Supreme Court. The Tribunal initially assessed the service tax based on Section 67 of the Finance Act, 1994, read with Rule 5. The Order-in-Original stated that salaries paid to labor and PF & ESI contributions were not excludable from the taxable value, as per Rule 5.3. Limitation Period for Issuing Show Cause Notice:The Tribunal noted that the show cause notice was issued beyond the normal one-year period. For such an extended period, the Department needed to prove suppression, fraud, or misstatement by the appellant. The Tribunal found no such intent to defraud, as the appellant maintained records and believed in good faith that service tax was not payable on reimbursable expenses. Thus, the demand beyond the normal period was barred by limitation, but the demand within the normal period was upheld.4. Interpretation of Section 67 of the Finance Act, 1994:The High Court examined whether the Tribunal was correct in including PF, ESI, and salaries in the taxable value contrary to Section 67 and the Supreme Court judgment. Section 67 defines the gross amount charged for taxable services, and the Supreme Court clarified that only the consideration for the service provided should be included, not reimbursable expenses. The High Court found that Rule 5 went beyond the mandate of Section 67, which only includes the gross amount charged for the service provided.5. Applicability of Supreme Court and Kerala High Court Judgments:The appellant argued that the Kerala High Court judgment in Security Agencies Association was not applicable, as it dealt with a period before the amendment of Section 67 on 01.05.2006. The High Court agreed, noting that the Supreme Court's decision in Union of India Vs. Intercontinental Consultants and Technocrats Pvt. Ltd. applied to the period after the amendment. The Supreme Court ruled that reimbursable expenses should not be included in the taxable value, reinforcing the appellant's position.Conclusion:The High Court concluded that the appellant was liable to be charged service tax only on the consideration for the service provided, excluding reimbursable expenses. The judgment of the Division Bench of Kerala High Court did not apply to the present case, as it pertained to a period before the amendment of Section 67. Consequently, the substantial question of law was answered in favor of the appellant, and the appeal was allowed, setting aside the demand beyond the normal period of limitation and penalties.