20 March 2018
EY Tax Alert
Tax Alerts cover significant tax
news, developments and changes
in legislation that affect Indian
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SC holds service tax not
leviable on reimbursement
of expenses
Executive summary
This Tax Alert summarizes a recent ruling of the Supreme Court (SC)1 dealing with the levy
of service tax on an amount received by a service provider as reimbursement of expenses.
The SC referred to Section 66 and 67 of the Finance Act, 1994 and Rule 5(1) of Service
Tax (Determination of Value) Rules, 2006 and observed that service tax is leviable on the
value of service that is actually rendered and any amount received for providing a service
other than such taxable service cannot be a part of the valuation.
Thus, the SC upheld the decision of the Delhi High Court and held that the amount of
reimbursements will not be includible in the value of gross amount charged for the purpose
of levy of service tax.
The SC also considered the substantive amendment in law effective 14 May 2015 which
specifically provided for the inclusion of reimbursements in the value of consideration for
levy of service tax and concluded that service tax can be levied on reimbursements only
after 14 May 2015.
1
TS-72-SC-2018-ST

Background and facts
• The assessee is a provider of consulting engineering
services and is specialized in highways, structures,
airports, urban and rural infrastructural projects.
• The assessee was discharging service tax in respect of
amounts received by it for the services rendered to its
clients. However, it was not paying service tax in respect
of expenses like air travel, hotel stay etc. incurred by it,
which were reimbursed by the client.
• Revenue referred Rule 5(1) of the Service tax
(Determination of Value) Rules, 2006 and issued Show
Cause Notice (SCN) demanding service tax on the
amount of reimbursements received along with interest.
• Rule 5(1) provides that any expenditure or costs which is
incurred by the service provider in the course of
providing taxable services, are required to be included in
the value of services for levying service tax.
• Further, Section 67 of the Finance Act, 1994 (Act)
provides that the value of any taxable service shall be the
gross amount charged by the service provider for such
service provided or to be provided.
• The assessee preferred writ petition before the Delhi
High Court (HC) challenging the validity of Rule 5(1).
• The HC2 opined that scope of Rule 5 goes beyond the
Section 67 of the Act which was impermissible and held
that the expenditure or cost 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.
• Aggrieved by the HC’s order, the Revenue filed the
appeal before the Supreme Court (SC).
Assessee’s Contention
• Section 67 of the Act was amended w.e.f. 14 May 2015
to insert an explanation that consideration includes
reimbursement of expenditure or cost incurred by the
service provider. Thus, prior to 14 May, 2015, the term
‘consideration’ was having limited sphere, viz. it was only
in respect of taxable services provided or to be provided.
• The assessee also referred to para 2.4 of Circular/
Instructions F. No. B-43/5/97-TRU dated June 6, 1997
wherein it is clarified that ‘...various other reimbursable
expenses incurred are not to be included for computing
the service tax”.
• The assessee submitted that the High Court was right in
holding that as per Section 66, which was a charging
section, service tax is to be charged only on the ‘value of
taxable services’. Likewise, Section 67 which deals with
valuation of taxable service categorically mentions that it
was only on the gross amount charged for providing
‘such’ taxable service. Therefore, any amount collected
which is not for providing such taxable service could not
be brought within the tax net.
• In support of its above contention, the assessee relied on
various rulings3.
2
2012-TIOL-966-HC-DEL-ST
Page 2
Revenue’s Contention
• Rule 5 is inserted with effect from 19 April 2006.
Therefore, prior to that, the value of taxable services
was covered by Section 67 of the Act.
• The connotation ‘gross amount charged’ in Section 67
denotes the total amount which is received in rendering
those services and would include the other amounts
like transportation, office rent, office appliances,
furniture and equipment etc. Thus, the essential input
cost had to be included in arriving at gross amount
charged by a service provider.
• Section 67 was amended w.e.f. 18 April 2006 and sub-
section (4) of the amended section provides that the
value has to be determined in such a manner as may be
prescribed and in pursuant thereto. Thus, provision of
Rule 5 did not go contrary to Section 67 as it only
mentions what would be the meaning of gross amount
charged.
• The Revenue relied on SC’s judgment in the case of
Bombay Tyre International Limited & Ors.4 and
submitted that while dealing with the valuation of a
taxable service, the provision which deals with
valuation has to be taken into consideration and no
assistance can be taken from charging section.
• The Revenue contended that the HC had committed
serious error 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 examining the
validity of Rule 5.
• Revenue also relied upon the dictionary meaning of the
word “gross amount”.
• At the end, Revenue submitted that Section 67 which
uses the term “any amount” in the definition of
consideration, 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 not
ultra vires the Section 67 of the Act.
Supreme Court ruling
• SC noticed that Section 66 of the Act refers to service
tax in respect of those services which are taxable and
specifically referred to in various sub-clauses of Section
65.
• Further, it also specifically mentions that the service
tax will be @ 12% of the ‘value of taxable services’. As a
necessary corollary, it is the value of the services which
are actually rendered, the value whereof is to be
ascertained for the purpose of calculating the service
tax payable thereupon.
• Thus, the expression ‘such’ occurring in Section 67 of
the Act assumes importance.
3
Mathuram Agarwal v. State of Madhya Pradesh (1999) 8 SCC 667, Govind
Saran Ganga Saran v. Commissioner of Sales Tax & Ors. (1985) Suppl. SCC 205
4
(1984) 1 SCC 467
 Page 3

• SC observed that, any other amount which is calculated

not for providing such taxable service cannot be a part of
that valuation as that amount is not calculated for
providing such “taxable service”.
• Therefore, once such interpretation is to be given to
Section 67, it hardly needs to be emphasized that Rule 5
of the Rules went much beyond the mandate of Section
67.
• The SC further observed that the position did not change
even in the amended Section 67. Section 67(4)
empowers the rule making authority to lay down the
manner in which value of taxable service is to be
determined. However, Section 67(4) is expressly made
subject to the provisions of sub-section (1) of the said
section.
• The SC relied on its ruling in the case of Babaji Kondaji
Garad5 and iterated that rules cannot go beyond the
statute.
• Treating the amendment in Section 67 as “substantive
change”, SC stated that the same will be effective
prospectively. In this regard, the SC relied on the ruling
of the Constitution Bench in the case of Vatika Township
Private Limited6.
• Thus, the SC upheld the HC’s decision holding that the
value of taxable service shall be the gross amount
charged by the service provider ‘for such service’ and the
valuation of taxable service cannot be anything more or
less than the consideration paid as quid pro quo for
rendering such a service.

Comments
The Apex Court’s ruling puts at rest a long
pending litigation on the issue of taxability of
reimbursements until the amendment in the
provisions of service tax. It will help in settling a
lot of cases under dispute and provide much
awaited relief to various service providers.

The principle of prospective applicability of

substantive amendment by way of an explanation
in the tax statute has been reconfirmed by the
SC.

One will need to analyze whether this ruling will

hold good to determine the taxability of
reimbursements under the GST regime.

5
(1984) 2 SCC 50
6
(2015) 1 SCC 1
 Page 4

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