2019 (8) TMI 263 - HC - Service Tax

Scope of the contract - collection of service tax from the parties by enforcing bank guarantee - power of Power Distribution Company to initiate recovery proceedings - mere audit objection raised by the Accountant General as regarding liability admissible under the Service Tax Law - HELD THAT - We are in no confusion to hold that in absence of adjudication by the respondent Department on the issue, we are not required to express ourselves as to whether the contract executed by the petitioner was exigible to service tax and if the answer was Yes , then the extent of liability to be suffered by each of the party. We would leave such determination at the wisdom of the Department to come to a just conclusion on the issue obviously, in a duly constituted proceeding and on hearing the parties. Whether the act of the Power Distribution Company to mechanically proceed on the audit objection of the Accountant General to make realization of the service tax from the bills of the petitioner by enforcement of the Bank Guarantee is justified? - HELD THAT - It is not a case that while making payment of the bill of the petitioner, any amount was deducted by the Power Distribution Company rather having made payment for execution of the contract in question that when audit objection came they have chosen to enforce the Bank Guarantee to realize that amount of service tax which as per their own statement, was actually payable by them in terms of the notification bearing no. 30 of 2012 dated 20.06.2012 - Since this is purely a contractual dispute and requires interpretation of the terms of the contract, we leave it open for the parties to resolve the issue of payability before the appropriate forum. The respondents no. 2 to 4 are directed to remit the amount recovered within a period of eight weeks from today - petition allowed.

Issues Involved:
1. Jurisdiction of Power Distribution Company to recover service tax without adjudicatory proceeding.
2. Legality of recovery of service tax based on audit objection.
3. Authority to enforce Bank Guarantee for service tax recovery.
4. Interpretation of contractual terms regarding service tax liability.
5. Compliance with legal provisions for service tax collection and payment.

Issue 1: Jurisdiction of Power Distribution Company
The primary issue in this judgment revolves around the jurisdiction of the Power Distribution Company to recover service tax without the initiation of any adjudicatory proceeding by the competent authority under the Service Tax Act. The court questioned whether the Power Distribution Company had the lawful authority to issue a notice for recovery and enforce a Bank Guarantee based solely on an audit objection raised by the Accountant General, without a formal assessment of service tax liability. The court highlighted the absence of any statutory provision allowing a service recipient to deduct service tax from the bill of a service provider, emphasizing the responsibility of the service provider for service tax collection and payment under the Finance Act, 1994.

Issue 2: Legality of Recovery based on Audit Objection
The court examined the legality of the Power Distribution Company's actions in recovering service tax following an audit objection, amounting to ?25,03,919. The court noted that the recovery was not supported by any adjudicatory order from the Service Tax Department, raising concerns about the company's authority to enforce the recovery. The court emphasized that the recovery was without jurisdiction, as there was no provision allowing a service recipient to deduct service tax from the service provider's bill. The court highlighted the misapprehension of legal position by the Power Distribution Company in mechanically following the audit objection without proper legal sanction.

Issue 3: Authority to Enforce Bank Guarantee
Regarding the enforcement of the Bank Guarantee for service tax recovery, the court found that the Power Distribution Company had no legal basis to enforce the guarantee for realizing service tax, especially without contractual violation by the petitioner. The court emphasized that the company's actions lacked lawful sanction and constituted a misinterpretation of contractual obligations. The court directed the company to restore the Bank Guarantee and remit the recovered amount within a specified timeframe, confirming an interim order issued earlier.

Issue 4: Interpretation of Contractual Terms
The judgment delved into the interpretation of contractual terms regarding service tax liability between the petitioner and the Power Distribution Company. The court highlighted conflicting submissions regarding the liability for service tax payment, with the Power Distribution Company admitting to sharing 50% of the liability. The court emphasized the need for a proper adjudication by the competent authority under the Service Tax Department to determine the taxability of the contract and the extent of liability for each party.

Issue 5: Compliance with Legal Provisions
The court expressed dissatisfaction with the laid-back attitude of the Service Tax Department in resolving taxability and liability issues, despite the matter being pending for two years. The judgment underscored the importance of a formal adjudication process by the Department to determine the tax liability and ensure compliance with legal provisions. The court urged the parties to resolve contractual disputes through appropriate forums, emphasizing the need for a just conclusion based on a duly constituted proceeding and hearing of all parties involved.

In conclusion, the judgment quashed the notices issued by the Accounts Officers for service tax recovery, highlighting the illegal nature of the actions taken by the Power Distribution Company without proper legal authority. The court directed the company to remit the recovered amount and confirmed an interim order for restoring the Bank Guarantee.

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