No service tax on reimbursement

In the recent case, Delhi High Court has given it verdict against the constitutionally validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006.

This decision will have implication for all the assessees providing consulting/technical service to client.

Extract of decision

The petitioner was a company providing consulting engineering services. It was specialises in highways, structures, airports, urban and rural infrastructure projects and was 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.

The department has raised the demand for service tax on the reimbursement considering the rule 5 of Service Tax (Determination of Value) Rules, 2006.

In the decision Delhi High Court mentioned

"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"

Intercontinental Consultants and Technorats Pvt. Ltd. Vs U.O.I. & ANR.