Delhi High Court
has in a very important case namely Intercontinental Consultants and
Technocrats Pvt Ltd Vs UOI held that reimbursement of expenses cannot be
charged to service tax by treating the same as part of service charges. Rule
5(1) of Service Tax (Determination of value) Rules has been held as ultra vires
to the extent it brings the reimbursement of expenses within the ambit of
service tax
It has been held that Section 67 states that ‘Service tax was to be charged on the
gross value including reimbursable and out of pocket expenses’ – Charging
Section 66 states that ‘the charge of service tax is on the value of taxable
services’ - Section 67 (1) makes the provisions of the section subject to the
provisions of Chapter V, which includes Section 66 - This is a clear mandate
that the value of taxable services for charging service tax has to be in
consonance with Section 66 which levies a tax only on the taxable service and
nothing else - Rule 5 (1) which provides for inclusion of the expenditure or
costs incurred by the service provider in the course of providing the taxable
service in the value for the purpose of charging service tax is ultra vires
Section 66 and 67
Rule 5 may also result in double taxation - If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication
Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made “for carrying out the provisions of this Chapter” i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.
“The Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.” as decided in case of Taj Mahal Hotel (1971 (8) TMI 2 - SUPREME COURT)
Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.
Sub-ordinate legislation - The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act.
Rule 5 may also result in double taxation - If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication
Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made “for carrying out the provisions of this Chapter” i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.
“The Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.” as decided in case of Taj Mahal Hotel (1971 (8) TMI 2 - SUPREME COURT)
Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.
Sub-ordinate legislation - The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act.
DELHI HIGH COURT
INTERCONTINENTAL CONSULTANTS AND TECHNORATS PVT.
LTD. Versus U.O.I. & ANR.
No. - W.P. (C) 6370/2008
Dated - November 30, 2012
S. Ravindra Bhat And R.V. Easwar, JJ
Appellant Rep. by : Mr. J. K. Mittal, Mr. Arun
Gulati and Mr. V. K. Jha, Adv
Respondent Rep. by : Ms. Sonia Sharma and Mr. V.
C. Jha, Adv
JUDGEMENT
Per: R V Easwar, J:
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.
Period
|
Reimbursable Income
|
Rate of Service Tax
|
Service Tax Payable
|
Total
|
|
Service Tax
|
Edu. Cess
|
||||
Oct’02 to April’03
|
99,42,433/-
|
5%
|
4,97,122/-
|
-
|
4,97,122/-
|
May’03 to Aug’04
|
4,87,83,282/-
|
8%
|
39,02,662/-
|
-
|
39,02,662/-
|
Sep’04 to March’06*
|
13,22,66,980/-
|
10.2%
|
1,32,26,698/-
|
2,64,534/-
|
1,34,91,232/-
|
April’06 to March’07
|
14,45,23,874/-
|
12.24%
|
1,73,42,865/-
|
3,46,857/-
|
1,76,89,722/-
|
Total
|
33,55,16,569/-
|
3,49,69,347/-
|
6,11,391/-
|
3,55,80,738/-
|
|
*(Note: - For the period prior to April’06, the reimbursable
income on account of traveling 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;
(f) the reimbursement received by the authorized service station
from manufacturer for carrying out any service of nay motor car, light motor
vehicle or two wheeled motor vehicle manufactured by such manufacturer; and
(g) the commission or any amount received by the rail travel agent
from the Railways or the customer,
But does not include-
(i) initial deposit made by the subscriber at the time of
application for telephone connection or pager or facsimile (FAX) or telephone
or telex or for leased circuit;
(ii) the cost of unexposed photography film, unrecorded magnetic
tape or such other storage devices, if any, sold to the client during the
course of providing the service;
(iii) the cost of parts or accessories, or consumable such as
lubricants and coolants, if any, sold to the customer during the course of
service or repair of motor cars, light motor vehicle or two wheeled motor
vehicles;
(iv) the airfare collected by air travel agent in respect of
service provided by him;
(v) the rail fare collected by rail travel agent in respect of
service provided by him;
(vi) the cost of parts or other material, if any, sold to the
customer during the course of providing maintenance or repair service;
(vii) the cost of parts or other material, if any, sold to the
customer during the course of providing erection, commissioning or installation
service; and
(viii) interest on loan.
Explanation 2 - Where the gross
amount charged by a service provider is inclusive of service tax payable, the
value of taxable service 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 declared that the gross amount charged for the taxable
service shall include any amount received towards the taxable service before,
during or after provision of such service.”
8. The new Section 67 which came into effect from 01.05.2006 is
shorter and it is as follows: -
“67. Valuation of taxable services for charging service tax
(1) Subject to the provisions of this Chapter, where service tax
is chargeable 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
consideration in money, be the gross amount charged by the service provider for
such service provided or to be provided by him;
(ii) in a case where the provision of service is for a
consideration not wholly or partly consisting of money, be such amount in money
as, with the addition of service tax charged, is equivalent to the
consideration;
(iii) in a case where the provision of service is for a
consideration which is not ascertainable, be the amount as may be determined in
the prescribed manner.
(2) Where the gross amount charged by a service provider, for the
service provided or to be provided is inclusive of service tax payable, the
value of such taxable service shall be such amount as, with the addition of tax
payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include
any amount received towards the taxable service before, during or after
provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3),
the value shall be determined in such manner as may be prescribed.
Explanation: For the purpose of this
section, -
(a) “consideration” includes any amount that is payable for the
taxable services provided or to be provided;
(b) “money” includes any currency, cheque, promissory note, letter
of credit, draft, pay order, travelers cheque, money order, postal remittance
and other similar instruments but does not include currency that is held for
its numismatic value;
(c) “gross amount charged” includes payment by cheque, credit
card, deduction from account and any form of payment by issue of credit notes
or debit notes and book adjustment, and any amount credited or debited, as the
case may be, to any account, whether called “Suspense account” or by any other
name, in the books of accounts of a person liable to pay service tax, where the
transaction of taxable service is with any associated enterprise.”
9. The Service Tax (Determination of Value) Rules, 2006,
hereinafter referred to as “Rules”, was brought into effect from 01.06.2007.
Rule 5 provided for “inclusion in or exclusion from value of certain
expenditure or costs”. It is necessary to reproduce the rule, which is as
follows: -
“5. Inclusion in or exclusion from value of certain expenditure or
costs
(1) Where any expenditure or costs are incurred by the service
provider in the course of providing taxable service, all such expenditure or
costs shall be treated as consideration for the taxable service provided or to
be provided and shall be included in the value for the purpose of charging
service tax on the said service.
(2) Subject to the provisions of sub-rule (1), the expenditure or
costs incurred by the service provider as a pure agent of the recipient of
service, shall be excluded from the value of the taxable service if all the following
conditions are satisfied, namely: -
- the service provider acts as a
pure agent of the recipient of service when he makes payment to third
party for the goods or services procured;
- the recipient of service receives
and uses the goods or services so procured by the service provider in his
capacity as pure agent of the recipient of service;
- the recipient of service is liable
to make payment to the third party;
- the recipient of service
authorities the service provider to make payment on his beahfl;
- the recipient of service knows
that the goods and services for which payment has been made by the service
provider shall be provided by the third party;
- the payment made by the service
provider on behalf of the recipient of service has been separately
indicated in the invoice issued by the service provider to the recipient
of service;
- the service provider recovers from
the recipient of service only such amount as has been paid by him to the
third party; and
- the goods or services procured by
the service provider from the third party as a pure agent of the recipient
of service are 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 recipient of service to act as his pure agent to incur
expenditure or costs in the course of providing taxable service;
- neither intends to hold nor holds
any title to the goods or services so procured or provided as pure agent
of the recipient of service;
- does not use such goods or
services so procured; and
- receives only the actual amount
incurred to procure such goods or services.
Explanation 2 : For the removal of
doubts it is clarified that the value of the taxable service is the total
amount of consideration consisting of all components of the taxable service and
it is immaterial that the details of individual components of the total
consideration is indicated separately in the invoice.
Illustration 1 : X contracts with Y, a
real estate agent to sell his house and thereupon Y gives an advertisement in
television. Y billed X including charges for Television advertisement and paid
service tax on the total consideration billed. In such a case, consideration
for the service provided is what X pays to Y. Y does not act as an agent behalf
of X when obtaining the television advertisement even if the cost of television
advertisement is mentioned separately in the invoice issued by X. Advertising
service is an input service for the estate agent in order to enable or
facilitate him to perform his services as an estate agent.
Illustration 2 : In the course of
providing a taxable service, a service provider incurs costs such as traveling
expenses, postage, telephone, etc., and may indicate these items separately on
the invoice issued to the recipient of service. In such a case, the service
provider is not acting as an agent of the recipient of service but procures
such inputs or input service on his own account for providing the taxable
service. Such expenses do not become reimbursable expenditure merely because
they are indicated separately in the invoice issued by the service provider to
the recipient of service.
Illustration 3 : A contracts with B,
an architect for building a house. During the course of providing the taxable
service, B incurs expenses such as telephone charges, air travel tickets, hotel
accommodation, etc., to enable him to effectively perform the provision of
services to A. In such a case, in whatever form B recovers such expenditure
from A, whether as a separately itemised expense or as part of an inclusive
overall fee, service tax is payable on the total amount charged by B. Value of
the taxable service for charging service tax is what A pays to B.
Illustration 4 : Company X provides a
taxable service of rent-a-cab by providing chauffeur-driven cars for overseas
visitors. The chauffeur is given a lump sum amount to cover his food and
overnight accommodation and any other incidental expenses such as parking fees
by the Company X during the tour. At the end of the tour, the chauffeur returns
the balance of the amount with a statement of his expenses and the relevant bills.
Company X charges these amounts from the recipients of service. The cost
incurred by the chauffeur and billed to the recipient of service constitutes
part of gross amount charged for the provision of services by the company X.”
10. The contention of the petitioner that Rule 5(1) of the Rules,
in as much as it provides that all expenditure or costs incurred by the service
provider in the course of providing the taxable service shall be treated as
consideration for the taxable service and shall be included in the value for
the purpose of charging service tax goes beyond the mandate of Section 67
merits acceptance. Section 67 as it stood both before 01.05.2006 and after has
been set out hereinabove.
This section quantifies the charge of service tax provided in
Section 66, which is the charging section. Section 67, both before and after
01.05.2006 authorises the determination of the value of the taxable service for
the purpose of charging service tax under Section 66 as the gross amount
charged by the service provider for such service provided or to be provided by
him, in a case where the consideration for the service is money. The underlined
words i.e. “for such service” are important in the setting of Section 66 and
67. The charge of service tax under Section 66 is on the value of taxable
services. The taxable services are listed in Section 65(105). The service
provided by the petitioner falls under clause (g). It is only the value of such
service that is to say, the value of the service rendered by the petitioner to
NHAI, which is that of a consulting engineer, that can be brought to charge and
nothing more. The quantification of the value of the service can therefore
never exceed the gross amount charged by the service provider for the service
provided by him. Even if the rule has been made under Section 94 of the Act
which provides for delegated legislation and authorises the Central Government
to make rules by notification in the official gazette, such rules can only be
made “for carrying out the provisions of this Chapter” i.e. Chapter V of the
Act which provides for the levy, quantification and collection of the service
tax. The power to make rules can never exceed or go beyond the section which
provides for the charge or collection of the service tax.
11. In the aforesaid backdrop of the basic features of any
legislation on tax, we have no hesitation in ruling that Rule 5 (1) which
provides for inclusion of the expenditure or costs incurred by the service
provider in the course of providing the taxable service in the value for the
purpose of charging service tax is ultra vires Section 66 and 67 and travels
much beyond the scope of those sections. To that extent it has to be struck
down as bad in law. The expenditure or costs incurred by the service provider in
the course of providing the taxable service can never be considered as the
gross amount charged by the service provider “for such service” provided by
him. The illustration 3 given below the Rule amplifies what is meant by
sub-rule (1). In the illustration given, the architect who renders the service
incurs expenses such as telephone charges, air travel tickets, hotel
accommodation, etc. to enable him to effectively perform the services.
The illustration, therefore, says that these expenses are to be
included in the value of the taxable service. The illustration clearly shows
how the boundaries of Section 67 are breached by the Rule. Apart from
travelling beyond the scope and mandate of the Section, the Rule may also
result in double taxation. If the expenses on air travel tickets are already
subject to service tax and is included in the bill, to charge service tax again
on the expense would certainly amount to double taxation. It is true that there
can be double taxation, but it is equally true that it should be clearly
provided for and intended; at any rate, double taxation cannot be enforced by
implication. A Constitution Bench of the Supreme court in Jain Brothers v.
Union of India, (1970) 77 ITR 107 observed as follows, expounding the
principles relating to double taxation: -
“It is not disputed that there can be double taxation if the
legislature has distinctly enacted it. It is only when there are general words
of taxation and they have to be interpreted, they cannot be so interpreted as
to tax the subject twice over to the same tax (vide Channell J. in Stevens v.
Durban-Roodepoort Gold Mining Co. Ltd.). The Constitution does not contain any
prohibition against double taxation even if it be assumed that such a taxation
is involved in the case of a firm and its partners after the amendment of
section 23(5) by the Act of 1956. Nor is there any other enactment which
interdicts such taxation. It is true that section 3 is the general charging
section. Even if section 23(5) provides for the machinery for collection and
recovery of the tax, once the legislature has, in clear terms, indicated that
the income of the firm can be taxed in accordance with the Finance Act of 1956
as also the income in the hands of the partners, the distinction between a
charging and a machinery section is of no consequence. Both the sections have
to be read together and construed harmoniously. It is significant that similar
provisions have also been enacted in the Act of 1961. Sections 182 and 183
correspond substantially to section 23(5) except that the old section did not
have a provision similar to sub-section (4) of section 182. After 1956,
therefore, so far as registered firms are concerned the tax payable by the firm
itself has to be assessed and the share of each partner in the income of the
firm has to be included in his total income and assessed to tax accordingly. If
any double taxation is involved the legislature itself has, in express words,
sanctioned it. It is not open to any one thereafter to invoke the general
principles that the subject cannot be taxed twice over.”
12. There is ample authority for the proposition that the rules
cannot override or overreach the provisions of the main enactment. In Central
Bank of India v. Their Workmen, AIR 1960 SC 12, a Constitution Bench of the
Supreme Court was concerned with the Banking Companies Act, 1949. Section 10 of
the Act prohibit the grant of industrial bonus to bank employees in as much as
such bonus is remuneration which takes the form of a share in the profits of
the banking company. Rule 5 of the Banking Companies Rules, 1949, which were
statutory rules, required a banking company to send periodically to the
principle office of the Reserve Bank a statement in Form-I showing the
remuneration paid during the previous calendar year to officers of the company.
In a footnote to the Form, it was stated that remuneration includes salary,
house allowance, dearness allowance, bonus, fees and allowances to Directors,
etc. The contention was that Rule 5 enlarged the meaning and content of Section
10. The contention was repelled but not on the ground that the rule can validly
enlarge the content of the Section, but on the ground that the Section itself
used the word “remuneration” in the widest sense. It was however acknowledged
by the Court that the Rule cannot go beyond the statute. The relevant
observations are: -
“We do not say that a statutory rule can enlarge the meaning of
S.10; if a rule goes beyond what the Section contemplates, the rule must yield
to the statute. We have, however, pointed out earlier that S.10 itself uses the
word “remuneration” in the widest sense, and R.5 and Form-I are to that extent
in consonance with the Section.”
It has not been suggested in the present case that the words
“consideration in money” or “the gross amount charged” themselves have been
used in section 67 in the widest sense of including the amounts collected by
the service provider for his travel, hotel stay, transportation and other out
of pocket expenses. These words have been defined in the Explanation below the
section and it is significant that the out of pocket expenses such as travel,
hotel stay, transportation etc. have not been included in those expressions.
13. In Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank
Ltd., (1984) 2 SCC 50, the Supreme Court (Three-Judge Bench) observed as under:
-
“Now if there is any conflict between a statute and the
subordinate legislation, it does not require elaborate reasoning to firmly
state that the statute prevails over subordinate legislation and the bye-law,
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 has
precedence and must be complied with.”
14. A learned single Judge of this Court in Devi Datt v. Union of
India, AIR 1985 Delhi 195 held that though the language of Rule 102 of the
Displaced Persons (Compensation and Rehabilitation) Rules, 1955 was wider in
its ambit and covered the properties comprised in the compensation bill and entrusted
to a managing officer for management, “but obviously the said rule has to be
construed in the light of the parent Section and it cannot be construed as
enlarging the scope of Section 19 itself. It is a well settled canon of
construction that the Rules made under a statute must be treated exactly as if
they were in the Act and are of the same effect as if contained in the Act.
There is another principle equally fundamental to the rules of construction,
namely, that the Rules shall be consistent with the provisions of the Act.
Hence, Rule 102 has to be construed in conformity with the scope and ambit of
Section 19 and it must be ignored to the extent it appears to be inconsistent
with provisions of Section 19”. In making these observations, the learned single
Judge referred to and followed the judgment of the Supreme Court in State of
Uttar Pradesh v. Babu Ram Upadhyay, AIR 1961 SC 751.
15. In the tax jurisprudence the position is no different and it
has been held in CIT v. S. Chenniappa Mudaliar, (1969) 74 ITR 41 that if a rule
clearly comes into conflict with the main enactment or if there is any
repugnancy between the substantive provisions of the Act and the Rules made
therein, it is the rule which must give way to the provisions of the Act. In
Bimal Chandra Banerjee v. State of M.P. and Ors., (1971) 81 ITR 105, Hegde J.
was examining the provisions of the M.P. Excise Act, 1915. The legislature
levied excise duty only on those articles which came within the scope of
Section 25 of that Act. The rule-making authority, which was the State
Government, purported to levy duty on articles which did not fall within the
scope of the Section. Holding this act of the State Government to be ultra
vires the Section, it was observed as under: -
“No tax can be imposed by any bye-law or rule or regulation unless
the statute under which the subordinate legislation is made specially
authorises the imposition even if it is assumed that the power to tax can be
delegated to the executive. The basis of the statutory power conferred by the
statute cannot be transgressed by the rule making authority. A rule making
authority has no plenary power. It has to act within the limits of the power
granted to it.
16. In CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44 it
was held by the Supreme Court that
“the Rules were meant only for the purpose of carrying out the
provisions of the Act and they could not take away what was conferred by the
Act or whittle down its effect.”
17. In Commissioners of Customs and Excise v. Cure and Deeley
Ltd., (1961) 3 WLR 788 (QB) the facts were these. Section 33(1) of the Finance
Act, 1940 of the United Kingdom enacted that the Commissioners might make
regulations providing for any method for which provision appeared to them to be
necessary for the purpose of giving effect to the provisions of the Act and of
enabling them to discharge the functions. The Commissioners framed Regulation
12 of the Purchase Tax Regulations, 1945. It stated that if any person failed
to furnish a return as required by the regulation or furnished an incomplete
return, then the Commissioners could determine the amount of tax appearing to
them to be due from such person, and demand payment thereof. Such amount
determined by the Commissioners was to be deemed to be the proper tax due from
such person and the tax had to be paid within 7 days of the demand. The
regulations did not provide for any appeal or for taking up the decision of the
Commissioners to any Court of law. The validity of the regulation came up for
consideration before the Court. Sachs J., observed as follows: -
“To my mind a Court is bound before reaching a decision on the
question whether a regulation is intra vires to examine the nature, objects,
and scheme of the piece of legislation as a whole, and in the light of that
examination to consider exactly what is the area over which powers are given by
the section under which the competent authority is purporting to act.”
It was ultimately held by the Court that Regulation 12 was ultra
vires on three grounds. One of the grounds, which is relevant for our purpose,
was that the regulation rendered the subject liable to pay such tax as the
Commissioner believed to be due whereas the charging Section imposed a liability
to pay such tax as in law was due.
18. Section 66 levies service tax at a particular rate on the
value of taxable services. Section 67 (1) makes the provisions of the section
subject to the provisions of Chapter V, which includes Section 66. This is a
clear mandate that the value of taxable services for charging service tax has
to be in consonance with Section 66 which levies a tax only on the taxable
service and nothing else. There is thus in built mechanism to ensure that only
the taxable service shall be evaluated under the provisions of 67. Clause (i)
of sub-section (1) of Section 67 provides that the value of the taxable service
shall be the gross amount charged by the service provider “for such service”.
Reading Section 66 and Section 67 (1) (i) together and harmoniously, it seems
clear to us that in the valuation of the taxable service, nothing more and
nothing less than the consideration paid as quid pro quo for the service can be
brought to charge. Sub-section (4) of Section 67 which enables the
determination of the value of the taxable service “in such manner as may be
prescribed” is expressly made subject to the provisions of sub-section (1). The
thread which runs through Sections 66, 67 and Section 94, which empowers the
Central Government to make rules for carrying out the provisions of Chapter V
of the Act is manifest, in the sense that only the service actually provided by
the service provider can be valued and assessed to service tax. We are,
therefore, undoubtedly of the opinion that Rule 5 (1) of the Rules runs counter
and is repugnant to Sections 66 and 67 of the Act and to that extent it is
ultra vires. It purports to tax not what is due from the service provider under
the charging Section, but it seeks to extract something more from him by
including in the valuation of the taxable service the other expenditure and
costs which are incurred by the service provider “in the course of providing
taxable service”. What is brought to charge under the relevant Sections is only
the consideration for the taxable service. By including the expenditure and
costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.
It is no answer to say that under sub-section (4) of Section 94 of the Act,
every rule framed by the Central Government shall be laid before each House of
Parliament and that the House has the power to modify the rule. As pointed out
by the Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427: -
“The fact that the rules framed under the Act have to be laid before
each House of Parliament would not confer validity on a rule if it is made not
in conformity with Section 40 of the Act.”
Thus Section 94 (4) does not add any greater force to the Rules
than what they ordinarily have as species of subordinate legislation.
19. For the above reasons we quash the impugned show-cause notice
and allow the writ petition with no order as to costs.
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