2023 (11) TMI 1369 - HC - GST

Demand of differential amount of tax arising from reduction in the rate of tax - recovery notices issued by the respondents complied with the principles of natural justice or not - grievance of petitioner is that had they been put on notice before issuing the demand notices they could have pointed out that the amount of tax as demanded by the respondents from them was not due even after reduction of rates if calculated properly - HELD THAT - In the instant case the Government issued SRO-GST-06 (Rate) on 21.09.2017 in exercise of powers conferred by subsection (1) of Section 9 subsection (1 ) of Section 11 subsection (5) of Section 15 and subsection (1) of Section 15 of the Act of 2017 and made amendments in SRO-GST-2 (Rate) notification dated 22.08.2017 and reduced the rate of service tax on the works contract from 18% to 12%. From a reading of SRO dated 21.09.2017 it clearly transpires that the amendments effected were prospective in nature and came into force only w.e.f 21.09.2017. It is thus abundantly clear that the service tax came to be reduced from 18% to 12% much after the submission of bid by the petitioner and the last date fixed for receipt of tenders in question. That being the admitted factual position emerging the above quoted provisions of the contract were to take effect. Since there was decrease in the percentage rate of tax directly related to the contract value with reference to the prevailing rate on the last due date for receipt of tenders as such the differential amount was liable to be refunded by the petitioner to the respondents. The plea of learned counsel for the petitioner that the rate of service tax from 18% came to be reduced to 12% on 05.08.2017 when the GST Council met and took a decision for reduction of rate of tax is totally baseless and misconceived. The plea of the petitioner that the rate of service tax which was taken into account by the petitioner at the time of submission of bid was 12% and not 18% will lose its significance in view of the clear stipulation in the contract agreement that the rates quoted by the petitioner shall be inclusive of the taxes directly related to contract value as prevailing on the last due date for receipt of tenders. It is in reference to this date the respondents were to determine increase or decrease in percentage rates of taxes directly related to contract value. The consequences of increase and decrease were clearly stipulated in special condition No. 49 of the contract agreement. Conclusion - The petitioner is liable to refund the differential amount of service tax arising from the reduction of the rate from 18% to 12% effective after the last date for receipt of tenders. The recovery notices must comply with principles of natural justice. Petition dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the petitioner-company is liable to pay the differential amount of service tax (GST) arising from the reduction of the tax rate from 18% to 12% subsequent to the submission of the bid?

- Whether the recovery notices issued by the respondents complied with the principles of natural justice?

- Whether the petitioner's contention that the service tax rate applicable at the time of bid submission was 12% (based on GST Council recommendations) and not 18%, is tenable?

- Whether the principle of res judicata bars the petitioner from re-agitating the issue already decided by the Division Bench?

- Interpretation and application of the contract provisions relating to tax variations, specifically Notes 11 and 12 of Schedule 'A' and Special Condition No. 49, concerning reimbursement/refund on variation in taxes directly related to contract value.

- The legal effect of GST Council recommendations versus statutory amendments under the Jammu and Kashmir Goods and Services Tax Act, 2017.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability to pay differential service tax due to reduction of tax rate from 18% to 12%

Relevant legal framework and precedents: The contract agreement between the parties contains explicit provisions governing tax variations. Notes 11 and 12 of Schedule 'A' and Special Condition No. 49 of the contract clearly stipulate that the contractor's quoted rates are inclusive of all taxes as prevailing on the last date for receipt of tenders. Clause 49.2 defines "taxes directly related to contract value" and provides for reimbursement or refund in case of any increase or decrease in such taxes relative to the prevailing rates on the last date for receipt of tenders.

The Jammu and Kashmir Goods and Services Tax Act, 2017 ("Act of 2017") and the rules framed thereunder govern the levy and collection of GST. The GST Council's recommendations, though influential, do not have statutory force until incorporated into law through notifications or amendments under the Act.

Court's interpretation and reasoning: The Court emphasized that on the last date for receipt of tenders (11.08.2017), the prevailing rate of service tax under the Act of 2017 was 18%. Although the GST Council had recommended a reduction to 12% on 05.08.2017, such recommendation lacked statutory effect until the Government issued the formal notification (SRO-GST-06 dated 21.09.2017), which amended the rate prospectively.

Accordingly, the contract terms required the petitioner to include the tax rate prevailing on the last date for receipt of tenders (18%) in its bid. The subsequent reduction to 12% was a decrease in the tax rate directly related to contract value, triggering the refund/deduction clause under Special Condition No. 49.2.

Key evidence and findings: The contract documents, particularly Notes 11 and 12 and Special Condition No. 49, were pivotal in determining the parties' rights and obligations. The Government notification dated 21.09.2017 was critical to establish the effective date of the tax rate reduction.

Application of law to facts: Since the reduction in service tax rate became effective only after the last date for receipt of tenders, the petitioner was contractually bound to pay the differential amount arising from the decrease in tax rate. The petitioner's bid was deemed inclusive of 18% tax, and the contract required refund of any decrease in such taxes.

Treatment of competing arguments: The petitioner argued that it had factored in the 12% rate based on the GST Council's decision on 05.08.2017. The Court rejected this argument, holding that GST Council recommendations are not statutory and cannot alter contractual obligations unless formally enacted by Government notification. The petitioner's reliance on the GST Council decision was therefore misconceived.

Conclusions: The petitioner is liable to refund the differential amount of service tax arising from the reduction of the tax rate from 18% to 12% as per the contract terms and statutory framework.

Issue 2: Validity of recovery notices and compliance with principles of natural justice

Relevant legal framework and precedents: The Division Bench's earlier judgment dated 23.12.2020 held that the recovery notices issued to the petitioner were defective for non-compliance with principles of natural justice, specifically for failing to afford the petitioner an opportunity of hearing before issuing demand notices.

Court's interpretation and reasoning: The Court reiterated that the liability to pay the differential tax was not disputed; only the quantum was in contention. The earlier judgment directed the respondents to re-examine the matter after hearing the petitioners and to issue fresh demand notices if any amount was due.

Key evidence and findings: The earlier Division Bench judgment and the petitioner's grievance that without hearing, the amount was calculated unilaterally.

Application of law to facts: The Court observed that the petitioner had already been afforded an opportunity to be heard as per the earlier directions, and the present petition was a reiteration of the same grievance.

Treatment of competing arguments: The petitioner contended that the recovery notices did not comply with natural justice. However, the Court found that the issue had been settled and that the petitioner was attempting to relitigate the matter.

Conclusions: The recovery notices must comply with principles of natural justice, but this issue was already addressed in the earlier judgment. The current petition did not raise any new grounds on this issue.

Issue 3: Maintainability of the petition in view of res judicata

Relevant legal framework and precedents: The doctrine of res judicata bars re-litigation of issues that have been conclusively decided by a competent court between the same parties.

Court's interpretation and reasoning: The Court found that the issue of liability to pay the differential tax had been conclusively decided by the Division Bench in the earlier writ petition. The present petition was barred by res judicata as it raised the same issue.

Key evidence and findings: The earlier Division Bench judgment dated 23.12.2020 in WP(C) No. 2183/2019 and connected matters.

Application of law to facts: The petitioner's attempt to re-agitate the issue was impermissible under the principles of res judicata.

Treatment of competing arguments: Despite the res judicata bar, the Court proceeded to decide the petition on merits to put a final end to the litigation.

Conclusions: The petition was not maintainable on the ground of res judicata but was decided on merits to prevent further litigation.

Issue 4: Interpretation of contract provisions relating to tax variations

Relevant legal framework and precedents: Contractual interpretation principles apply. The contract clearly defines the tax rates applicable and the mechanism for reimbursement or refund of tax variations.

Court's interpretation and reasoning: The Court closely examined Notes 11 and 12 of Schedule 'A' and Special Condition No. 49. It held that the contract requires the contractor to include all taxes prevailing on the last date for receipt of tenders in its bid. Any subsequent decrease in such taxes must be refunded by the contractor to the respondents.

Key evidence and findings: The contract clauses explicitly provide for adjustment of tax variations, excluding income tax but including service tax and other taxes directly related to contract value.

Application of law to facts: Since the service tax rate was 18% on the last date for receipt of tenders, and later reduced to 12%, the petitioner was obliged to refund the differential amount as per contract.

Treatment of competing arguments: The petitioner's argument that it included 12% in the bid was rejected because the contract required reference to the prevailing rate on the last date for receipt of tenders, which was 18%.

Conclusions: The contract provisions unambiguously require the petitioner to refund the differential amount arising from the reduction in service tax rate.

Issue 5: Legal effect of GST Council recommendations versus statutory amendments

Relevant legal framework and precedents: Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by authority of law (statutory enactment or subordinate legislation). GST Council recommendations are policy decisions without statutory force until incorporated into law.

Court's interpretation and reasoning: The Court emphasized that the GST Council's decision on 05.08.2017 to reduce service tax from 18% to 12% was only a recommendation. The statutory amendment reducing the rate was effected by Government notification dated 21.09.2017, which was prospective in nature.

Key evidence and findings: The Government notification (SRO-GST-06 dated 21.09.2017) was the only legal instrument effecting the tax rate change.

Application of law to facts: The petitioner could not rely on the GST Council's recommendation as a basis for including 12% tax in the bid since it lacked statutory authority at the relevant time.

Treatment of competing arguments: The petitioner's reliance on the GST Council decision was rejected as "totally baseless and misconceived."

Conclusions: Only statutory amendments under the Act of 2017 have legal effect for levy and collection of tax; GST Council recommendations are not binding law.

3. SIGNIFICANT HOLDINGS

"It is trite law that in view of the provisions of Article 265 of the Constitution of India, no tax can be levied or collected except by the authority of law. The law here would mean only a statutory law or the Act of Legislature. The tax can be levied or collected only either by an Act of Legislature or the subordinate legislation framed thereunder. Any tax levied under the executive authority of the State or by any other statutory or nonstatutory authority like the GST Council is not a tax levied or collected under an authority of law. The legal position in this regard is well settled."

"The rates quoted by the contractor shall be deemed to be inclusive of all taxes directly related to contract value with existing percentage rates as prevailing on last due date for receipt of tenders. Any increase in percentage rates of 'taxes directly related to contract value' with reference to prevailing rates on last due date for receipt of tenders shall be reimbursed to the contractor and any decrease in percentage rate of such taxes shall be refunded by the contractor to the Govt/deducted by the Govt. from any payment due to the contractor."

"The service tax chargeable on works contract is a tax directly relatable to contract value. On the last date for receipt of tenders i.e 11.08.2017 the rate of tax under the Act of 2017 and the rules framed thereunder was 18%. It is this rate which shall be deemed to have been taken into account by the petitioner while submitting the bid."

"The petitioner's plea that the rate of service tax which was taken into account by the petitioner at the time of submission of bid was 12% and not 18% will lose its significance in view of the clear stipulation in the contract agreement that the rates quoted by the petitioner shall be inclusive of the taxes directly related to contract value as prevailing on the last due date for receipt of tenders."

"The petition is not maintainable and hit by the principles of res judicata as the issue raised by the petitioner in respect of its liability to pay the differential amount of GST on account of reduction of rate subsequent to the submission of bid stood already decided by the Division Bench of this Court."

Final determination: The petitioner is liable to refund the differential amount of service tax arising from the reduction of the rate from 18% to 12% effective after the last date for receipt of tenders. The recovery notices must comply with principles of natural justice. The petitioner's contention regarding the rate of tax at bid submission is rejected. The petition is dismissed.