The document summarizes a presentation on recent developments in service tax law related to reimbursement of expenses and recovery of tax. It discusses that service tax can only be levied on the taxable service and not other expenses. It also summarizes judicial decisions that have struck down rules allowing service tax to be levied on reimbursed expenses. The document then discusses provisions related to recovery of tax and recent circulars and judicial decisions regarding the same.

1. Presents
5th Knowledge Master Class
On
“Service Tax Law Simplified”
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Wednesday,
20th March, 2013
Gurgaon © Dr. Sanjiv Agarwal
1

2. SESSION – IV
Recent developments in Service Tax
2

3. This Presentation Covers
 Reimbursement of Expenses
 Recovery of Tax

4.  Gross amount charged by the service provider for such
services provided or to be provided (Section 67)
 Service Tax (Determination of Value) Rules, 2006, Rule
5 – Inclusions in or exclusion from value of
expenditure / costs
 Expenditure / costs incurred in course of providing
services – treated as consideration
 Expenditure / costs incurred as pure agent of recipient
of service – excluded conditionally
 RE arises where person paying is under no obligation
to pay and pays on behalf of other
4

5.  Only when service recipient is having obligation, (legal or
contractual) to pay certain amount to any third party and
such amount is paid by service provider on behalf of
service recipient, question of RE arises [ Sri Bhagavathy
Traders v. CCE (2011) 24 STR 290 Cestat-LB]
 reimbursable charges incurred by assessee for travelling
allowances to consulting engineers are not required to be
included in the fees for services so paid by them for the
purpose of Service Tax. But the Supreme Court did not
held that Rule 5(1) is ultra vires the provisions of section 67
of the Finance Act, 1994 which provides for provisions on
valuation of taxable services. [CCE & C, Rajkot v. Reliance
Industries Ltd. (2012) 37 STT 359 (Supreme Court)]

6. Intercontinental Consultants and Technorats Pvt. Ltd. v U.O.I. 2012 (12)TMI 150 (Delhi HC- DB)
 Earlier stayed (2008)12 STR 689 (Delhi)
 Petitioner providing consulting engineering services in respect of highway
projects to NHAI
 Receives payment not only for its service but also reimbursed (out of
pocket) expenses incurred on hotel, travel etc.
 Held not to pay service tax on reimbursed expenses
 Rule 5(1) of the Service Tax (Determination of Value) Rule, 2006 is ultra
vires the provisions of the Finance Act, 1994.
 Rule 5(1) is against the charging provision and has been struck down.
 Even if rules are laid before both the houses of the Parliament, such an act
cannot confer validity to the rules.
 Section 94(4) of the Finance Act, 1994 does not add any greater force to the
rules. They continue to be a piece of sub ordinate legislation.
Contd……….
6

7.  Service Tax is levied at a particular rate (presently 12%) on the value of taxable
services in terms of charging section.
 Value of taxable service for levy of Service Tax has to be in consonance with the
charging section.
 Service Tax can be levied on the taxable service and nothing more or nothing
less.
 It is only the taxable service which needs to be evaluated for the purpose of
valuation u/s 67 as it talks of ‘such service’.
 Thus, value of taxable service shall be the gross amount charged by the service
provider ‘for such service’. It has to be essentially for ‘such service’ and nothing
else.
 The charging section (erstwhile section 66) and valuation provisions (section
67) of the Finance Act, 1994 have to be read together and harmoniously.
 If read in consonance, only the consideration paid as quid pro quo for the
taxable service can be brought to charge of Service Tax.
Contd…..

8.  The valuation rules, i.e., Service Tax (Determination of Value)
Rules, 2006 are expressly made subject to the provisions of section
67(1) and as such, it cannot go beyond what is intended to be in section
67.
 The common thread running through the provisions of section 66, 67
and 94 of the Finance Act, 1994 is manifest and leads to only
conclusion that ‘only the services actually provided by the service
provider can be valued and assessed to Service Tax’.
 What has to be valued is only the output service and nothing
else, i.e., not the input services or other expenses which go into
rendering of such services.
 If it is not held so, the rule 5(1) of valuation rule seeks to extract more
as Service Tax than stipulated in section 67(1) by including in the value
of service, the other costs and expenditure which are incurred by the
service provider in the course of providing the taxable service.
 What can be taxed as Service Tax is only the consideration which is
further qualified by ‘for the taxable service’.

9. Recovery of any amount due to Central Government (Section
87)
 Recovery proceedings by Central Excise Officer
 Deduct or require to deduct from any sum payable under Service Tax /
Excise / Customs
 Notice to other persons from whom money is due or who holds or may hold
money on account of such person to pay to the Department
 Any contrary conditions for such recovery not to apply in case of banks /
post offices/ insurers
 Such person failing to do so shall be deemed to be assessee in default
 Distrain any movable / immovable property and may cause sale of such
property , if required
 Recovery as arrears of land revenue through Collector.

10.  CBEC Circular No. 967/1/2013 dated 1.1.2013 [based on
Collector of Customs, Bombay v Krishna Sales Pvt. Ltd.
(1993) 9 TMI 124(SC)]
 Recovery proceedings to be initiated against a confirmed
demand if–
Appeal to Commissioner (Appeal)
 No appeal is filed against OIO - after expiry of 60 days for
filling appeal
 Appeal filed without stay application – after such an
appeal has been filed
 Appeal filed with stay application– within 30 days from
the day of appeal filed or if heard and no stay is granted ,
whichever is earlier 10

11. Appeal to Tribunal
 No appeal is filed against OIO - after expiry of 90 days from
OIO
 Appeal filed without stay application– after appeal has been
filed
 Appeal filed with stay application– within 30 days from the
date of appeal filed or if heard and no stay is granted ,
whichever is earlier
 No appeal is filed against OIA confirming demand for first
time - after expiry of 90 days from OIA
 Appeal filed against OIA confirming demand for first time
without stay application to CESTAT – immediately after
appeal has been filed
11

12.  Appeal filed against OIA conforming demand for first
time with stay application to CESTAT – with in 30 days
from the day of appeal filed or if heard and no stay is
granted , whichever is earlier
 All cases where Commissioner (Appeals) confirms
demand in OIO – Immediately on the issue of OIA
 Tribunal or high court confirms the demand –
immediately , if no stay is in operation
12

13. Earlier Judicial Pronouncements against Coercive Recovery
 B.G. Chitale (1992) 42 ECR 279 (Cestat) – Recovery cannot be pursued during pendency of
appeal.
 Manu Udyog Pvt. Ltd. (1992) 43 ECR 689 and Indodan Industries (1992) 43 ECR 717
(Allahabad) - Recovery to be suspended during pendency of stay application.
 Packwell Associates (1998) 98 ELT 601 (Karnataka) – Recovery proceedings to remain
suspended pending final orders on stay applications.
 Cascade Systems (2004) 165 ELT 400 (Karnataka) – Authorities not to resort to recovery
proceedings for a period of one month from the date of adverse orders, should issue
notice to initiate recovery proceedings within one month of the order so that the party is
kept on guard for further steps and moving to appellate forums.
 CC&CE, Ahmedabad v. Kumar Cotton Miles Pvt. Ltd. (2005) 180 ELT 434 (SC) – Assessee
cannot be punished for matters which may be completely beyond their control. Assessee
cannot be held liable for stay application not disposed off within specified time.

14. Larsen & Toubro Ltd. v. Union of India & Others (2013) 29 STR 449 (Bombay) –
Judgment dated 7.2.2013
 Circular dated 1.1.2013 is arbitrary and violative of Article 14 of the Constitution of India.
 If an assessee has done everything in his control by moving a stay application, it would
not be justified if recovery proceedings are allowed to be initiated, where the appeal had
remained pending for reasons not attributable to the assessee.
 Initiation of recovery proceedings without allowing the assessee, the time which is
otherwise allowed by law to file an appeal or apply for waiver of pre-deposit or for filing
appeal before high court is not justified.
 The Circular deprives the assessee of a remedy to move to appellate authority viz,
Tribunal, High Court or Supreme Court against an order of adjudication.
Contd……

15.  It is not justified to commence recovery or demand immediately following an appellate
order where limitation period for filing an appeal against such order has not expired.
 It is not justified for the revenue authorities to argue that field offices do not have means
to enquire / verify the status of stay applications.
 MOF to ensure steps for recording of proceedings before all authorities in electronic
form.
 The only relief to the revenue authorities is that if the failure to dispose of the stay
application is on account of assessee’s conduct or actions, revenue would be justified in
commencing the recovery proceedings against the assessee.

16.  Ultra Tech Cement Ltd. v. Union of India (2013) 29 taxmann.com 427
(AP) – Interim stay of recovery of amount till the appellate
authority disposes application.
 Bharat Hotels Ltd. v. Union of India (2013) 288 ELT 509 (Delhi) –
Coercive measures to recover demand to be stayed till disposal of
the appeal.
 Texonic Instruments v. Union of India (2013) 288 ELT 510
(Karnataka) – Till disposal of stay application, department
restrained from taking coercive measures to recover demand.
 RSWM Ltd. v. Union of India (2013) 288 ELT 511 (Karnataka) -
Appeal / stay application was pending for over 6 months; Recovery
of dues by coercive means stayed.

17.  Patel Engineering Ltd. (2013) TIOL – 150 (Mumbai)
– Recovery proceedings stalled; directed to issue a
Circular based on L & T judgment.
 PML Industries Ltd. v. Union of India (P&H) –
CBEC tax recovery circular is untenable,
misconceived, wholly illegal and arbitrary.

18. Kautilya in Arthsasthra
“Just as fruits are gathered from a garden as often as
they become ripe, so revenue shall be collected as often
as it becomes ripe. Collection of revenue or of fruits,
when unripe, shall never be carried on, lest their source
may be injured, causing immense trouble.”

19. THANK YOU
FOR
YOUR
PRECIOUS TIME
AND
ATTENTION
Dr. Sanjiv Agarwal
FCA, FCS, Jaipur
asandco@gmail.com
sanjivservicetax@gmail.com
19