2013 (6) TMI 587 - HC - Service Tax

Renting of immovable property - levy of service tax - dispute between landlord and tenant - tenant refused to pay as per the terms of contract - Held that - The most crucial aspect which is material for decision of the present case, as noticed by us, is that service tax is neither a property tax nor an outgoing in respect of the premises; it is on the commercial activity carried on. The two expressions property tax and outgoings in respect of the premises are in fact of a common species. Clause 7.1 thus 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. As service tax on commercial rented properties is an indirect tax and the jurisprudence on indirect tax tells us that the primary liability of the landlord to pay the tax to the Income Tax Authorities can be passed on to the tenant which enhances the utility to the tenant with respect to the property which attracts service tax on commercial properties. Tenant has to bear the incidence of the service tax and not the landlord. There is no dispute about the quantum of the amount of service tax which already stands paid by the appellant which is ₹ 37,42,954/- and ₹ 48,27,777/- in the two appeals respectively which will now thus have to be paid by the respondent to the appellant. Since the premises were vacated on 30.09.2011, we consider it appropriate to grant interest from 01.10.2011 till date of payment at the rate of 9% per annum simple interest.

Issues Involved:
1. Liability for service tax under the Lease Deed.
2. Interpretation of specific clauses in the Lease Deed.
3. Jurisdiction and scope of court intervention under Section 34 of the Arbitration & Conciliation Act, 1996.
4. Nature of service tax and its applicability to the lessee or lessor.

Issue-Wise Detailed Analysis:

1. Liability for Service Tax under the Lease Deed:
The primary dispute arose from the Finance Act, 2007, which introduced service tax on rent received from renting immovable properties for commercial purposes. The appellant (Raghubir Saran Charitable Trust) included a service tax element in the rental bills, which the respondent refused to pay, citing Clause 7.1 of the Lease Deed. The appellant paid the service tax to avoid penalties and invoked the arbitration clause for resolution. The Arbitrator and the learned Single Judge both ruled that the liability to pay service tax was on the appellant, based on the interpretation of the Lease Deed clauses.

2. Interpretation of Specific Clauses in the Lease Deed:
Clause 7.1 of the Lease Deed states that the lessor is liable to pay property taxes and other outgoings related to the premises. The Arbitrator and the learned Single Judge interpreted this clause to include service tax as an outgoing. However, the appellant argued that service tax is an indirect tax on the service rendered and should be borne by the service recipient (lessee). The court noted that Clause 7.1 should be read in conjunction with Clause 9(d), which states that the lessee must pay all taxes necessary for carrying on its business within the premises, excluding municipal taxes and related property taxes. The court concluded that service tax, being a tax on commercial activity, falls under Clause 9(d) and not Clause 7.1.

3. Jurisdiction and Scope of Court Intervention under Section 34 of the Arbitration & Conciliation Act, 1996:
The court emphasized the limited scope of intervention under Section 34, which allows interference only if the arbitral award is contrary to the plain reading of the contract clauses. The court found that the Arbitrator's interpretation was not plausible and that the plain reading of the clauses indicated that service tax should be borne by the lessee.

4. Nature of Service Tax and Its Applicability to the Lessee or Lessor:
The court referred to judicial pronouncements, including the All India Federation of Tax Practitioners v. Union of India and Association of Leasing and Finance Service Companies v. Union of India, to establish that service tax is a value-added tax (VAT) on commercial activities and is ultimately borne by the consumer. The court concluded that service tax is not a property tax or an outgoing in respect of the premises but a tax on the commercial activity carried out, thus falling under the lessee's responsibility as per Clause 9(d).

Conclusion:
The court set aside the arbitral awards and the judgments of the learned Single Judge, ruling that the respondent (lessee) is liable to pay the service tax. The court ordered the respondent to reimburse the appellant for the service tax amounts already paid, with interest from the date of vacating the premises until payment.

Final Judgment:
The appeals were allowed, and the respondent was ordered to pay Rs. 37,42,954 and Rs. 48,27,777 to the appellant, along with 9% per annum simple interest from 01.10.2011 until the date of payment. The parties were left to bear their own costs.

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