Reimbursable expenditure excluded from service tax value for pre-2015 periods; retrospective demand could not stand.

Reimbursable expenditure and losses could not be added to the value of taxable services for periods before 14.05.2015. The Gujarat HC applied the principle that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 travelled beyond Section 67 of the Finance Act, 1994 to the extent it brought reimbursable costs into service value, and treated that expansion as ultra vires for the pre-amendment period. It also held that the amendment to Section 67 enlarging the scope of consideration was a substantive change operating prospectively from 14.05.2015. On that basis, a show cause notice for the earlier period could not be sustained.

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Issues: Whether a show cause notice demanding service tax on reimbursable expenditure and losses for the period prior to 14.05.2015 could be sustained by relying on Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 and the amended Section 67 of the Finance Act, 1994.

Analysis: The dispute related to the period F.Y. 2012-13 to 2014-15. The Court applied the ruling that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 travelled beyond Section 67 of the Finance Act, 1994 and could not validly bring reimbursable expenditure into the value of taxable services for the pre-amendment period. It further held that the amendment to Section 67 enlarging the scope of consideration to include reimbursable expenditure or cost was a substantive change and operated prospectively from 14.05.2015. Since the impugned notice proceeded on a pre-2015 period, the demand could not be sustained in law.

Conclusion: The show cause notice was without jurisdiction and could not be sustained for the period in question; the issue was decided in favour of the assessee.

Ratio Decidendi: Reimbursable expenditure cannot be included in the value of taxable services for periods prior to the prospective amendment of Section 67, and a rule that enlarges the charging value beyond the statute is ultra vires and inoperative to that extent.

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