Case Law Details
As far as the submission of shifting of tax liability is concerned, as observed in paragraph 9 of Laghu Udyog Bharati (Supra), service tax is an indirect tax, and it is possible that it may be passed on. Therefore, an assessee can certainly enter into a contract to shift its liability of service tax. Though the appellant became the assessee due to amendment of 2000, his position is exactly the same as in respect of Sales Tax, where the seller is the assessee, and is liable to pay Sales Tax to the tax authorities, but it is open to the seller, under his contract with the buyer, to recover the Sales Tax from the buyer, and to pass on the tax burden to him.
Therefore, though there is no difficulty in accepting that after the amendment of 2000 the liability to pay the service tax is on the appellant as the assessee, the liability arose out of the services rendered by the respondent to the appellant, and that too prior to this amendment when the liability was on the service provider. The provisions concerning service tax are relevant only as between the appellant as an assessee under the statute and the tax authorities. This statutory provision can be of no relevance to determine the rights and liabilities between the appellant and the respondent as agreed in the contract between two of them. There was nothing in law to prevent the appellant from entering into an agreement with the respondent handling contractor that the burden of any tax arising out of obligations of the respondent under the contract would be borne by the respondent.
If this clause was to be read as meaning that the respondent would be liable only to honour his own tax liabilities, and not the liabilities arising out of the obligations under the contract, there was no need to make such a provision in a bilateral commercial document executed by the parties, since the respondent would be otherwise also liable for the same. In Bank of India (supra) one party viz. the bank was responsible for the formulation of the Voluntary Retirement Scheme, and the employees had only to decide whether to opt for it or not, and the principle of contra proferentem was applied. Unlike the VRS scheme, in the present case we are concerned with a clause in a commercial contract which is a bilateral document mutually agreed upon, and hence this principle can have no application. Therefore, clause 9.3 will have to be read as incorporated only with a view to provide for contractor”s acceptance of the tax liability arising out of his obligations under the contract.
It was pointed out on behalf of the appellant that it is conventional and accepted commercial practice to shift such liability to the contractor. A similar clause was considered by this Court in the case of Numaligarh Refinery Ltd. vs. Daelim Industrial Co. Ltd., reported in [2007 (8) SCC 466]. In that matter, the question was as to whether the contractor was liable to pay and bear the countervailing duty on the imports though this duty came into force subsequent to the relevant contract. The relevant clause 2(b) read as follows: “2(b) All taxes and duties in respect of job mentioned in the aforesaid contracts shall be the entire responsibility of the contractor” Reading this clause and the connected documents, this Court held that they leave no manner of doubt that all the taxes and levies shall be borne by the contractor including this countervailing duty.
In any case, assuming that clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator. The legal position in this behalf has been summarized in paragaph 18 of the judgment of this court in SAIL vs. Gupta Brother Steel Tubes Ltd. (supra) and which has been referred to above. Similar view has been taken later in Sumitomo Heavy Industries Ltd. vs. ONGC Ltd. reported in [2010 (11) SCC 296] to which one of us (Gokhale J.) was a party. The observations in paragraph 43 thereof are instructive in this behalf. This paragraph 43 reads as follows:
Please become a Premium member. If you are already a Premium member, login here to access the full content.
Rider:
As per the extant law itself (section 2 (24) rw 28 (iv)), as one sees, scope for taxing such ‘benefit’ as mentioned above, in the hands of the service provider (supplier), cannot be wished away.
KEY NOTE: The suggestion, as offered from a common man’s perception, is, ideally speaking, and from a social point of view, not that the government / Revenue should try and so tax. On the contrary, bearing in mind the undesirable consequence that might entail i.e. its cost-push / added inflationary effects, the government should seriously consider , in proper consultation with impartial experts in the field, mandating through suitable legislative measures that none of such statutory levies , present or future, which basically / principally constitute the liability of NOT the customer , ought not to be passed on, directly or otherwise, to him.
Now, over to the experts.
The grounds of and crux of the Ruling are to be found in paragraph 29 of the judgment. The ruling given is mainly based on the terms of the contract (s).
In one’s understanding, as per the scheme of the service tax law itself, service tax is the primary liability of the service provider. That is, same way as sales tax is that of the seller of goods. It is more as a commercial practice, not by reason of any specific provision or mandate of the law, that is recovered as part of the price.
Even as per section Sec. 68(2) of the Act read with Rule 2(d) of the Service Tax Rules, 1994, in specified situations, receiver of the services is made responsible for payment of service tax. That is, one would urge, not to say that the service provider is absolved from the primary liability to service tax.
Following observations of SC case are relevant:
“The service tax levied by reason of services which are offered. The imposition is on the person rendering the service. Of course, it may be indirect tax, it may be possible that the same is passed on to the customer but as far as the levy and assessment is concerned, it is the person rendering the service who alone can be regarded as an assessee and not the customer. This is the only way in which the provision can be read harmoniously.”
As was further opined:
”The charge of tax is on the value of services and it is only the person who is providing service can be regarded as an assessee. The rules, therefore, cannot be so framed which do not carry out the purpose of the Chapter (Statute) and cannot be in conflict with the same.”
If closely studied, seem to bring to surface some materially valid points having a nexus to such disputes. Besides, a serious doubt is whether the service provider is at all right in passing on, as a matter of routine, unless otherwise specifically agreed upon, the burden of service tax to customer.
That apart, in one’s conviction, any recovery cannot be regarded to have no income-tax implication.
To digress: As one may be aware, – income-tax is a tax on ‘income’, and it is levied on the person who is in receipt or ‘beneficiary’ thereof. It is he who is the ‘assessee’, accountable and liable to pay. But, if instead, by virtue of a contract or arrangement, the tax otherwise payable/to be borne by the assessee comes to be passed on to / ‘borne’ by another, the assessee is liable to pay tax by applying the commonly known concept of –grossing up of income for tax.
The point is prima facie a moot one. Nonetheless, it seems worthwhile to seriously consider: – Why not, by the same token of logic, ‘service tax’ (so also ‘GST’, if and after it has come into force) passed on by the service provider (or ‘seller’), to his customer, be regarded a ‘benefit’ and accordingly be treated as his ‘income’ and taxed as such in his hands? OR
In the alternative, for achieving the same result, is there not scope for invoking the provision already on the statute- section 40 (ii) of the IT Act- or in any case, justification for suitably amending it.