W.P. (C) NO. 6370 of 2008. Case: Intercontinental Consultants & Technorats (P.) Ltd. Vs Union of India. Delhi High Court

Case Number:W.P. (C) NO. 6370 of 2008
Party Name:Intercontinental Consultants & Technorats (P.) Ltd. Vs Union of India
Judges:R.V. Easwar, J.
Issue:Finance Act, 1994 - Sections 66 and 67 of Chapter V; Service Tax (Determination of Value) Rules, 2006 - Rule 5
Judgement Date:November 30, 2012
Court:Delhi High Court


R.V. Easwar, J.

  1. In this writ petition, the petitioner challenges the constitutional validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes re-imbursement of expenses in the value of taxable services for the purposes of levy of service tax. The petitioner also contends, in the alternative that the said rule is ultra vires of the provisions of Section 66 and 67 of Chapter V of the Finance Act, 1994.

  2. The petitioner is a company providing consulting engineering services. It specialises in highways, structures, airports, urban and rural infrastructural projects and is engaged in various road projects outside and inside India. In the course of the carrying on of its business, the petitioner rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients. On 19.10.2007, the Superintendent (Audit) Group II (Service Tax), New Delhi issued a letter to the petitioner on the subject "service tax audit for the financial year 2002-03 to 2006-07″ and informed the petitioner as follows: -

    "During the scrutiny of the records it was observed that you have been charging and depositing service tax on remuneration income only in the case of invoices issued in the name of M/s. NHAI (National Highway Authority of India). As per the provision of sub-rule (i) of Rule 5 of the Service Tax (Determination of value) Rules, (Notification number 12/2006-ST, dated 19.04.2006) the service tax is liable to be charged on the gross value including reimbursable and out of pocket expenses like travelling, lodging and boarding etc.

    As per records, it was found that you have short paid Service Tax amounting to Rs. 1,30,26,572/- for the financial year 2006-07. You are hereby directed to deposit the due service tax along with interest @ 13% under section 73 and 75 respectively of the Finance Act, 1994 within 15 days.

    The matter may please be treated MOST URGENT/ TIME BOUND."

  3. In response to the above letter the petitioner provided monthwise details of professional income as well as reimbursable out of pocket expenses for the period mentioned in the letter. On 17.03.2008, a show-cause notice was issued by the Commissioner, Service Tax Commissionerate by which the petitioner was asked to show-cause why service tax of Rs. 3,55,80,738/- should not be recovered from it along with interest and penalty under Sections 76 to 78 of the Finance Act, 1994. The aforesaid figure of service tax was arrived at in the following manner in the show-cause notice.


    Reimbursable Income 

    Rate of Service Tax 

    Service Tax Payable 


    Service Tax 

    Edu. Cess 

    Oct''02 to April''03 





    May''03 to Aug''04 





    Sep''04 to March''06* 






    April''06 to March''07 












    *(Note: -- For the period prior to April''06, the reimbursable income on account of travelling lodging and boarding have not been taken into account).

  4. The basis of the show-cause notice was the provisions of sub-rule (1) of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. It was the case of the respondent that under the aforesaid rule, service tax was to be charged on the gross value including reimbursable and out of pocket expenses such as travelling, boarding and lodging, transportation, office rent, office supplies and utilities, testing charges, etc. which, according to the respondent, were "essential expenses for providing the taxable service of consulting engineers". It was stated in the show-cause notice that prior to 19.04.2006, under Section 67 of the Finance Act, 1994, the value of taxable services in relation to consulting engineer services provided or to be provided by a consulting engineer to the client shall be the gross amount charged from the client in respect of engineering services.

  5. The petitioner has filed the present writ petition with three prayers; (i) quashing rule 5 in its entirety of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax and (ii) declaring the rule to be unconstitutional and ultra vires Sections 66 and 67 of the Finance Act, 1994 and (iii) for quashing the impugned show-cause notice-cum-demand dated 17.03.2008 holding that it is illegal, arbitrary, without jurisdiction and unconstitutional.

  6. There is no dispute that the petitioner obtained service tax code from service tax authorities for future payment of service tax w. e. f. 01.07.2002, nor is it in dispute that on 09.07.2007 the petitioner got itself registered with the service tax department as consulting engineering services and was paying service tax since 1997 regularly.

  7. Service tax was introduced by Chapter V of the Finance Act, 1994. Section 65 (105) defined "taxable service". It contains several clauses but, herein we are concerned only with clause (g) which is applicable to the petitioner. Any service provided to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering including the discipline of computer hardware engineering is defined to be a taxable service under this clause. The charge of service tax is effectuated in Section 66 of the Act. It says that "there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses................of Section 65 and collected in such manner as may be prescribed". Section 67 of the Act as it stood before being substituted by the Finance Act, 2006, w. e. f. 01.05.2006 was as under: -

    67. Valuation of taxable services for charging service tax

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

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

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

    (b) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;

    (c) the amount of premium charged by the insurer from the policy holder;

    (d) the commission received by the air travel agent from the airline;

    (e) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;


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