Service tax valuation excludes reimbursed exchange transaction charges where they are not consideration for the taxable brokerage service.

Transaction charges paid by a commodity broker to stock exchanges and recovered from clients were not includible in taxable value for service tax during the disputed period. Sections 66 and 67 of the Finance Act, 1994 confined valuation to consideration for the taxable service actually provided, and Rule 5 of the Service Tax (Determination of Value) Rules, 2006 could not expand that statutory base to include reimbursed expenses. The later amendment expressly including reimbursable expenditure was substantive and applied prospectively. Consequently, demands, interest and penalties based on inclusion of those charges were unsustainable.

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Issues: Whether transaction charges paid by a commodity broker to stock exchanges and reimbursed by clients were includible in the taxable value for levy of service tax during the period from 01.04.2007 to 13.05.2008.

Analysis: The taxable value under Sections 66 and 67 of the Finance Act, 1994 is confined to the consideration for the taxable service actually provided. Rule 5 of the Service Tax (Determination of Value) Rules, 2006 cannot enlarge the statutory valuation base by including amounts that are merely reimbursed expenses and are not consideration for the taxable service. The subsequent statutory amendment expressly including reimbursable expenditure with effect from 14.05.2015 was substantive and prospective. Transaction charges paid to the exchanges and recovered from clients were therefore not includible for the disputed period. The demands, interest and penalties were consequently unsustainable.

Conclusion: Transaction charges reimbursed by clients were not liable to inclusion in the taxable value for the disputed period.

Ratio Decidendi: Subordinate legislation cannot extend the taxable value beyond the consideration for the taxable service specified by the charging and valuation provisions, and a substantive amendment including reimbursed expenses operates prospectively.

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