Service tax would easily qualify as the legislation which has witnessed maximum changes over the last 16 years.
What started off as a simple tax on three services has now turned into a cash-cow for the Government with revenues budgeted at Rs 1,24,000 crore in the current fiscal.
The negative list introduced in 2012 is expected to be a game-changer for service tax law as it is touted as a precursor to the Goods and Services Tax (GST) – if and when it comes.
The Delhi High Court is turning out to be a good place to turn to for consultation on service tax.
It turned out a landmark judgement in the case of the Home Solution Retail ruling that base rent from property cannot be subject to service tax, which the Government reversed with its Brahmastra:amending the Finance Act, 1994 to accommodate the levy.
Overreach of Rule 5(1)
In a recent case concerning Intercontinental Consultants and Technocrats Pvt. Ltd, the Delhi High Court has delivered another quality landmark judgement in ruling that reimbursement of expenses are not subject to service tax. The Court ruled that Rule 5 (1) of the Service Tax Valuation Rules, which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax, is ultra vires Section 66 and 67 of the Finance Act, 1994, travels much beyond the scope of those sections, and, to that extent, has to be struck down as bad in law.
The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him.
Illustration 3 amplifies what is meant by sub-rule (1). In the illustration given, the architect who renders the service incurs expenses such as telephone charges, air travel tickets, hotel accommodation, and so on to enable him to effectively perform the services. The illustration, therefore, says that these expenses are to be included in the value of the taxable service.
The illustration clearly shows how the boundaries of Section 67 are breached by the Rule.
The High Court opined that apart from travelling beyond the scope and mandate of the Section, the Rule may also result in double taxation.
If the expenses on air travel tickets are already subject to service tax and are included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication.
While the jurisdiction of this decision would be restricted to the jurisdiction of the Delhi High Court, it would trigger a number of similar writs in high courts across the country probably, leading to a reference to the apex court too.
Service tax and Cenvat
On hindsight, it appears that the decision to integrate central excise and service tax was not a very reasoned one. Valuation and Cenvat credit are both integrally connected with central excise law but alien to service tax.
Manufacture and service are totally different in nature and envisaging a common law for both was never going to be easy. Since inception, service tax law has used the term, ‘gross amount charged’, to determine the value of the service.
This could be taken to mean the amount that charged for rendering a service – for instance a charge by a lawyer at a rate per hour based on number of hours spent.
Logically, one charges only for the value of services rendered but expenses are claimed as a reimbursement.
Rule 5(1) of the Valuation Rules did not make this distinction between a charge and a claim and included all expenses in the value except expenses incurred as a pure agent.
The concept of a pure agent may not be valid in the service industry as it can be claimed that one always acts as a pure agent of a client irrespective of the number of clients being serviced.
Striking down Rule 5(1) under the pretext of double taxation may not hold water for long as double taxation as a concept has been accepted in the country and has been blessed by the apex court too.
The difference between a charge and a claim should be the reason for not levying service tax on expenses reimbursement.
The Government should take this decision in the right spirit and not amend Rule 5(1) to retrospectively include all reimbursements.
The law should state that as long as there is a one-to-one correspondence between the claim and the expense, and there is no profit being made by the service provider out of the expense claim, it should not be eligible to tax.
Doing anything different would only tempt a litigious tax-payer to knock on the comforting chambers of the Delhi High Court.
(The author is Director, Finance, Ellucian Higher Education, Bangalore.)