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2025 (3) TMI 849 - HC - Service TaxReimbursement of service tax component in terms of tender documents followed by contract in the light of subsequent amendment of law relating to Service Tax Regime w.e.f. 1.7.2012 - arbitration clause barring the invocation of writ jurisdiction for the resolution of disputes concerning the reimbursement of the service tax component. Arbitration clause barring invocation of writ jurisdiction - HELD THAT - The arbitration clause is hit by the Apex Court decision in CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION vs. ECI SPIC SMO MCML (JV) 2024 (11) TMI 542 - SUPREME COURT (LB) . Therefore the subject arbitration clause is liable to be ignored for all practice purposes. Secondly the question is not as to the liability to pay the service tax in respect of services in question; it is essentially as to who should pay this in the light of change of legal regime of taxation post conclusion of contracts - there being no repudiation of liability for discharging the service tax it cannot be argued that there is an arbitrable dispute merely because a question as to who should pay eventually arises. An arbitration clause of the kind even otherwise does not constitute a China Wall against exercising writ jurisdiction. In appropriate cases Writ Court can grant relief when the answering respondent happens to be Article 12-Entity - It is not that the Writ Courts should invariably deny relief merely because the other side disputes the fact matrix provided that the disputed facts can be ascertained from the pleadings record. Liability of Railways to Reimburse Service Tax - HELD THAT - On the principle of reimbursement as such there is no dispute at all. The dispute is the extent of reimbursement in the sense that what is payable by way of service tax because of paradigm shift in the Legal Regime with effect from 1.7.2012 i.e. post-contract period. Interpretation of Tender/Contract Clauses - HELD THAT - Section 83 of Finance Act 1994 read with Sections 12A 12B of Central Excise Act 1944 raises a presumption that the incidence of duty can be passed on to the buyer unless contrary is proved and therefore being an indirect tax has to be borne by the service recipient vide Satya Developers Pvt. Ltd. vs. Pearey Lal Bhawan Association 2015 (10) TMI 2667 - DELHI HIGH COURT and Meattles Pvt. Ltd. Vs. HDFC Bank Ltd. 2012 (10) TMI 685 - DELHI HIGH COURT - When the contracts in question were entered into in the year 2011 both the parties had not contemplated change of legal regime with effect from 1.7.2012 from Positive List to Negative List eventually giving rise to new tax liability. It is not just change of rates of tax but very taxability. Analogous Application of Section 64A of the Sale of Goods Act 1930 - HELD THAT - Section 64A as such cannot be invoked because the case does not relate to tax on goods; however that does not mean that the wisdom of its underlying principle cannot be made use of by analogy - The recipient of services like the buyer of goods has to bear the new levy of service tax occasioned by State action namely the amendment to Finance Act 1994 w.e.f. 01.07.2012 which obviously is post conclusion of contracts in question. Any other answer or view would strike at reason at law and at logic. Conclusion - i) The arbitration clause did not preclude the exercise of writ jurisdiction in this case given the nature of the dispute and the status of the respondent as an Article 12-Entity. ii) The Railways are liable to reimburse the service tax component to the appellant with interest due to the change in the legal regime post-contract. iii) New tax liabilities arising from state action should be borne by the service recipient drawing an analogy to Section 64A of the Sale of Goods Act 1930. iv) A Writ of Mandamus issues directing the respondent-South Western Railway to reimburse to the appellant all that amount which it has paid by way of service tax with 9% interest p.a. from the date the amount became payable within eight weeks. The impugned order of the learned Single Judge is set aside - appeal allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Arbitration Clause and Writ Jurisdiction The Court examined whether the arbitration clause in the agreements barred the invocation of writ jurisdiction. The arbitration clause stated that disputes would be referred to the Chief Commercial Manager of South Western Railway, whose decision would be final. However, the Court found that this clause was not an absolute bar to writ jurisdiction. The Court referenced the Apex Court decision in CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION vs. ECI SPIC SMO MCML (JV) 2024 SCC Online SC 3219, which influenced the decision to disregard the arbitration clause for practical purposes. The Court also noted that the issue was not about the liability to pay service tax but about who should bear the cost due to the change in the legal regime post-contract. The Court emphasized that writ jurisdiction could be exercised when the respondent is an Article 12-Entity, as supported by the precedent in R.D. SHETTY vs. INTERNATIONAL AIRPORT AUTHORITY OF INDIA AIR 1979 SC 1628. 2. Liability of Railways to Reimburse Service Tax The Court analyzed the Railways' stance from its legal reply notice, where it admitted that the service tax is an indirect tax collected from the service receiver. The Railways had already discharged the service tax portion to the appellant, asserting that the cost as per tenders included the service tax portion. The Court found that there was no dispute about the principle of reimbursement, but rather about the extent of reimbursement due to the change in the legal regime. The Court determined that the Railways' obligation to reimburse the service tax component was consistent with its admissions and the statutory provisions under the Finance Act, 1994, and Central Excise Act, 1944. 3. Interpretation of Tender/Contract Clauses The Court considered the argument that the Price Bid included all applicable taxes and levies, as stated in the tender documents. The Court found this argument unconvincing, noting that the Railways had already reimbursed the service tax component at the agreed rate. The Court emphasized that the Railways, as the service recipient, had an obligation to discharge the tax component. The Court referenced Section 83 of the Finance Act, 1994, which presumes that the incidence of duty is passed on to the buyer unless proven otherwise, reinforcing the obligation of the service recipient to bear the tax burden. 4. Analogous Application of Section 64A of the Sale of Goods Act, 1930 The Court explored the analogous application of Section 64A of the Sale of Goods Act, 1930, which addresses the adjustment of contract prices due to changes in tax laws. The Court acknowledged that while Section 64A does not directly apply to services, its underlying principle could guide the resolution of the case. The Court reasoned that a new tax levy imposed post-contract should be borne by the service recipient, similar to how increased taxes on goods are handled under Section 64A. The Court concluded that the Railways, as the service recipient, should bear the new service tax liability arising from the legal regime change. SIGNIFICANT HOLDINGS The Court held that the arbitration clause did not preclude the exercise of writ jurisdiction in this case, given the nature of the dispute and the status of the respondent as an Article 12-Entity. The Court established that the Railways are liable to reimburse the service tax component to the appellant, with interest, due to the change in the legal regime post-contract. The Court's reasoning emphasized the principle that new tax liabilities arising from state action should be borne by the service recipient, drawing an analogy to Section 64A of the Sale of Goods Act, 1930. The final determination was to allow the appellant's writ petitions, directing the Railways to reimburse the service tax amount with interest.
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