2023 (8) TMI 997 - HC - Service Tax

Liability of service tax on lease - burden of service tax should be borne by the lessor i.e. the service provider or the lessee i.e. the service recipient? - entitlement to pendente lite interest and if so, for what period - HELD THAT - In the case of M/s Meattles 2012 (10) TMI 685 - DELHI HIGH COURT , a suit was filed by the Plaintiff for declaration, recovery of money and injunction and the prime issue before the Court was whether the Defendant was liable to pay service tax on the rent. In Pearey Lal 2010 (10) TMI 137 - DELHI HIGH COURT , learned Single Judge has categorically observed that the Court is not unmindful of the circumstance that service tax is a species of levy which parties clearly did not envision while entering into their arrangement. Having so observed, the Court held that if the overall objective of the levy was to be taken into consideration, it is the service which is taxed and the levy is an indirect one, which necessarily means that the user has to bear it. The rationale, why this logic is to be accepted is that the ultimate consumer has contact with the user and it is from them that the levy would ultimately be realized by including the amount of tax in the cost of service or goods. Another Division Bench of this Court in Raghubir Saran 2013 (6) TMI 587 - DELHI HIGH COURT , held that service tax is neither a property tax nor outgoing in respect of the premises, but is a tax on the commercial activity carried on. Pertinently, the Division Bench was dealing with Clause 7.1 of the Lease Deed therein, which placed the responsibility of paying property taxes and other outgoings on the lessor and the Court held that Clause 7.1 only deals with taxes which are relatable to the property and not the activity carried out in the premises, which is on what service tax is levied. It is true that when the Lease Deeds were executed by the parties, there was no stipulation with respect to service tax and this was introduced later by the Finance Act, 2007. However, in view of the judgements of this Court holding that the legislative intent is quite clear that the service tax is to be ultimately borne by the recipient of the service, though it is the service provider who is statutorily liable to pay the said tax to the exchequer, the Appellant must fail in its challenge in the present Appeal. In view of the clear observation of the Courts that there vests a legal right in the service provider to recover the amount of service tax from the recipient of the service, even if there is no agreement between them for reimbursement of such tax by the recipient of the service to its provider, this Court finds no reason warranting interference with the impugned order of the learned trial court. Grant of pendente lite interest on the entire service tax amount - HELD THAT - The Plaintiff is only partially correct. The suit was filed by the Plaintiff on 06.12.2013 and therefore, he cannot lay a claim to pendente lite interest for any period prior thereto. Insofar as interest from 06.12.2013 to 30.05.2015 is concerned, the Court finds merit in the plea of the Plaintiff. Courts have repeatedly held that no person or authority can retain money belonging to another person or party without authority of law and if the Court comes to a conclusion on a given set of facts that a party has been wrongly denied use of its money, it is the duty of the Court to see that the party is appropriately compensated. The decree passed by the Trial Court is upheld with the aforementioned modification with respect to the pendente lite interest component - appeal dismissed.

Summary

Issues Involved:
1. Liability to pay service tax as per the Lease Deed.
2. Entitlement of Plaintiff to pendente lite interest.

Summary:

Issue 1: Liability to Pay Service Tax

The Plaintiff leased premises to the Bank, initially through a Lease Deed dated 07.05.2007, later renewed. The Plaintiff's case was that service tax, introduced retrospectively by the Finance Act, 2007, should be borne by the Bank. The Bank contended that according to Clause 7 of the Lease Deed, all property taxes and outgoings were payable by the Plaintiff, and service tax was not specifically mentioned. The Trial Court held that the service tax was a future increment in taxes, thus payable by the Bank. This decision was based on precedents from Delhi High Court, which consistently held that service tax, being an indirect tax, is ultimately borne by the recipient of the service, even if not explicitly mentioned in the agreement. The High Court upheld this view, affirming that the service provider has a legal right to recover service tax from the service recipient under Section 83 of the Finance Act read with Sections 12A and 12B of the Central Excise and Salt Act, 1944.

Issue 2: Entitlement to Pendente Lite Interest

The Plaintiff sought pendente lite interest on the service tax amount. The Trial Court denied this, stating it would be inequitable as no penalty or interest was paid by the Plaintiff on the service tax. The High Court modified this, granting interest at 12% per annum from the date of filing the suit (06.12.2013) to the end of the lease period (30.05.2015), citing the principle that a party wrongly denied the use of its money must be compensated.

Conclusion:

The High Court dismissed the Bank's appeal, affirming the Trial Court's decree that the Bank is liable to pay the service tax. The Plaintiff's appeal was partly allowed, granting pendente lite interest from 06.12.2013 to 30.05.2015.