UNION OF INDIA & ANR. versus M/S. INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. on 7 March 2018

[2018] 10 S.C.R. 309

UNION OF INDIA & ANR.

v.

M/S. INTERCONTINENTAL CONSULTANTS ANDTECHNOCRATS PVT. LTD.

(Civil Appeal No. 2013 of 2014)

MARCH 07, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Service Tax (Determination of Value) Rules, 2006 – r.5 – Ifultra vires the provisions of ss.66, 67 of 1994 Act – Respondents-Assessees, provider of various services receive payments not onlyfor the services so rendered but are also reimbursed out of pocketexpenses incurred by them such as air travel, hotel stay, etc.–Assessees paying service tax in respect of amounts received by themfor services so rendered but not for the out of pocket expensesincurred by them, which was reimbursed by the clients – Under r.5,the value of said reimbursable activities are also to be included aspart of services provided by the respondents – Challenge to – Writpetition allowed by High Court – On appeal, held: Section 66 ofthe 1994 Act is the charging section and refers to service tax, i.e. inrespect of those services which are taxable and specifically referredto in various sub-clauses of s.65 of the 1994 Act – It is the value ofthe services which are actually rendered, the value whereof is to beascertained for the purpose of calculating the service tax payablethereupon – Any other amount which is calculated not for providingsuch taxable service cannot be a part of that valuation – Thus,service tax is to be paid only on the services actually provided bythe service provider – This is the plain meaning to be attached tos.67 which deals with valuation of taxable services for chargingservice tax – r.5 went much beyond the mandate of s.67 – HighCourt was right in interpreting ss.66 and 67 to say that in thevaluation of taxable service, the value of taxable service shall bethe gross amount charged by the service provider ‘for such service’and the valuation of tax service cannot be anything more or lessthan the consideration paid – Finance Act, 1994 – ss. 66, 67 ands.94.

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Interpretation of Statutes – Conflict between statute (Act) andsubordinate legislation (Rules) – Held: Rules are framed forachieving the purpose behind the provisions of the Act and thus,cannot go beyond the statute – A rule which comes in conflict withthe main enactment has to give way to the provisions of the Act.

BDismissing the appeals and disposing of the transferredwrits, the Court HELD: 1.1 Rule 5 of the Service Tax (Determination ofValue) Rules, 2006 brings within its sweep the expenses whichare incurred while rendering the service and are reimbursed,Cthat is, for which the service receiver has made the payments tothe assessees. As per these Rules, these reimbursable expensesalso form part of ‘gross amount charged’. Prior to April 19, 2006,i.e., in the absence of any such Rule, the valuation was to bedone as per the provisions of Section 67 of the Finance Act, 1994.[Para 21] [343-E-F]

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1.2 Section 67, Finance Act, 1994 refers to service tax, i.e.,in respect of those services which are taxable and specificallyreferred to in various sub-clauses of Section 65, Finance Act,1994. Further, it also specifically mentions that the service taxwill be @ 12% of the ‘value of taxable services’. Thus, serviceEtax is in reference to the value of service. As a necessary corollary,it is the value of the services which are actually rendered, thevalue whereof is to be ascertained for the purpose of calculatingthe service tax payable thereupon. In this hue, the expression‘such’ occurring in Section 67 of the Act assumes importance. InFother words, in valuation of taxable services for charging servicetax, the authorities are to find what is the gross amount chargedfor providing ‘such’ taxable services. As a fortiori, any otheramount which is calculated not for providing such taxable servicecannot a part of that valuation as that amount is not calculated forproviding such ‘taxable service’. That is the plain meaning whichGis to be attached to Section 67 (unamended, i.e., prior to May 01,2006) or after its amendment, with effect from, May 01, 2006.Once this interpretation is to be given to Section 67, it hardlyneeds to be emphasised that Rule 5 of the 2006 Rules went muchbeyond the mandate of Section 67. The High Court was right in H

interpreting Sections 66 and 67, Finance Act, 1994 to say that inthe valuation of taxable service, the value of taxable service shallbe the gross amount charged by the service provider ‘for suchservice’ and the valuation of tax service cannot be anything moreor less than the consideration paid as quid pro quo for renderingsuch a service. This position did not change even in the amendedSection 67 which was inserted on May 01, 2006. Sub-section (4)of Section 67 empowers the rule making authority to lay downthe manner in which value of taxable service is to be determined.However, Section 67(4) is expressly made subject to theprovisions of sub-section (1). Mandate of sub-section (1) of Section67 is manifest, viz., the service tax is to be paid only on theservices actually provided by the service provider. It is tritethat rules cannot go beyond the statute. [Paras 23-26] [343-G-H;344-A-G]

1.3 A rule which comes in conflict with the main enactmenthas to give way to the provisions of the Act. Rules are framed forachieving the purpose behind the provisions of the Act. [Paras27, 28] [345-B]

CIT v. S. Chenniappa Mudaliar (1969) 74 ITR 41 –relied on.

1.4 In the present case, the aforesaid view gets strengthenedfrom the manner in which the Legislature itself acted. Realisingthat Section 67, dealing with valuation of taxable services, doesnot include reimbursable expenses for providing such service,the Legislature amended by Finance Act, 2015 with effect fromMay 14, 2015, whereby Clause (a) which deals with ‘consideration’is suitably amended to include reimbursable expenditure or costincurred by the service provider and charged, in the course ofproviding or agreeing to provide a taxable service. Thus, onlywith effect from May 14, 2015, by virtue of provisions of Section67 itself, such reimbursable expenditure or cost would also formpart of valuation of taxable services for charging service tax.Though, it was not argued by the Department that Section 67 is adeclaratory provision, nor could it be argued so, as it is foundthat this is a substantive change brought about with theamendment to Section 67 and therefore, has to be prospective innature. [Para 29] [345-D-F]

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ACIVIL APPEAL NO. 6865 OF 2014, CIVIL APPEAL NO. 6864OF 2014, CIVIL APPEAL NO. 4975 OF 2016, CIVIL APPEALNO. 5130 OF 2016 AND CIVIL APPEAL NOS. 4536-4537 OF2016

1.5 In the aforesaid appeals, the issue is as to whether theBvalue of free supplies of diesel and explosives in respect of theservice of ‘Site Formation and Clearance Service’ can be includedfor the purpose of assessment to service tax under Section 67 ofthe Act. These assessees had not availed the benefit of NotificationNos.15/2004 and 4/2005. Therefore, the issue has to be adjudgedsimply by referring to Section 67 of the Act. It has been alreadyCheld above that the value of such material which is supplied freeby the service recipient cannot be treated as ‘gross amountcharged’ and that is not the ‘consideration’ for rendering theservices. Therefore, value of free supplies of diesel and explosiveswould not warrant inclusion while arriving at the gross amountDcharged on its service tax is to be paid. Therefore, all theseappeals are also dismissed. [Para 31] [347-C-E]TRANSFER PETITION (CIVIL) NOS. 1043-1045 OF 2017

TRANSFER PETITION (CIVIL) NOS. 1932-1934 OF 2017

E1.6 These transfer petitions are allowed and the writpetitions mentioned in the prayer clause, which are pendingbefore the High Court of Madras, are transferred to SupremeCourt. The transferred writs are also disposed of in terms of thejudgment rendered above in Civil Appeal No. 2013 of 2014 andother connected matters. [Paras 32, 33] [347-F]FUnion of India & Ors. v. Bengal Shrachi HousingDevelopment Limited & Anr. (2018) 1 SCC 311 –distinguished.

Babaji Kondaji Garad v. Nasik Merchants Co-operativeBank Ltd. (1984) 2 SCC 50 : [1984] 1 SCR 767; CIT,GAndhra Pradesh v. Taj Mahal Hotel (1971) 82 ITR 44– relied on.

Jain Brothers v. Union of India (1970) 77 ITR 107;Central Bank of India & Ors. v. Workmen, etc. [1960] 1SCR 200; State of U.P. & Ors. v. Babu Ram Upadhya H

UNION OF INDIA v. M/S. INTERCONTINENTALCONSULTANTS AND TECHNOCRATS

[1961] 2 SCR 679; Bimal Chandra Banerjee v. State ofM.P. & Ors. (1971) 81 ITR 105; Commissioner ofCustoms and Excise v. Cure and Deeley Ltd (1961) 3WLR 788 (QB); Union of India & Ors. v. Bombay TyreInternational Limited & Ors. (1984) 1 SCC 467 : [1984]1 SCR 347; Mathuram Agrawal v. State of MadhyaPradesh (1999) 8 SCC 667 : [1999] 4 Suppl. SCR 195;Govind Saran Ganga Saran v. Commissioner of SalesTax & Ors. (1985) Suppl. SCC 205 : [1985] 3 SCR985; Commissioner of Income Tax (Central)-I, New Delhiv. Vatika Township Private Limited (2015) 1 SCC 1 :[2014] 12 SCR 1037– referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2013of 2014

From the Judgment and Order dated 30.11.2012 of the High Courtof Delhi at New Delhi in Writ Petition (C) No. 6370 of 2008.

With

Civil Appeal Nos. 295-299, 2021, 4340-4341, 6866, 7685, 7688,6864 and 6865 of 2014.

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ACivil Appeal Nos. 8056 and 3360 of 2015Transfer Petition (Civil) Nos. 1043-1045, 1932-1934 of 2017Civil Appeal Nos. 6090, 10626-10627, 10223-10224, 5444 of 2017

Civil Appeal Nos. 4536-4537, 5130, 4975 and 5453 of 2016.

BK. Radhakrishnan, Sr. Adv., Ms. Nisha Bagchi, Ms. B. SunitaRao, Anurag, Shashank Kumar, Rajiv Nanda, Ms. Shirin Khajuria, RupeshKumar, Ms. Pooja Sharma, Ms. Sanskriti Bhardwaj, B. Krishna Prasad,Advs. for the Appellants.

Susmit Pushkar, Abhijeet Swaroop, Ayush Mehrotra, PraveenCSwarup, Pravin Satale, Rajiv Shankar Dvivedi, S. Sunil, Sudarshan SinghRawat, Aravindh S., Mohinder Jit Singh, J. K. Mittal, Rajveer Singh,Sumit Batra, Nikhil Gupta, Advs. for the Respondent.

The Judgment of the Court was delivered by

A. K. SIKRI, J. 1. In all these appeals, legal issue that needsDdetermination is almost identical, though there may be little variation onfacts. This difference pertains to the nature of services provided by therespondents/assessees who are all covered by the service tax. Thefringe diferences in the nature of services, however, nature of differences,however, has no impact on the final outcome.

E2. All the assessees are paying service tax. The services whichthese assessees are rendering broadly fall in the following four categories:

(a) Consulting engineering services.

(b) Share transfer agency services.

F(c) Custom house agent services covered by the head ‘clearing and forwarding agent’.

(d) The site formation and clearances, excavation and earth moving and demolition services.

3. While rendering the aforesaid services, the assessees are alsoGgetting reimbursement in respect of certain activities undertaken by themwhich according to them is not includable to arrive at ‘gross value’ chargedfrom their clients. As per Rule 5 of the Service Tax (Determination ofValue) Rules, 2006 (hereinafter referred to as the ‘Rules’), the value ofthe said reimbursable activities is also to be included as part of services H

provided by these respondents. Writ petitions were filed by the assesseeschallenging the vires of Rule 5 of the Rules as unconstitutional as wellas ultra vires the provisions of Sections 66 and 67 of Chapter V of theFinance Act, 1994 (hereinafter referred to as the ‘Act’). The HighCourt of Delhi has, by the judgment dated November 30, 2012, acceptedthe said challenge and declared Rule 5 to be ultra vires these provisions.Other cases have met similar results by riding on the judgment datedNovember 30, 2012. This necessitates examining the the correctness ofthe judgment of the Delhi High Court and outocme thereof woulddetermine the fate of all these appeals/transfer petitions.

4. This judgment was rendered by the High court in the writ petitionfiled by M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. outof which Civil Appeal No. 2013 of 2014 arises. Therefore, for our purpose,it would suffice to advert to the facts of this appeal and take note of thereasons which have prevailed with the High Court in arriving at thisconclusion.

5. The assessee M/s. Intercontinental Consultants and TechnocratsPvt. Ltd. is a provider of consulting engineering services. It specialisesin highways, structures, airports, urban and rural infrastructural projectsand is engaged in various road projects outside and inside India. In thecourse of the carrying on of its business, the petitioner renderedconsultancy services in respect of highway projects to the NationalHighway Authority of India (NHAI). The petitioner receives paymentsnot only for its service but is also reimbursed expenses incurred by itsuch as air travel, hotel stay, etc. It was paying service tax in respect ofamounts received by it for services rendered to its clients. It was notpaying any service tax in respect of the expenses incurred by it, whichwas reimbursed by the clients. On 19.10.2007, the Superintendent (Audit)Group II (Service Tax), New Delhi issued a letter to the petitioner on thesubject “service tax audit for the financial year 2002-03 to 2006-07. Inthis letter, it was mentioned by the appellant that service tax was liableto be charged on the gross value including reimbursable and out of pocketexpenses like travelling, lodging and boarding etc. and the respondentwas directed to deposit the due service tax along with interest @13%under Sections 73 and 75 respectively of the Act. In response, therespondent provided month-wise detail of the professional income aswell as reimbursable out of pocket expenses for the period mentioned inthe aforesaid letter. Thereafter, a show cause notice dated March 17, AB

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A2008 was issued by the Commissioner, Service Tax, Commissioneratevide which the respondent was asked to show cause as to why theservice tax should not be recovered by including the amounts ofreimbursable which were received by the respondent, pointing out thesewere to be included while arriving at the gross value as per provisions ofRule 5(1) of the Rules.B

6. Rule 5 was brought into existence w.e.f. June 01, 2007. Thedemand which was made in the show cause notice was covered by theperiod from October, 2002 to March, 2007. Against this show causenotice, the respondent preferred Writ Petition No. 6370 of 2008 in theHigh Court of Delhi challenging the vires thereof with three prayers,Cnamely:

(i) for quashing Rule 5 in its entirety of the Service Tax(Determination of Value) Rules, 2006 to the extent it includes thereimbursement of expenses in the value of taxable service for thepurpose of charging service tax; and D(ii) for declaring the rule to be unconstitutional and ultra viresSections 66 and 67 of the Finance Act, 1994; and

(iii) for quashing the impugned show-cause notice-cum-demanddated 17.03.2008 holding that it is illegal, arbitrary, withoutEjurisdiction and unconstitutional.

7. Rule 5, which provides for ‘inclusion in or exclusion from thevalue of certain expenditure or costs’, is reproduced below in order tounderstand its full implication:

“5. Inclusion in or exclusion from value of certain expenditure orFcosts.

(1) Where any expenditure or costs are incurred by the serviceprovider in the course of providing taxable service, all suchexpenditure or costs shall be treated as consideration for thetaxable service provided or to be provided and shall be included inGthe value for the purpose of charging service tax on the saidservice.

(2) Subject to the provisions of sub rule (1), the expenditure orcosts incurred by the service provider as a pure agent of therecipient of service, shall be excluded from the value of the taxableservice if all the following conditions are satisfied, namely:

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• the service provider acts as a pure agent of the recipient ofservice when he makes payment to third party for the goodsor services procured;

• the recipient of service receives and uses the goods orservices so procured by the service provider in his capacityas pure agent of the recipient of service;

• the recipient of service is liable to make payment to thethird party;

• the recipient of service authorities the service providerto make payment on his behalf;

• the recipient of service knows that the goods and servicesfor which payment has been made by the service providershall be provided by the third party;

• the payment made by the service provider on behalf of therecipient of service has been separately indicated in theinvoice issued by the service provider to the recipient ofservice;

• the service provider recovers from the recipient ofservice only such amount as has been paid by him to thethird party; and

• the goods or services procured by the service provider fromthe third party as a pure agent of the recipient of serviceare in addition to the services he provides on his own account.

Explanation 1 : For the purposes of sub rule (2), “pure agent”means a person who –

• enters into a contractual agreement with the recipientof service to act as his pure agent to incur expenditure orcosts in the course of providing taxable service;

• neither intends to hold nor holds any title to the goodsor services so procured or provided as pure agent of therecipient of service; A

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• does not use such goods or services so procured; and

• receives only the actual amount incurred to procure suchgoods or services.

Explanation 2 : For the removal of doubts it is clarified thatthe value of the taxable service is the total amount ofconsideration consisting of all components of the taxableservice and it is immaterial that the details of individualcomponents of the total consideration is indicated separatelyin the invoice.

Illustration 1 : X contracts with Y, a real estate agent to sellhis house and thereupon Y gives an advertisement in television.Y billed X including charges for Television advertisement andpaid service tax on the total consideration billed. In such acase, consideration for the service provided is what X paysto Y. Y does not act as an agent behalf of X when obtainingthe television advertisement even if the cost of televisionadvertisement is mentioned separately in the invoice issuedby X. Advertising service is an input service for the estateagent in order to enable or facilitate him to perform his servicesas an estate agent.

Illustration 2 : In the course of providing a taxable service, aservice provider incurs costs such as traveling expenses,postage, telephone, etc., and may indicate these itemsseparately on the invoice issued to the recipient of service. Insuch a case, the service provider is not acting as an agent ofthe recipient of service but procures such inputs or inputservice on his own account for providing the taxable service.Such expenses do not become reimbursable expendituremerely because they are indicated separately in the invoiceissued by the service provider to the recipient of service.

Illustration 3 : A contracts with B, an architect for building ahouse. During the course of providing the taxable service, Bincurs expenses such as telephone charges, air travel tickets,hotel accommodation, etc., to enable him to effectively performthe provision of services to A. In such a case, in whateverform B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overallfee, service tax is payable on the total amount charged by B.Value of the taxable service for charging service tax is whatA pays to B.

Illustration 4 : Company X provides a taxable service of rentcab by providing chauffeur driven cars for overseas visitors.The chauffeur is given a lump sum amount to cover his foodand overnight accommodation and any other incidentalexpenses such as parking fees by the Company X during thetour. At the end of the tour, the chauffeur returns the balanceof the amount with a statement of his expenses and therelevant bills. Company X charges these amounts from therecipients of service. The cost incurred by the chauffeur andbilled to the recipient of service constitutes part of grossamount charged for the provision of services by the companyX.”

8. The case set up by the respondent in the writ petition was thatRule 5(1) of the Rules, which provides that all expenditure or cost incurredby the service provider in the course of providing the taxable servicesshall be treated as consideration for the taxable services and shall beincluded in the value for the purpose of charging service tax, goes beyondthe mandate of Section 67. It was argued that Section 67 which dealswith valuation of taxable services for charging service tax does not providefor inclusion of the aforesaid expenditure or cost incurred while providingthe services as they cannot be treated as element/components of service.Section 67 was amended by Finance Act, 2006 w.e.f. May 01, 2006.Since the cases before us involve period prior to the aforesaid amendmentas well as post amendment period, it would apt to take note of bothunamended and amended provisions. Unamended Section 67 was inthe following form:

“”67. Valuation of taxable services for charging service tax.

For the purposes of this Chapter, the value of any taxable serviceshall be the gross amount charged by the service provider forsuch provided or to be provided by him.

Explanation 1. For the removal of doubts, it is hereby declaredthat the value of a taxable service, as the case may be, includes, A

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(a) the aggregate of commission or brokerage charges by a brokeron the sale or purchase of securities including the commission orbrokerage paid by the stock broker to any sub broker.

(b) the adjustments made by the telegraph authority from anydeposits made by the subscriber at the time of application forBtelephone connection or pager or facsimile or telegraph or telexor for leased circuit;

(c) the amount of premium charged by the insurer from the policyholder; (d) the commission received by the air travel agent from the airline; C

(e) the commission, fee or any other sum received by an actuary,or intermediary or insurance intermediary or insurance agent fromthe insurer; (f) the reimbursement received by the authorized service stationfrom manufacturer for carrying out any service of nay motor car,light motor vehicle or two wheeled motor vehicle manufacturedby such manufacturer; and D

(g) the commission or any amount received by the rail travel agentfrom the Railways or the customer.

EBut does not include –

(i) initial deposit made by the subscriber at the time of applicationfor telephone connection or pager or facsimile (FAX) or telephoneor telex or for leased circuit;

(ii) the cost of unexposed photography film, unrecorded magnetictape or such other storage devices, if any, sold to the client duringthe course of providing the service; F

(iii) the cost of parts or accessories, or consumable such aslubricants and coolants, if any, sold to the customer during thecourse of service or repair of motor cars, light motor vehicle orGtwo wheeled motor vehicles;

(iv) the airfare collected by air travel agent in respect of serviceprovided by him;

(v) the rail fare collected by rail travel agent in respect of serviceprovided by him; H

(vi) the cost of parts or other material, if any, sold to the customerduring the course of providing maintenance or repair service;

(vii) the cost of parts or other material, if any, sold to the customerduring the course of providing erection, commissioning orinstallation service; and

(viii) interest on loan.

Explanation 2 – Where the gross amount charged by a serviceprovider is inclusive of service tax payable, the value of taxableservice shall be such amount as with the addition of tax payable,is equal to the gross amount charged.

Explanation 3. For the removal of doubts, it is hereby declaredthat the gross amount charged for the taxable service shall includeany amount received towards the taxable service before, duringor after provision of such service.”

9. After its amendment w.e.f. May 01, 2006, a much shorter versionwas introduced which reads as under:

“67. Valuation of taxable services for charging service tax.

(1) Subject to the provisions of this Chapter, where service tax ischargeable on any taxable service with reference to its value,then such value shall,

(i) in a case where the provision of service is for a considerationin money, be the gross amount charged by the service providerfor such service provided or to be provided by him;

(ii) in a case where the provision of service is for a considerationnot wholly or partly consisting of money, be such amount in moneyas, with the addition of service tax charged, is equivalent to theconsideration;

(iii) in a case where the provision of service is for a considerationwhich is not ascertainable, be the amount as ay be determined inthe prescribed manner.

(2) Where the gross amount charged by a service provider, forthe service provided or to be provided is inclusive of service taxpayable, the value of such taxable service shall be such amountas, with the addition of tax payable, is equal to the gross amountcharged.

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(3) The gross amount charged for the taxable service shall includeany amount received towards the taxable service before, duringor after provision of such service.

(4) Subject to the provisions of sub sections (1), (2) and (3), thevalue shall be determined in such manner as may be prescribed.

BExplanation: For the purpose of this section, (a) “consideration” includes any amount that is payable for thetaxable services provided or to be provided; (b) “money” includes any currency, cheque, promissory note, letterCof credit, draft, pay order, travelers cheque, money order, postalremittance and other similar instruments but does not includecurrency that is held for its numismatic value;

(c) “gross amount charged” includes payment by cheque, creditcard, deduction from account and any form of payment by issueDof credit notes or debit notes and book adjustment, and any amountcredited or debited, as the case may be, to any account, whethercalled “Suspense account” or by any other name, in the books ofaccounts of a person liable to pay service tax, where the transactionof taxable service is with any associated enterprise.”

10. The High Court, after taking note of the aforesaid provisions,Enoted that the provisions both amended and unamended Section 67authorised the determination of value of taxable services for the purposeof charging service tax under Section 66 (which is a charging section)as the gross amount charged by the service provider for such servicesprovided or to be provided by him, in a case where the consideration forFthe service is money. Emphasising on the words ‘for such service’, theHigh Court took the view that the charge of service tax under Section66 has to be on the value of taxable service i.e. the value of servicerendered by the assessee to the NHAI, which is that of a consultingengineer, that can be brought to charge and nothing more. Thequantification of the value of the service can, therefore, never exceedGthe gross amount charged by the service provider for the service providedby him. On that analogy, the High Court has opined that scope of Rule5 goes beyond the Section which was impermissible as the Rules whichhave been made under Section 94 of the Act can only be made ‘forcarrying out the provisions of this Chapter’ (Chapter V of the Act)

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which provides for levy quantification and collection of the service tax.In the process, the High Court observed that the expenditure or costincurred by the service provider in the course of providing the taxableservice can never be considered as the gross amount charged by theservice provider ‘for such service’ provided by him, and illustration 3given below the Rule which included the value of such services was aclear example of breaching the boundaries of Section 67. The HighCourt even went on to hold further pointed out that it may even result indouble taxation inasmuch as expenses on air travel tickets are alreadysubject to service tax and are included in the bill. No doubt, doubletaxation was permissible in law but it could only be done if it wascategorically provided for and intended; and could not be enforced byimplication as held in Jain Brothers v. Union of India[1]. The HighCourt has also referred to many judgments of this Court for the propositionthat Rules cannot be over-ride or over-reach the provisions of the mainenactment[2]. The High Court also referred to the judgment of QueensBench of England in the case of Commissioner of Customs and Excisev. Cure and Deeley Ltd.[3].

11. Mr. K. Radhakrishnan, learned senior counsel argued for theappellant, ably assisted by Ms. Nisha Bagchi, advocate who also madesignificant contribution by arguing some of the nuances of the issueinvolved. Submission of the learned counsel appearing for the appellant/Department was that prior to April 19, 2006 i.e. in the absence of Rule 5of the Rules, the value of taxable services was covered by Section 67 ofthe Act. As per this Section, the value of taxable services in relation toconsulting engineering services provided or to be provided by a consultingengineer to the client shall be the gross amount charged for a considerationor in money from the client in respect of engineering services. Theexpression ‘gross amount charged’ would clearly include all the amountswhich were charged by the service provider and would not be limited tothe remuneration received from the customer. The very connotation 1 (1970) 77 ITR 107

2 Central Bank of India & Ors. v. Workmen, etc., (1960) 1 SCR 200; Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd., (1984) 2 SCC 50; State of U.P. & Ors. v. Babu Ram Upadhya, (1961) 2 SCR 679; CIT v. S. Chenniappa Mudaliar, (1969) 74 ITR 41; Bimal Chandra Banerjee v. State of M.P. & Ors., (1971) 81 ITR 105 and CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44

3 (1961) 3 WLR 788 (QB)

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A‘gross amount charged’ denotes the total amount which is received inrendering those services and would include the other amounts liketransportation, office rent, office appliances, furniture and equipmentsetc. It was submitted that this expenditure or cost would be part ofconsideration for taxable services. It was, thus, argued that essentialinput cost had to be included in arriving at gross amount charged by aBservice provider.

12. It was further submitted that Section 67 of the Act was amendedw.e.f. May 01, 2006 and this also retained the concept of ‘the grossamount charged’ for the purpose of arriving at valuation on which theservice tax is to be paid. The learned counsel pointed out that sub-Csection (4) of amended Section 67 categorically provides that the valuehas to be determined in such a manner as may be prescribed and inpursuant thereto, Rule 5 of the Rules which came into effect from June01, 2007, provided for ‘inclusion in or exclusion from value of certainexpenditure or costs’. It was submitted that there was no dispute thatDas per this Rule, all such expenditure or costs which are incurred by theservice provider in the course of providing taxable services are to betreated as consideration for the taxable services provided or to be providedfor arriving at valuation for the purpose of charging service tax, exceptthose costs which were specifically excluded under sub-rule (2) of Rule5. Submission was that since Section 67 specifically lays down theEprinciple of gross amount charged by a service provider for the servicesprovided or to be provided, Rule 5 did not go contrary to Section 67 as itonly mentions what would be the meaning of gross amount charged.

13. In the aid of this submission, the learned counsel sought totake help from principle laid down in excise law and submitted that it isFheld by this Court in Union of India & Ors. v. Bengal Shrachi HousingDevelopment Limited & Anr.[4] that same principles as applicable inexcise law are applicable while examining service tax matters. Reliancewas placed on paragraph 22 of the said judgment to support thisproposition. However, we may point out at this stage itself that theGcontext in which the observations were made were entirely different.The issue was as to whether service tax, which is an indirect tax, can bepassed on by the service provider to the recepient of the service and, inthis hue, the matter was discussed, as can be seen from the combinedreading of paragraphs 21 and 22 which are to the following effect:

H4 (2018) 1 SCC 311

H4 (2018) 1 SCC 311

“21. It is thus clear that the judgments of this Court whichreferred to service tax being an indirect tax have referenceonly to service tax being an indirect tax in economic theoryand not constitutional law. The fact that service tax may not, ingiven circumstances, be passed on by the service provider tothe recipient of the service would not, therefore, make suchtax any the less a service tax. It is important to bear this inmind, as the main prop of Shri Jaideep Gupta’s argument isthat service tax being an indirect tax which must be passed onby virtue of the judgments of this Court, would make therecipient of the service the person on whom the tax is primarilyleviable.

22. Let us now examine some of the judgments relating toanother indirect tax, namely, excise duty. Like service tax,excise duty is also in the economic sense, an indirect tax. Thelevy is on manufacture of goods; and the taxable person isusually the manufacturer of those goods. InCentral Provincesand Berar Sales of Motor Spirit and Lubricants TaxationAct, 1938, In re, the Federal Court decided, through MauriceGwyer, C.J., that excise duty under the Government of IndiaAct, 1935 is a power to impose duty of excise upon themanufacturer of excisable articles at the stage of or inconnection with manufacture or production. In a separatejudgment, Jayakar, J. held that all duties of excise are levied onmanufacture of excisable goods and can be levied and collectedat any subsequent stage up to consumption.”

14. It was also submitted that while dealing with the valuation ofa taxable service, the provision which deals with valuation has to betaken into consideration and no assistance can be taken from chargingsection, as held in Union of India & Ors. v. Bombay Tyre InternationalLimited & Ors.[5]:

“8. Mr N.A. Palkhivala, learned counsel for the assessees,has propounded three principles which, he contends, form theessential characteristics of a duty of excise. Firstly, he says,excise is a tax on manufacture or production and not on anythingelse. Secondly, uniformity of incidence is a basic characteristicof excise. And thirdly, the exclusion of post-manufacturing 5 (1984) 1 SCC 467

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expenses and post-manufacturing profits is necessarily involvedin the first principle and helps to achieve the second. Learnedcounsel urges that where excise duty is levied on an ad valorembasis the value on which such duty is levied is a “conceptualvalue”, and that the conceptual nature is borne out by thecircumstance that the identity of the manufacturer and theidentity of the goods as well as the actual wholesale pricecharged by the manufacturer are not the determining factors.It is urged that the old Section 4(a) clearly indicates that aconceptual value forms the basis of the levy, and that the actualwholesale price charged by the particular assessee cannot bethe basis of the excise levy. It is said that the criterion adoptedin clause (a) succeeds in producing uniform taxation, whetherthe assessees are manufacturers who sell their goods inwholesale, semi-wholesale or in retail, whether they have avast selling and marketing network or have none, whether theysell at depots and branches or sell at the factory gate, andwhether they load the ex-factory price with post-manufacturingexpenses and profits or do not do so. Because the value of thearticle rests on a conceptual base, it is urged, the result of theassessment under Section 4(a) cannot be different from theresult of an assessment under Section 4(b). The contention isthat the principle of uniformity of taxation requires the exclusionof post-manufacturing expenses and profits, a factor whichwould vary from one manufacturer to another. It is pointed outthat such exclusion is necessary to create a direct andimmediate nexus between the levy and the manufacturingactivity, and to bring about a uniformity in the incidence of thelevy. Learned counsel contends that the position is the sameunder the new Section 4 which, he says, must need be sobecause of the fundamental nature of the principles propoundedearlier. Referring to the actual language of the new Section4(1)(a), it is pointed out that the expression “normal price”therein means “normal for the purposes of excise”, that is tosay, that the price must exclude post-manufacturing expensesand post-manufacturing profit and must not be loaded withany extraneous element. It is conceded, however, that underthe new Section 4(1)(a) there is no attempt to preserveuniformity as regards the amount of duty between one

manufacturer and another, but it is urged that the basis on whichthe value is determined is constituted by the same conceptualcriterion, that post-manufacturing expenses and post-manufacturing profit must be excluded. Considerable emphasishas been laid on the submission that as excise duty is a tax onthe manufacture or production of goods it must be a taxintimately linked with the manufacture or production of theexcisable article and, therefore, it can be imposed only on theassessable value determined with reference to the excisablearticle at the stage of completed manufacture and to no pointbeyond. To preserve this intimate link or nexus between thenature of the tax and the assessment of the tax, it is urged thatall extraneous elements included in the “value” in the nature ofpost-manufacturing expenses and post-manufacturing profitshave to be off-loaded. It is pointed out that factors such asvolume, quantity and weight, which enter into the measure ofthe tax, are intimately linked with the manufacturing activity,and that the power of Parliament under Entry 84 of List I ofthe Seventh Schedule to the Constitution to legislate in respectof “value” is restricted by the conceptual need to link the basisfor determining the measure of the tax with the very nature ofthe tax.

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10. Besides this fundamental issue, there are other points ofdispute, principally in respect of the connotation of the expression“related person” in the new Section 4 as well as the nature ofthe deductions which can be claimed by the assessee as post-manufacturing expenses and post-manufacturing profit fromthe price for the purpose of determining the “value”.

11. The submissions made by learned counsel for the partiesin support of their respective contentions cover a wide area,and several questions of a fundamental nature have been raised.We consider it necessary to deal with them because they enterinto and determine the conclusions reached by us.

12. We think it appropriate that at the very beginning we shouldbriefly indicate the concept of a duty of excise. Both Entry 45of List I of the Seventh Schedule to the Government of IndiaAct, 1935, under which the original Central Excises and Salt ABCD

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Act was enacted, and Entry 84 of List I of the SeventhSchedule to the Constitution under which the Amendment Actof 1973 was enacted, refer to “Duties of excise on... goodsmanufactured or produced in India”. A duty of excise,according to the Federal Court in The Central Provinces andBerar Sales of Motor Spirit and Lubricants Taxation Act,1938 [AIR 1939 FC 1, 6 : 1939 FCR 18] is a duty ordinarilylevied on the manufacturer or producer in respect of themanufacture or production of the commodity taxed. A distinctionwas drawn between the nature of the tax and the point atwhich it was collected, and Gwyer, C.J. observed thattheoretically “. . .there can be no reason in theory why anexcise duty should not be imposed even on the retail sale of anarticle, if the taxing Act so provides. Subject always to thelegislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage whichthe authority finds to be the most convenient and the mostlucrative, wherever it may be; but that is a matter of themachinery of collection, and does not affect the essentialnature of the tax. The ultimate incidence of an excise duty, atypical indirect tax, must always be on the consumer, who paysas he consumes or expends; and it continues to be an exciseduty, that is, a duty on home-produced or home-manufacturedgoods, no matter at what stage it is collected….” (emphasissupplied). The position was explained further in Province ofMadras v. Boddu Paidanna and Sons [1942 FCR 90, 101 :AIR 1942 FC 33] where the Federal Court observed:

“… There is in theory nothing to prevent the Central Legislaturefrom imposing a duty of excise on a commodity as soon as itcomes into existence, no matter what happens to it afterwards,whether it be sold, consumed, destroyed, or given away. Ataxing authority will not ordinarily impose such a duty, becauseit is much more convenient administratively to collect the duty(as in the case of most of the Indian Excise Acts) when thecommodity leaves the factory for the first time, and alsobecause the duty is intended to be an indirect duty which themanufacturer or producer is to pass on to the ultimate consumer,which he could not do if the commodity had, for example, beendestroyed in the factory itself. It is the fact of manufacture which attracts the duty, even though it may be collectedlater;….”

The observations show that while the nature of an excise isindicated by the fact that it is imposed in respect of the manufactureor production of an article, the point at which it is collected is notdetermined by the point of time when its manufacture is completedbut will rest on considerations of administrative convenience, andthat generally it is collected when the article leaves the factoryfor the first time. In other words, the circumstance that the articlebecomes the object of assessment when it is sold by themanufacturer does not detract from its true nature, that it is a levyon the fact of manufacture. In a subsequent case, Governor-General-in-Council v. Province of Madras [1945 FCR 179 :AIR 1945 FC 98] , the Privy Council referred to both CentralProvinces and Berar Sales of Motor Spirit and LubricantsTaxation Act, 1938 [AIR 1939 FC 1, 6 : 1939 FCR 18]and Province of Madras v. Boddu Paidanna and Sons [1942FCR 90, 101 : AIR 1942 FC 33] and affirmed that when excisewas levied on a manufacturer at the point of the first sale by him“that may be because the taxation authority imposing a duty ofexcise finds it convenient to impose that duty at the moment whenthe excisable article leaves the factory or workshop for the firsttime on the occasion of its sale. But that method of collecting thetax is an accident of administration; it is not of the essence of theduty of excise, which is attracted by the manufacture itself. ThisCourt had occasion to consider a similar question in R.C.Jall v. Union of India [AIR 1962 SC 1281 : 1962 Supp (3) SCR436, 451] . In that case, the Central Government was authorisedby an Ordinance to levy and collect as a cess on coal and cokedespatched from collieries in British India a duty of excise at aspecified rate. Rule 3 made under the Ordinance empowered theGovernment to impose a duty of excise on coal and coke whensuch coal and coke was despatched by rail from the collieries ofthe coke plants, and the duty was to be collected by the RailwayAdministration by means of a surcharge on freight either fromthe consignor or consignee. It was contended by the assesseethat the excise duty could not legally be levied on the consigneewho had nothing to do with the manufacture or production ofcoal. The Court remarked:

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“The argument confuses the incidence of taxation with themachinery provided for the collection thereof,”

and reference was made to In re the Central Provinces andBerar Act 14 of 1938[AIR 1939 FC 1, 6 : 1939 FCR 18], Province of Madras v. Boddu Paidanna and Sons [1942 FCR90, 101 : AIR 1942 FC 33] and Governor-General inCouncil v. Province of Madras [1945 FCR 179 : AIR 1945 FC98] . This Court then summarised the law as follows:

“… Excise duty is primarily a duty on the production ormanufacture of goods produced or manufactured within thecountry. It is an indirect duty which the manufacturer orproducer passes on to the ultimate consumer, that is, its ultimateincidence will always be on the consumer. Therefore, subjectalways to the legislative competence of the taxing authority,the said tax can be levied at a convenient stage so long as thecharacter of the impost, that is, it is a duty on the manufactureor production, is not lost. The method of collection does notaffect the essence of the duty, but only relates to the machineryof collection for administrative convenience.”

Other cases followed where the nature of excise duty wasreaffirmed in the terms set out earlier, and reference may be madeto In re Bill to Amend Section 20 of the Sea Customs Act,1878 and Section 3 of the Central Excises And Salt Act, 1944[AIR 1963 SC 1760 : (1964) 3 SCR 787] ; Union of India v. DelhiCloth & General Mills [AIR 1963 SC 791 : 1963 Supp (1) SCR586] ; Guruswamy & Co. v. State of Mysore [AIR 1967 SC 1512: (1967) 1 SCR 548] and South Bihar Sugar Mills Ltd. v. Unionof India [AIR 1968 SC 922 : (1968) 3 SCR 21] .

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17. A contention was raised for some of the assessees, that themeasure was to be found by reading Section 3 with Section 4,thus drawing the ingredients of Section 3 into the exercise. Weare unable to agree. We are concerned with Section 3(1), and wefind nothing there which clothes the provision with a dual character,a charging provision as well as a provision defining the measureof the charge.

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35. We have examined the principles of an excise levy and haveconsidered the statutory construction of the Act, before and afterits amendment, in view of the three propositions formulated, onbehalf of the assessees, as principles constituting the essentialcharacteristics of a duty of excise. It is apparent that the firstproposition, that excise is a tax on the manufacture or productionof goods, and not on anything else, is indisputable and is supportedby a catena of cases beginning with The Central Provinces andBerar Sales of Motor Spirit and Lubricants Taxation Act, 1938[AIR 1939 FC 1, 6 : 1939 FCR 18] . As regards the secondproposition. that uniformity of incidence is a basic characteristicof excise, we are inclined to think that the accuracy of theproposition depends on the level at which the statute rests it. Weshall discuss that presently. As to the third proposition, that theexclusion of post-manufacturing expenses and post-manufacturingprofit is necessarily involved in the first principle does not inevitablyfollow. The exclusion of post-manufacturing expenses and post-manufacturing profits is a matter pertaining to the ascertainmentof the “value” of the excisable article, and not to the nature of theexcise duty, and as we have explained, the standard adopted bythe Legislature for determining the “value” may possess a broaderbase than that on which the charging provision proceeds. Theacceptance of the further statement contained in the formulationof the third proposition, that the exclusion of post-manufacturingexpenses and post-manufacturing profits helps to achieveuniformity of incidence in the levy of excise duty, depends onwhat is the point at which such uniformity of incidence iscontemplated. It is not necessarily involved at the stage of sale ofthe article by the manufacturer because we find, for example,that under the amended Section 3(3) of the Central Excises andSalt Act, different tariff values may be fixed not only (a) fordifferent classes or descriptions of the same excisable goods, butalso (b) for excisable goods of the same class or description (i)produced or manufactured by different classes of producers ormanufacturers, or (ii) sold to different classes of buyers. That the“value” of excisable goods determined under the new Section4(1)(a) may also vary according to certain circumstances is evident A

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Afrom the three clauses of the proviso to that clause. Clause (i)recognises that in the normal practice of wholesale trade the sameclass of goods may be sold by the assessee at different prices todifferent classes of buyers; in that event, each such price shall,subject to the other conditions of clause (a), be deemed to be thenormal price of such goods in relation to each class of buyers.BClause (ii) provides that where the goods are sold in wholesale ata price fixed under any law or at a price being the maximum,fixed under any such law, then the price or the maximum price, asthe case may be, so fixed, shall in relation to the goods be deemedto be the normal price thereof. Under clause (iii), where the goodsCare sold in the course of wholesale trade by the assessee to orthrough a related person, the normal price shall be the price atwhich the goods are sold by the related person in the course ofwholesale trade at the time of removal to dealers (not being relatedpersons) or where such goods are not sold to such dealers, todealers (being related persons) who sell such goods in retail. TheDverity of the three principles propounded by learned counsel forthe assessees has been, as indeed it had to be, examined in thecontext of the Act before and after its amendment. For the caseof the assessees is that the amendment has made no materialchange in the basic scheme of the levy and the provisions forEdetermining the value of the excisable article.”

15. It was, thus, argued that the High Court had committed seriouserror in relying upon Section 66 of the Act (which is a charging section)while interpreting Section 67 of the Act, or for that matter, while examiningthe validity of Rule 5 of the Rules. The learned counsel also relied upon Fthe dictionary meaning that is given to the word ‘gross amount’. At theend, it was submitted that Section 67 which uses the term ‘any amount’would include quantum as well as the nature of the amount and, therefore,cost for providing services was rightly included in Rule 5, which was notultra vires Section 67 of the Act.

G16. Mr. J.K. Mittal, Advocate, appeared for M/s. IntercontinentalConsultants and Technocrats Pvt. Ltd. He argued with emphasis thatthe impugned judgment of the High Court was perfectly in tune withlegal position and did not call for any interference. At the outset, hepointed out that the Parliament has again amended Section 67 of the Actby the Finance Act, 2015 w.e.f. May 14, 2015. By this amendment,H

explanation has been added which now lays down that considerationincludes the reimbursement of expenditure or cost incurred by the serviceprovider. Taking clue therefrom, he developed the argument that for thefirst time, w.e.f. May 14, 2015, reimbursement of expenditure or costincurred by the service provider gets included under the expression‘consideration’, which legal regime did not prevail prior to May 14, 2015.Therefore, for the period in question, the ‘consideration’ was havinglimited sphere, viz. It was only in respect of taxable services provided orto be provided. On that basis, submission was that for the period inquestion that is covered by these appeals, there could not be any servicetax on reimbursed expenses as Section 67 of the Act did not provide forsuch an inclusion. Mr. Mittal also referred to para 2.4 of Circular/Instructions F. No. B-43/5/97-TRU dated June 6, 1997 wherein it isclarified that ‘...various other reimbursable expenses incurred are not tobe included for computing the service tax”.

17. Coming to the main arguments revolving around Sections 66and 67, he submitted that the High Court was right in holding that as perSection 66 which was a charging section, service tax is to be chargedonly on the ‘value of taxable services’. Likewise, Section 67 whichdeals with valuation of taxable service categorically mentions that it wasonly on the gross amount charged for providing ‘such’ a taxable service.Therefore, any amount collected which is not for providing such taxableservice could not be brought within the tax net. Further, w.e.f. April 18,2006, as per Explanation (c) to Section 67, “gross amount charged”includes payment by cheque, credit card, deduction from account andany form of payment by issue of credit notes or debit notes and bookadjustment, and any amount credited or debited, as the case may be, toany account, whether called “Suspense account” or by any other name,in the books of accounts of a person liable to pay service tax, where thetransaction of taxable service is with any associated enterprise.”Whereas prior to April 18, 2006, as per Explanation 3 to Section 67, -“For the removal of doubts, it is hereby declared that the gross amountcharged for the taxable service shall include any amount received towardsthe taxable service before, during or after provision of such service.”Thus, levy on taxable services were not levied at once, but tax waslevied at different point of time, tax was levied on difference person andalso values in many taxable services was substantially exempted. Hedemonstrated it from the following table:

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ASl. Taxable ServicesSub-clause Date of Tax No. of 65 (105)levyRate1 Consulting Engineer (g) 7-7-1997 Service2 Rent-a-Cab services by a (o) 16-7-1997 * Bperson engage in business of renting of cabs3 Transport of Passenger by (zzzo) ** Air by an aircraft operator (a) International 1-5-2006 (b) Domestic 1-7-2010 C4 Renting of immovable (zzzz) 1-7-2007 property5Restaurant services(zzzzy)1-5-2011***6 Accommodation services (zzzzw) 1-5-2011 ****by Hotel 7 Telephone Services/ (b), 1-7-DTelecommunication (zzzx) 1994, services by Telegraph 1-6-2007 Authority Notes :

* Service Tax was leviable only on 40% of value, 60% valueEwas exempted.

** Service Tax was leviable only on 40% of value, 60% valuewas exempted, but prior to 01-04-2012, tax was only on 10%of value of tickets.

*** Service Tax was leviable only on 30% of value, 70% valueFwas exempted.

**** Service Tax was leviable only on 50% of value, 50%value was exempted.

18. Following judgments were referred to and relied upon by Mr.Mittal for placating the aforesaid submissions:G

(a) In the first instance, reference was made to the ConstitutionBench judgment in the case of Mathuram Agrawal v. State ofMadhya Pradesh[6] wherein this Court held:

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“12. ... The statute should clearly and unambiguously conveythe three components of the tax law i.e. the subject of the tax,the person who is liable to pay the tax and the rate at whichthe tax is to be paid. If there is any ambiguity regarding any ofthese ingredients in a taxation statute then there is no tax inlaw. Then it is for the legislature to do the needful in the matter.”

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(b) The learned counsel also relied upon the following observationsin case of Govind Saran Ganga Saran v. Commissioner ofSales Tax & Ors.[7]:

“6. The components which enter into the concept of a tax arewell known. The first is the character of the imposition knownCby its nature which prescribes the taxable event attracting thelevy, the second is a clear indication of the person on whomthe levy is imposed and who is obliged to pay the tax, the thirdis the rate at which the tax is imposed, and the fourth is themeasure or value to which the rate will be applied for computingthe tax liability. If those components are not clearly and definitelyDascertainable, it is difficult to say that the levy exists in point oflaw. Any uncertainty or vagueness in the legislative schemedefining any of those components of the levy will be fatal to itsvalidity.”

19. The learned counsel reiterated that such an ambiguity in lawis now cured by amendment to Section 67 only w.e.f. May 14, 2015.

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20. We have duly considered the aforesaid submissions made bythe learned counsel for the Department as well as the counsel for theassessees. As can be seen, these submissions are noted in respect ofCivil Appeal No. 2013 of 2014 where the assessee is providing ‘consultingFengineering services’. In other appeals, though the nature of services issomewhat different, it doesn’t alter the colour of legal issue, in any manner.In the course of providing those services, the assessees had incurredcertain expenses which were reimbursed by the service recepient. Theseexpenses were not included for the purpose of valuation, while payingthe service tax. Thus, the question for determination which is posed inGCivil Appeal No. 2013 of 2014, answer to that would govern the outcomeof the other appeals as well. Still, for the sake of completeness, we maygive a brief resume of all these cases.

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A“A. “Consulting Engineering Services” – Assessee were providingconsulting services to M/s. NHAI for highway projects. Theywere paying Service Tax on remuneration only instead of the grossvalue charged from the client.Sl. Civil Appeal FactsReimbursable No.details claimed as not Bincludible1. 2013/2014 Period: Oct’2002 – Transportation, office UOI v. March’ 2007 (prior to rent, office supplies Intercontinental coming into effect of and utilities, testing Consultants impugned Rule 5 on charges, document 01.06.2007] printing charges, Ctravelling, lodging, Demand:Rs.3,55,80,38/- boarding etc. (post 19.04.2006) Assessee filed W.P. No. 6370/2008 directly Transportation, office against Show Cause rent, office supplies, Notice dated office furniture and D17.03.2008 resulting in equipment, reports the impugned judgment and documents dated 30.11.2012 printing charges etc. [Pre 19.04.2006].[page 62-64] E2 6090/2017 Period: 2007-2008 Transportation, office CST v. [post coming into effect rent, office supplies Intercontinental of impugned Rule 5 on & utilities, testing Consultants 01.06.2007] charges, document printing charges, FDemand: travelling, lodging, Rs. 1,50,62,017/- boarding etc. [page 157] Show Cause Notice dated 24.10.2008 was issued on the basis of the earlier SCN dated G17.03.2008 for the subsequent period. O-I-O dated 02.03.2010 covered both SCNs dated 17.03.2008 & 24.10.2008. H

not office pplies esting ument arges, dging, (post office pplies, and eports ments s etc. ge office pplies esting ument arges, dging, [page

B. Share Transfer Agency Service:ASl. Civil Appeal FactsReimbursable claimed No. details as not includible 1 6866/2014 Period: 01.04.2008-Reimbursement of 31.03.2010 Expenses, out of pocket CST v. expenses, Postage BThrough its Demand: expenses, stationery Secretary Rs.13,83,479 charges 2. 3360/2015 Period: 01.05.2006-Reimbursement of 31.03.2008 Expenses, out of pocket CST v. expenses, Postage CPinnacle Demand: expenses Share Rs. 13,83,479 Registry Pvt. Ltd.

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C. Custom House Agent covered by head “Clearing andForwarding Agent” prior to 18.04.2006. Procedure of raising twoDsets of invoices for reimbursement of various expenses and forservice/agency charged separately started after introduction ofService Tax on CHA’s (wef 15.06.1997) in view of Circular dated06.09.1997.

Invoice issued for services/agency charges alone is used forEpayment of Service Tax.

Sl. Civil Appeal FactsReimbursable No. details claimed as not includibleF1. 295-299/2014 Period: Customs CST v. Asshita 01.10.2003-Examination International 31.03.2008 ([pre Chages, Misc. and post coming Expenses, Sundry into effect of the expenses, impugned Rule 5] strapping and re-Gstrapping charges, Demand: documentation 4,66,607/- charges.

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ASCN dated 21.04.2009. O-I-A dated 30.11.2010 [pages 238-259] set aside demand prior to 18.04.2006 in Bview of circular dated 06.06.1997. 2. 2021/2014 Period: Apr.08 to Customs CST v. Sunder Aug’08 [post Examination CBalan coming into effect Charges, Misc. of impugned rule 5 Expenses, Sundry on 01.06.2007] expenses, strapping and re-Demand: strapping charges, Rs.2,26,659/- documentation Dcharges. SCN dated 24.07.2009.3. 4340-4341/2014 Period: 01.04.2004 Customs to 31.03.2008 Examination CST v. Suraj Charges, Misc. EForwarders Demand: Expenses, Sundry Rs. 6,35,071/- as expenses, confirmed in the O-strapping and re-I-O. The strapping charges, Commissioner documentation F(Appeals) set aside charges. the demand on the reimbursable expenses received under the category “Clearing & GForwarding Agent” Service relation to 1.04.2004-17.04.2006 and confirmed the remaining demand. H

A4.8056/2015Not AvailableCST v. Suraj Forwarders 5. T.P.(C) No. A Transfer CFS charges, 10431045/201Petition for steamer agent B7 transferring W.P. charges, delivery Nos. 20832, order charges, UOI v. S ri 14521 and 20590 Airport/Customs Chidambaram of 2016 pending charges [page 25-& Ors. before Hon’ble 26/para C] High Court at CMadras. Airline/steamer charges, storage SCNs raised and handling demands for Rs. charges, packing 37.13 lacs and Rs. charges, transport 53.30 lacs which charges, Dwere dropped by fumigation the O-I-O. charges, insurance However on survey charges, appeals the O-I-O original certificate was set aside, charges [pages 62-hence W.P’s were 62] filed. ECharges paid to: Steamer agent, Custom Freight Station, Airport Authority of India and Transporters F[page 106-107] 6. 7688/2014 Period: Customs 01.10.2003 to Examination CST v. Shree 31.03.2008 Charges, Misc. Gayatri Expenses, Sundry Clearing [pre and post expenses, GAgency coming into effect strapping and re-of impugned Rule strapping charges, 5 on 01.06.2007] documentation charges. Demand: Rs. 9,65,652/- H

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SCN issued on 21.04.2009. O-I-A dated 31.07.2013 set aside demand for the period 18.04.2006-31.03.2008 in view of circular dated 06.06.1997.7.7685/2014 Period:2004-05 & CMC charges, 2007-08 CONCOR, GSEC, Comm. of Transportation Customs v. The Adjudicating charges, Air and Ramdas Pragji Authority held sea freight, Custom Forwarders that no Service Duty, Custom Cess, Pvt. Ltd. Tax was payable fumigation charges, on reimbursable bottom paper, amount prior to wooden etc. 18.04.2006. the handling charges, Circular dated labour expenses, 06.06.1997 lost its sundry charges, validity after airport charges, introduction of documentation Rule 5. Hence the charges, ST was photocopying recoverable charges etc. [page thereafter. 181-182] 8.T.P.(C) 1932-Period: April Harbour/Airport 1934/2017 2006-March 2009 Authority of India/CFS/CCTL CST v. Green and delivery order Channel Cargo charges, harbour Care dues, seal verification, warehouse/godown charges.

D. Site Formation and clearance, excavation and earth movingand demolition services: Assessees conduct drilling, blasting,excavation, loading, transport etc. of overburdened at open cast rges, SEC, and stom Cess, rges, aper, etc. rges, nses, rges, rges, rt of TL order rbour seal

Mines. Issue is whether value of Goods/material service u/s.65(97a), is to be included in ‘Gross Amount’ u/s 67 of FinanceAct for the purpose of S.T.

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The impugned orders follow the decisions in Bhayana BuilderIntercontinental.

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Sl.Civil Appeal FactsReimbursable claimed Nodetails as not includible .1. 6864/2014 Period: 01.02.2005-Value of Diesel and CCE & ST v. 31.03.2009 explosives supplied S.V. free of cost by service Engineering Demand: Rs. recipient. C74,14,396/- and Rs. 12,26,38,376/- 2. 6865/2014 Period: 01.04.2009-Value of Diesel and DCCE & ST v. 31.03.2010 explosives supplied S.V. free of cost by service Engineering Demand: Rs. recipient. 87,63,595/- E3. 4356-Value of diesel oil and 4537/2016 explosives supplied free of cost by service CCE&ST v. recipient. FS.V. Engineering 4. 5130/2016 Demand of Rs. Value of explosives and 18,85,88,959/- diesel oil supplied free CCE & ST v. relating to period of cost by service Sushree Infra 01.06.2008 to recipient. 31.03.2012 GSCN dated 01.10.2012 confirmed by O-I-O dated 04.05.2011 H

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SUPREME COURT REPORTS

A5.4975/2016Period: October Value of explosives 2008 to November and diesel oil CCE & ST v. 2008 supplied free of Gulf Oil cost by service Demand: Rs. recipient. 50,54,746/- B6. 5453/2016 Period: Mar’08 to Value of explosives Mar’ 2012 and diesel oil CCCE & ST v. supplied free of AMR India Demand: cost Rs.57,74,30,683/- 7. 10223-Period: Apr’09 to Value of diesel oil 10224/2017 Jan’10 & February supplied free of D2010 to September cost CCE & ST v. 2010 Mehrotra Buildcon Demand: Rs.21,48,835/- + Rs. 18,06,655/- E5444/2017 Not available Value of diesel oil 8. supplied free of CCE & ST v. cost Mehrotra Buildcon FE.Sl. Civil FactsReimbursable No.Appeal claimed as not detailsincludible1. 10626-Period:Apr’04 to Hiring of venue, G10627/2017Mar’06 merchandise, artists, travel, [prior to coming into courier, food and effect of impugned beverages, Rule 5 on administrative 01.06.2007] expenses, [page 76 H@78]

sives oil e of el oil e of

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Demand:Rs.24,70,790/- SCN dated 22.10.2008 BNon-payment of Service Tax on the amount received as reimbursement by way of debit notes in addition to amount Ccharged through invoices for providing ‘Event Management Service’, Section D65(40) and Section 65(90)(zu)[page 83]

21. Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweepthe expenses which are incurred while rendering the service and arereimbursed, that is, for which the service receiver has made the paymentsto the assessees. As per these Rules, these reimbursable expenses alsoform part of ‘gross amount charged’. Therefore, the core issue is as towhether Section 67 of the Act permits the subordinate legislation to beenacted in the said manner, as done by Rule 5. As noted above, prior toApril 19, 2006, i.e., in the absence of any such Rule, the valuation was tobe done as per the provisions of Section 67 of the Act.

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22. Section 66 of the Act is the charging Section which reads asunder:

“there shall be levy of tax (hereinafter referred to as the servicetax) @ 12% of the value of taxable services referred to in sub-clauses .....of Section 65 and collected in such manner as may beprescribed.”

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23. Obviously, this Section refers to service tax, i.e., in respect ofthose services which are taxable and specifically referred to in various H

Asub-clauses of Section 65. Further, it also specifically mentions that theservice tax will be @ 12% of the ‘value of taxable services’. Thus,service tax is reference to the value of service. As a necessary corollary,it is the value of the services which are actually rendered, the valuewhereof is to be ascertained for the purpose of calculating the servicetax payable thereupon.B

24. In this hue, the expression ‘such’ occurring in Section 67 ofthe Act assumes importance. In other words, valuation of taxableservices for charging service tax, the authorities are to find what is thegross amount charged for providing ‘such’ taxable services. As a fortiori,any other amount which is calculated not for providing such taxableCservice cannot a part of that valuation as that amount is not calculatedfor providing such ‘taxable service’. That according to us is the plainmeaning which is to be attached to Section 67 (unamended, i.e., prior toMay 01, 2006) or after its amendment, with effect from, May 01, 2006.Once this interpretation is to be given to Section 67, it hardly needs to beDemphasised that Rule 5 of the Rules went much beyond the mandate ofSection 67. We, therefore, find that High Court was right in interpretingSections 66 and 67 to say that in the valuation of taxable service, thevalue of taxable service shall be the gross amount charged by the serviceprovider ‘for such service’ and the valuation of tax service cannot beanything more or less than the consideration paid as quid pro qua forErendering such a service.

25. This position did not change even in the amended Section 67which was inserted on May 01, 2006. Sub-section (4) of Section 67empowers the rule making authority to lay down the manner in whichvalue of taxable service is to be determined. However, Section 67(4) isFexpressly made subject to the provisions of sub-section (1). Mandate ofsub-section (1) of Section 67 is manifest, as noted above, viz., the servicetax is to be paid only on the services actually provided by the serviceprovider.

26. It is trite that rules cannot go beyond the statute.GIn Babaji Kondaji Garad, this rule was enunciated in the followingmanner:

“Now if there is any conflict between a statute and the subordinatelegislation, it does not require elaborate reasoning to firmly statethat the statute prevails over subordinate legislation and the bye-Hlaw, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored.The statutory provision ahs precedence and must be compliedwith.”

27. The aforesaid principle is reiterated in Chenniappa Mudaliarholding that a rule which comes in conflict with the main enactment hasto give way to the provisions of the Act.

28. It is also well established principle that Rules are framed forachieving the purpose behind the provisions of the Act, as held in TajMahal Hotel:

‘the Rules were meant only for the purpose of carrying out theprovisions of the Act and they could not take away what wasconferred by the Act or whittle down its effect.”

29. In the present case, the aforesaid view gets strengthened fromthe manner in which the Legislature itself acted. Realising that Section67, dealing with valuation of taxable services, does not includereimbursable expenses for providing such service, the Legislatureamended by Finance Act, 2015 with effect from May 14, 2015, wherebyClause (a) which deals with ‘consideration’ is suitably amended to includereimbursable expenditure or cost incurred by the service provider andcharged, in the course of providing or agreeing to provide a taxableservice. Thus, only with effect from May 14, 2015, by virtue of provisionsof Section 67 itself, such reimbursable expenditure or cost would alsoform part of valuation of taxable services for charging service tax.Though, it was not argued by the learned counsel for the Departmentthat Section 67 is a declaratory provision, nor could it be argued so, aswe find that this is a substantive change brought about with theamendment to Section 67 and, therefore, has to be prospective in nature.On this aspect of the matter, we may usefully refer to the ConstitutionBench judgment in the case of Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited[8] wherein it wasobserved as under:

“27. A legislation, be it a statutory Act or a statutory rule or astatutory notification, may physically consists of words printed onpapers. However, conceptually it is a great deal more than anordinary prose. There is a special peculiarity in the mode of verbalcommunication by a legislation. A legislation is not just a series of 8 (2015) 1 SCC 1

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statements, such as one finds in a work of fiction/non-fiction oreven in a judgment of a court of law. There is a technique requiredto draft a legislation as well as to understand a legislation. Formertechnique is known as legislative drafting and latter one is to befound in the various principles of “interpretation of statutes”.Vis-à-vis ordinary prose, a legislation differs in its provenance,layout and features as also in the implication as to its meaning thatarise by presumptions as to the intent of the maker thereof.

28. Of the various rules guiding how a legislation has to beinterpreted, one established rule is that unless a contrary intentionappears, a legislation is presumed not to be intended to have aretrospective operation. The idea behind the rule is that a currentlaw should govern current activities. Law passed today cannotapply to the events of the past. If we do something today, we doit keeping in view the law of today and in force and not tomorrow’sbackward adjustment of it. Our belief in the nature of the law isfounded on the bedrock that every human being is entitled toarrange his affairs by relying on the existing law and should notfind that his plans have been retrospectively upset. This principleof law is known as lex prospicit non respicit: law looks forwardnot backward. As was observed in Phillips v. Eyre [(1870) LR 6QB 1] , a retrospective legislation is contrary to the generalprinciple that legislation by which the conduct of mankind is to beregulated when introduced for the first time to deal with futureacts ought not to change the character of past transactions carriedon upon the faith of the then existing law.

29. The obvious basis of the principle against retrospectivity isthe principle of “fairness”, which must be the basis of every legalrule as was observed in L’Office Cherifien desPhosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus,legislations which modified accrued rights or which imposeobligations or impose new duties or attach a new disability haveto be treated as prospective unless the legislative intent is clearlyto give the enactment a retrospective effect; unless the legislationis for purpose of supplying an obvious omission in a formerlegislation or to explain a former legislation. We need not note thecornucopia of case law available on the subject because aforesaidlegal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In anycase, we shall refer to few judgments containing this dicta, a littlelater.”

30. As a result, we do not find any merit in any of those appealswhich are accordingly dismissed.

CIVIL APPEAL NO. 6865 OF 2014, CIVIL APPEAL NO. 6864OF 2014, CIVIL APPEAL NO. 4975 OF 2016, CIVIL APPEALNO. 5130 OF 2016 AND CIVIL APPEAL NOS. 4536-4537 OF2016

31. In the aforesaid appeals, the issue is as to whether the valueof free supplies of diesel and explosives in respect of the service of ‘SiteFormation and Clearance Service’ can be included for the purpose ofassessment to service tax under Section 67 of the Act. These assesseeshad not availed the benefit of aforesaid Notifications Nos. 15/2004 and4/2005. Therefore, the issue has to be adjudged simply by referring toSection 67 of the Act. We have already held above that the value ofsuch material which is supplied free by the service recipient cannot betreated as ‘gross amount charged’ and that is not the ‘consideration’ forrendering the services. Therefore, value of free supplies of diesel andexplosives would not warrant inclusion while arriving at the gross amountcharged on its service tax is to be paid. Therefore, all these appeals arealso dismissed.

TRANSFER PETITION (CIVIL) NOS. 1043-1045 OF 2017TRANSFER PETITION (CIVIL) NOS. 1932-1934 OF 2017

32. These transfer petitions are allowed and the writ petitionsmentioned in the prayer clause, which are pending before the High Courtof Madras, are transferred to this Court.

33. The transferred writs are also disposed of in terms of thejudgment rendered above in Civil Appeal No. 2013 of 2014 and otherconnected matters.

Divya Pandey

Matters disposed of.

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