2008 (11) TMI 418 - HC - Service Tax

Writ petition - Petitioners have taken rooms on rent from the respondent Municipality, They have been called upon to pay service tax. It is their case that the demand for service tax is illegal - According to the petitioners, under the agreement, there is no provision for payment of service tax. Therefore, the demand for payment of service tax is illegal, It is their contention that there is no authority with the Municipality to pass it on to the petitioners. He would further contend that the demand should not be sustained as it violates Article 268A, further contends that they are small tenants and the Municipality must be treated as units of the State within the meaning of Article 289. The intention behind Article 289 is that the property and income of the State should not be visited with tax. He also referred to Chapter IXA of the Constitution to contend that the Municipality is a unit of the State and, therefore, levy of service tax on the property or on the income of the Municipality is unsustainable - Held that - Article 289 constitutes a fetter on the power of the Union to levy tax on the properly of the State or on its income. The State is an expression which is not defined in Article 366 as such. In Article 12, no doubt, State is defined as including authorities, argument rejected that when service tax is levied on the Municipality there is violation of Article 289. In fact, the Municipality has not approached this court with such a plea. There is no contention raised by the Municipality that it is in violation of Article 289, there is no merit in the said contention, Writ petitions fail and they are dismissed

Summary

Issues:
1. Validity of demand for service tax on tenants by Municipality.
2. Whether Municipality can pass on service tax to tenants.
3. Applicability of Article 289 of the Constitution.
4. Interpretation of Article 268A in relation to the case.

Analysis:
1. The petitioners challenged the demand for service tax by the Municipality, arguing that their agreements with the Municipality did not include provisions for such tax. They contended that service tax is payable by the Municipality itself and cannot be passed on to tenants. Reference was made to Article 268A and Article 289 of the Constitution to support the argument that the levy of service tax on the Municipality or tenants is unsustainable.

2. The respondent, represented by counsel Sri Gopinath Menon, argued that service tax is an indirect tax that can be passed on to tenants as beneficiaries of the service. Citing the decision in All India Federation of Tax Practitioners v. Union of India, it was emphasized that service tax is a VAT levied on services provided within the country. The Division Bench decision in Tamil Nadu Kalyana Mandapam Assn. v. Union of India was also referenced to establish that service tax can be passed on to consumers.

3. The court rejected the argument that the Municipality cannot pass on service tax to tenants, stating that service tax is an indirect tax that can be passed on by the service provider. The judgment highlighted that there are instances where the legislature has prohibited passing on indirect taxes, but no such prohibition exists for service tax. It was concluded that the Municipality has the statutory right to pass on the tax to tenants.

4. Regarding the contention related to Article 289 of the Constitution, the court held that the prohibition on taxing the property or income of a State does not extend to Municipalities. The argument that Municipalities should be considered units of the State under Article 289 was dismissed, as Municipalities are specifically defined and governed under Part IXA of the Constitution, distinct from States.

5. The court also addressed the argument based on Article 268A, noting that it was not specifically pleaded in the writ petition. Counsel for the respondent contended that there is a law in place, and the court found no merit in this argument. Ultimately, the writ petitions challenging the demand for service tax were dismissed, upholding the Municipality's right to pass on the tax to tenants as beneficiaries of the service.