2019 (4) TMI 245 - HC - Service Tax

Scope of the terms of contract - reimbursement of additional liability of service tax - supply and washing of bedrolls to the passengers travelling in the trains - Held that - The issue raised in these present writ petitions is a matter of contract between the two parties and the same cannot be pronounced by this court at this stage prematurely. Neither the said issue for bearing additional tax liability has been adjudicated by any competent authority of the respondent-railway or the Service Tax Department nor the parties have raised this dispute before the agreed alternative forum of arbitration. There has been no novation of contract between the parties after July 1, 2012 with regard to variation of rates for the services rendered by the petitioner-contractor nor apparently the respondent-railway has agreed to bear the additional tax liability in the form of service tax after its imposition by the amendment of law with effect from July 1, 2012. This court respectfully cannot adopt the said view of the Delhi High Court in the case of GOVT OF NCT OF DELHI VERSUS MBL INFRASTRUCTURE LTD. 2012 (3) TMI 437 - DELHI HIGH COURT , in the present case as the terms of the contract are different and rates quoted are inclusive of all taxes and moreover the parties to the contract should have allowed the said issue to be either mutually agreed between the parties either by way of novation of the contract terms or by getting the matter adjudicated in the forum of arbitration. Unless the said additional service tax liability is ex-facie admitted in the contract, this court cannot either vary the terms of the contract nor direct the respondent-railway to reimburse the service tax liability to the petitioner-contractor. Petition dismissed.

Summary

Issues:
1. Liability of respondent to bear service tax under contract.
2. Interpretation of contract terms regarding taxes.
3. Existence of arbitration clause in the contract.
4. Applicability of previous judgments to the current case.

Issue 1: Liability of respondent to bear service tax under contract:
The petitioner sought a mandamus directing the respondent to bear the service tax liability imposed on the petitioner by law amendment from July 1, 2012. The petitioner argued that since the service tax law changed, the respondent should bear the additional tax liability incurred by the petitioner. However, the respondent contended that the rates quoted were inclusive of all applicable taxes, and thus, they were not liable to pay any additional charges. The court noted that the matter raised an abstract question about the interpretation of the contract terms and that no adjudication had been made by the tax department or railway authorities. The court concluded that within the existing contract terms, no mandamus direction could be given as there was no arbitrariness or illegality on the part of the respondent in denying the liability to bear the additional tax.

Issue 2: Interpretation of contract terms regarding taxes:
The contract explicitly stated that the rates quoted by the petitioner included all applicable taxes and levies. Additionally, clause 44 of the contract specified that statutory liabilities arising from various taxes would be deducted from the monthly bills. The respondent argued that the fares charged to passengers included the cost of washing linen, which already accounted for the service tax component. The court emphasized that the issue raised was contractual between the parties and should be resolved through arbitration or mutual agreement, as no novation of contract had occurred post the law amendment.

Issue 3: Existence of arbitration clause in the contract:
While both parties acknowledged the presence of an arbitration clause in the contract, no effort had been made to pursue arbitration in the present case. The court highlighted that the dispute should have been referred to the Chief Commercial Manager of South Western Railway for a final decision as per the contract terms. The failure to engage in arbitration hindered the resolution of the issue regarding the service tax liability.

Issue 4: Applicability of previous judgments to the current case:
The court distinguished a previous judgment of the Delhi High Court, emphasizing that the terms of the contract in the present case were different. The court noted that unless the additional service tax liability was explicitly mentioned in the contract, it could not direct the respondent to reimburse the petitioner. The court found that the previous judgment did not apply to the current situation due to variations in contract terms and the absence of mutual agreement or arbitration on the tax liability issue.

In conclusion, the court dismissed the writ petitions as it found no merit in the petitioner's claims. The court emphasized the importance of resolving contractual disputes through arbitration or mutual agreement and highlighted that without explicit contractual provisions, it could not alter the terms to impose the service tax liability on the respondent.