2017 (11) TMI 444 - SC - Service Tax

Renting of immovable property - levy of service tax - lease rentals - who is liable to bear the burden of tax i.e. the provider of services (lessor) or the recipient of services (the lassee) - scope of agreement - lease (rent) deed does not refer to service tax. Held that - It is 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. In Babu Ram Jagdish Kumar Co. v. State of Punjab, 1979 (5) TMI 135 - SUPREME COURT OF INDIA , 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. The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax. It is important to bear this in mind, as the main prop of Shri Jaideep Gupta s argument is that service tax being an indirect tax which must be passed on by virtue of the judgments of this Court, would make the recipient of the service the person on whom the tax is primarily leviable. Though in law and under clause 6 of the lease deed the Appellant is not required to pay service tax, we are loathe to upset the finding of the learned single Judge based upon a letter by the Appellant to the Respondent in which the Appellant has expressly stated that it was liable to pay service charges - the the case is in favor of appellant on law, but is against the appellant on facts - appeal dismissed - decided against appellant.

Issues Involved:
1. Liability to pay service tax under the lease agreement.
2. Interpretation of Clause 6 of the lease deed.
3. Applicability of relevant statutory provisions and rules to determine the liable party.
4. Judicial precedents and their relevance to the case.
5. Letters and communications between the parties affecting liability.

Detailed Analysis:

1. Liability to Pay Service Tax Under the Lease Agreement:
The core issue revolves around who is responsible for paying the service tax under the lease agreement dated 1.9.2012. The lease agreement stipulated that the lessor would pay all rates, taxes, and charges primarily leviable upon them, while the lessee (Government) would pay those primarily leviable upon the occupier. Disputes arose, leading to a writ petition by the lessor, which was decided by the Calcutta High Court in favor of the lessor. The single judge and the Division Bench both concluded that the lessee (Union of India) was liable to pay the service tax.

2. Interpretation of Clause 6 of the Lease Deed:
Clause 6 of the lease deed is pivotal, stating: “The lessor/lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes primarily leviable upon the occupier shall be paid by the Government.” The appellants argued that service tax, being primarily leviable on the lessor, should be borne by the lessor. The respondents contended that service tax, as an indirect tax, should be borne by the lessee, who is the recipient of the service.

3. Applicability of Relevant Statutory Provisions and Rules:
The court examined various provisions of the Finance Act, 1994, including Sections 65, 66, 66B, and 68, along with the Service Tax Rules, 1994. The Act and Rules indicated that the service provider (lessor) is the person liable to pay service tax. The court emphasized that service tax is an indirect tax, meaning it can be passed on to the recipient of the service, but the primary liability remains with the service provider.

4. Judicial Precedents and Their Relevance to the Case:
The court referred to several precedents, including Tamil Nadu Kalyana Mandapam Assn v. Union of India, All India Federation of Tax Practitioners v. Union of India, and Association of Leasing & Financial Service Companies v. Union of India, which clarified that service tax is an indirect tax and a value-added tax on the activity of providing service. The court distinguished between the taxable event (provision of service) and the taxable person (service provider). The court also discussed cases like Pearey Lal Bhawan Association v. M/S. Satya Developers Pvt. Ltd. and Raghubir Saran Charitable Trust v. Puma Sports India Pvt. Ltd., noting that these cases turned on specific contractual language and facts.

5. Letters and Communications Between the Parties Affecting Liability:
The court examined a sanction letter dated 27th April 2012 and a letter dated 30th April 2012, which indicated that the lessee (Government) would bear the service tax. The learned single judge relied on these letters to conclude that the lessee was liable to pay the service tax. Despite the legal interpretation of Clause 6, the court decided not to overturn the finding based on these letters, emphasizing the specific acknowledgment by the lessee of their liability to pay service tax.

Conclusion:
The Supreme Court set aside the Division Bench judgment on the legal interpretation but upheld the factual finding that the lessee (Union of India) was liable to pay the service tax based on the letters and communications between the parties. The appeal was dismissed on the facts of the case, reinforcing the lessee's obligation to bear the service tax as per their own communications.

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