Lessee being service receiver is liable to pay service tax to lessor

Kalegowda Enterprises Vs Union of India (Karnataka High Court)

Karnataka High Court held that lessor is merely obliged to collect the service tax and remit it to the department. A lessee being the person who avails of service is liable to pay service tax to the lessor.

Facts- The petitioner is the owner of a building in Mandya having a carpet area of 30700 sq. ft. which he has leased to the Life Insurance Corporation of India.

It is the case of the petitioner that he was obliged to pay the service tax by virtue of the provisions of Chapter V of Finance Act No.1994. It is his contention that he was merely the service provider and since the tax is payable by the person, who had availed the services i.e., the tenant, his only obligation, in law, was to collect the tax and remit it to the Department. It is his case that he proceeded to discharge his obligation of remitting the tax, but when he called upon the LIC to reimburse the service tax paid to him, LIC proceeded to issue the endorsements dated 29.08.2013 and 02.09.2013 by which they basically refused to honour their liability of paying the service tax.

It is the case of LIC that under the terms of the lease the petitioner was under an obligation to pay all taxes applicable and therefore, the component of service tax was also the burden of the petitioner and not that of the LIC.

Conclusion- In this view of the matter, it is the obligation of the lessor to collect the service tax and thereafter remit it to the Department. A lessee being the person who avails of service cannot deny his liability to pay the service tax, especially an instrumentality of the State i.e., to the LIC. This argument is therefore rejected.

It may also be pertinent to state here that it is not in dispute that since November 2017, LIC is, in fact, paying the service tax that is liable to be paid and this by itself indicates that the LIC acknowledges the liability in its law to pay the service tax.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

1. The petitioner is the owner of a building in Mandya having a carpet area of 30700 sq. ft. which he has leased to the Life Insurance Corporation of India (represented by respondents No.4 to 6) in this Writ Petition, under a registered lease deed dated 18.11.2010 (a copy of which is produced as Annexure-A to the writ petition). Under the terms of the lease, LIC was required to pay Rs.2,45,600/- per month as rent.

2. It is the case of the petitioner that he was obliged to pay the service tax by virtue of the provisions of Chapter V of Finance Act No.1994. It is his contention that he was merely the service provider and since the tax is payable by the person, who had availed the services i.e., the tenant, his only obligation, in law, was to collect the tax and remit it to the Department. It is his case that he proceeded to discharge his obligation of remitting the tax, but when he called upon the LIC to reimburse the service tax paid to him, LIC proceeded to issue the endorsements dated 29.08.2013 and 02.09.2013 by which they basically refused to honour their liability of paying the service tax.

3. It is the case of LIC that under the terms of the lease the petitioner was under an obligation to pay all taxes applicable and therefore, the component of service tax was also the burden of the petitioner and not that of the

4. LIC fundamentally seeks to rely upon the terms of the lease which according to them indicates that the liability to pay service tax is on the petitioner. In the light of this contention, it would be necessary to consider the terms of the lease. Clause V of the registered lease deed reads as follows –

“V. Together with all fixtures and fittings attached thereto (hereinafter called the said demised premises) and together with full right and liberty to the lessee to use in a reasonable manner wherever needed the stairs, passages, corridors and other areas with exclusive free access to the demised premises. The lessee has the full privilege to use bath rooms, toilets facilities etc of the said building as may be necessary for the full and proper enjoyment of the said demised premises and to have and to hold the said premises unto and to use the premises for a period of 10 years w.e.f. 18.11.2010. The date of occupation yielding and paying the rent as stipulated in clause-III of the agreement. The rent is inclusive of Municipal and all other taxes as are assessed  and levied as on date without any deduction  except Income Tax at source under section  194-I (Wherever applicable), the rent for each month is to be paid before the 10^th day of subsequent month subject to the observance and performance of the covenants on the part of the Lessees and the conditions herein contained.

(emphasis supplied)

5. As could be seen from Clause V, it is specifically stated that rent was inclusive of municipal as well as other taxes as are assessed and levied without any reduction of income tax at source under Section 194-I. Thus, the rent was inclusive of the municipal and other taxes which are assessed and levied on only the property and there is no obligation on the landlord to pay the service tax which is a tax, which is admittedly not levied on the property.

6. A reference may also be made to clause VI (1) of the lease agreement which reads as follows –

“(1) To pay all rates, taxes, ground rent, assessments and outgoings payable to the Municipal and/ or any other Government Department authority in respect of the entire schedule property as applicable at present including revision, if any.”

7. As could be seen from this clause also, the lessor e., the petitioner was obliged to pay all the rates, taxes, ground rent, assessments and the outgoings payable to the municipality or any other Government departments in respect of the entire schedule property as applicable.

8. It thus, makes it clear that whatever tax that was payable on the property, the petitioner became liable to pay the taxes. However, admittedly, service tax is not a tax which is payable on the property, but is a tax payable on the value of the services availed. It is therefore clear that the clauses in the lease agreement would not entitle the LIC to contend that he would not be liable to pay the service tax. As already stated above, the terms of the clause merely indicate that the lessor, being the owner of the property, he would have to necessarily pay the taxes that has been assessed on the property. The terms of the lease did not provide for the landlord to pay the service tax which, as stated above, is a separate tax levied on the value of the services availed and not on the property. It is, therefore, clear that the endorsements issued by the LIC refusing to pay the service tax paid by the petitioner are illegal and cannot be sustained.

9. Learned counsel for the LIC, however, sought to rely upon the judgment rendered by the Hon’ble Supreme Court in the case of Union of India and Others v. Bengal Shrachi Housing Development Limited and Another, reported in 2018(1) Supreme Court Cases 311 to contend that it is the obligation of the service provider to pay the tax. The Hon’ble Supreme Court in paragraph 18 has stated as follows –

“18. It is thus clear, on a conspectus of the authorities of this Court, that service tax is an  indirect tax, meaning thereby that the said tax can be passed on by the service provider to the  recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a  value added tax in the nature of a consumption  tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts. Thus, in Babu Ram Jagdish Kumar & Co. v. State of Punjab [(1 979)3 SCC 616], this Court made it clear that, in the case of a purchase tax, the “taxable event” is the purchase of paddy, whereas the “taxable person”, who is the person liable to pay the tax, is the purchaser. In the present case, therefore, the “taxable event” is the provision of the service of renting out immovable property, and the “taxable person”, that is the person liable to pay tax, is the service provider, namely the lessor.”

(emphasis supplied)

10. From the above extract, it is clear that though the person who provides the service, i.e., lessor, is liable to pay tax, he is entitled to pass on this liability to the recipient of the service.

11. In this view of the matter, it is the obligation of the lessor to collect the service tax and thereafter remit it to the Department. A lessee being the person who avails of service cannot deny his liability to pay the service tax, especially an instrumentality of the State i.e., to the LIC. This argument is therefore rejected.

12. It may also be pertinent to state here that it is not in dispute that since November 2017, LIC is, in fact, paying the service tax that is liable to be paid and this by itself indicates that the LIC acknowledges the liability in its law to pay the service tax.

13. It is to be borne in mind that the LIC being an instrumentality of the State should not take up technical pleas and attempt to evade its liability to pay a tax which it is bound to pay in the eye of law.

14. Learned counsel appearing for the Revenue submits that the petitioner has paid the following sums :

15. Since the LIC is held liable to pay the service tax, the above mentioned sums paid by the petitioner shall be paid by the LIC to the petitioner within a period of one month from the date of receipt of a copy of this order.