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Union of India & Anr. v. M/s Intercontinental Consultants and Technocrats Pvt. Ltd.

Civil Appeal · 2018 INSC 217Decided 7 Mar 2018
Civil Appeal No. 2013 of 2014
Justice A.K. Sikri · Justice Ashok Bhushan

Background

Intercontinental Consultants, an engineering consultancy firm, was paying service tax only on its professional fees but not on amounts reimbursed to it by clients for expenses like air travel, hotel stay, and other out-of-pocket costs. The tax department demanded service tax on these reimbursed expenses too, relying on Rule 5 of the Service Tax (Determination of Value) Rules, 2006, which required such reimbursements to be included in the "gross value" of taxable services. The Delhi High Court had struck down Rule 5 as unconstitutional and beyond the powers given by the parent statute (the Finance Act, 1994), and the Union of India appealed to the Supreme Court along with a batch of similarly affected appeals covering consulting, share-transfer-agency, customs clearing, and site-formation services.

Decision Breakdown

The Supreme Court upheld the Delhi High Court's view and dismissed the Union of India's appeals. It held that Sections 66 and 67 of the Finance Act, 1994 only permit service tax to be charged on the "gross amount charged... for such service," meaning the value of the service actually provided, not on incidental costs like travel or lodging that are merely reimbursed to the service provider and are not consideration for the service itself. Since Rule 5 tried to tax these reimbursable expenses as well, it went beyond what the parent Act authorized, making it ultra vires (i.e., exceeding the rule-making power) and therefore invalid. The Court also addressed and rejected arguments on retrospective application and dealt similarly with related appeals concerning free supplies of diesel and explosives, holding that the value of such free supplies likewise cannot be taxed as part of the service value. Pending transfer petitions were allowed and the connected Madras High Court writ petitions were transferred to and disposed of by the Supreme Court in terms of this judgment.

Lesson Learnt

A subordinate rule or regulation cannot expand a tax liability beyond what the parent legislation actually authorizes: reimbursed out-of-pocket expenses that are not part of the fee for a service are not taxable as "value of service," and businesses charged tax on such reimbursements have a valid basis to challenge it.

Official source (sci.gov.in)View Judgment (PDF)

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