2026 (1) TMI 325 - AT - Service Tax

Reimbursable expenses and reverse-charge liability for service tax, u/r 5(1)/s.68(2); demand and penalties set aside

For the period prior to 14.05.2015, the issue was whether reimbursable expenses could be included in the taxable value under Rule 5(1) of the 2006 ... Levy of service tax as per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, with interest and penalty - DIAL provided some free services and facilities such as transportation, medical, reimbursement or office expense, telephone expenses, rent free accommodation, dog squad handling expenses, etc. - HELD THAT:- As far as the period before the amendment of section 67 (14 May 2015) is concerned, the Supreme Court has already held in Intercontinental Consultants and Technocrats [2018 (3) TMI 357 - SUPREME COURT] that the Rule 5(1) of the 2006 Rules under which the demand was made was ultra vires of section 67. This issue is no longer res integra. Respectfully following the Intercontinental Consultants and Technocrats, the Commissioner dropping the demand for the period is upheld. As far as the period after 14 May 2015 is concerned, the submission of the learned Advocates is that although the CISF has been paying service tax, it did not have to pay service tax because as per Notification No. 30/2012 dated 20.6.2012 effective from 1.7.2012 issued under section 68(2) of the Finance Act, the service recipient and not the CISF had to pay service tax. As held by the Supreme Court in Govind Saran Ganga Saran [1985 (4) TMI 65 - SUPREME COURT], both the taxable event which makes the tax payable and the person who is obliged to pay the tax are two of the essential components of any charge of tax. If it is chargeable from ‘A’, it cannot be charged from ‘B’. Usually, as per section 68(1) of the Finance Act, the service provider has to pay the service tax but if the Central Government issues a notification shifting part or whole of the liability to pay service tax to the service recipient, the liability shifts to that extent to the service recipient. Needless to say that in such cases, the service tax can be charged from the service recipient and cannot be charged from the service provider. The CISF has been paying service tax all through except on the reimbursable expenses but we find that after Notification No. 30/2012 was issued, it had no liability to pay service tax at all. The mere fact that CISF was paying service tax does not shift the charge on to CISF. Conversely, if one was liable to pay tax and was not paying, it does not erase his liability to pay tax. The reason for this is simple. The fountain head of charge of any tax is the charging section of the Act and not any action of any individual - CISF was not liable to pay any service tax at all on the services which it had rendered to DIAL after Notification No. 30/2012-ST dated 20.6.2012 came into force. Therefore, the demand of service tax, interest and the penalties imposed cannot be sustained. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether service tax could be demanded on 'free services and facilities'/reimbursable expenses (transportation, medical, telephone, accommodation, etc.) for the period prior to 14 May 2015, when the demand was founded on Rule 5(1) of the 2006 valuation rules. (ii) Whether, after 1 July 2012, the liability to pay service tax on the security services supplied by a Government department to a commercial business entity stood shifted entirely to the service recipient under a notification issued under section 68(2), thereby barring demand, interest, and penalty from the service provider (including for the post-14 May 2015 period). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Taxability of reimbursable expenses/free facilities prior to 14 May 2015 under Rule 5(1) Legal framework: The Tribunal considered the validity and effect of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 vis-à-vis section 67 of the Finance Act, as judicially determined, for valuing taxable services by including reimbursable expenditure/cost. Interpretation and reasoning: The Tribunal held that for the period prior to 14 May 2015, the demand rested on Rule 5(1). Since the Supreme Court had already held that Rule 5(1) was ultra vires section 67 (pre-amendment), the Tribunal treated the matter as no longer open to debate and applied that binding determination to the present valuation-based demand on reimbursable/free facilities. Conclusions: The Tribunal upheld the dropping of the service tax demand for the period prior to 14 May 2015 insofar as it was premised on including reimbursable expenses/free facilities under Rule 5(1). Issue (ii): Effect of section 68(2) notification-whether the service provider remained liable post 1 July 2012 (including after 14 May 2015) Legal framework: The Tribunal examined sections 68(1) and 68(2) governing who must pay service tax, emphasizing that section 68(2) empowers the Government to notify services where the service recipient becomes liable 'as if' he were the person liable. The Tribunal also applied the principle that identification of the person liable to pay is an essential component of a valid tax charge. Interpretation and reasoning: The Tribunal found there was no dispute that the service provider was a Government department and the recipient was a commercial entity. It further found that the services in question were covered by the relevant entry in the section 68(2) notification, and were not within the excluded categories. Consequently, under the notification, 100% of the service tax was payable by the service recipient and nil by the service provider. The Tribunal rejected the Commissioner's view that such shifting of liability was merely a 'facilitation' and that the tax could still be demanded from the provider; it held that once the statute/notification fixes liability on the recipient, the tax cannot be levied from the provider. The Tribunal also held that the provider's past payment of tax could not create or shift the statutory charge, because tax liability flows from the charging provisions and valid notifications, not from a party's conduct. Conclusions: The Tribunal held that after the notification came into force, the service provider had no liability to pay service tax on the services rendered to the recipient. Therefore, the demand of service tax, interest, and the penalty confirmed for the post-14 May 2015 period (and any demand sought against the provider for the period covered by the notification) could not be sustained, and the impugned order was set aside to that extent, with consequential relief.