Liability of service tax is decided by contract between parties: HC

NT Correspondent

Bengaluru: The liability of paying the service tax lies on the shoulders of the party decided as per the contract between the parties, the High Court has said.

Though the Life Insurance Corporation (LIC) was the recipient of services, the contract it had with the lessor of a property stipulated that under some conditions, the lessee would pay the service tax.

The LIC had filed an appeal before the HC challenging the order of a single judge bench which had held that the company was liable to pay the service tax that included Rs.18.53 lakh in tax, Rs.12.25 in interest and Rs.4.63 lakh in penalty.

LIC had a lease agreement with Ms Kale Gowda Enterprises in Mandya. The company’s advocate argued that, “the liability to pay the service tax cannot be denied is true; however, on whose shoulders such liability rests is a matter of contract between the parties namely, the service provider and the service recipient; under the arrangement in question, such an obligation lies with the service provider only.”

The Division Bench however agreed with the judgement of the single judge who had cited the Supreme Court case of Union of India Vs Bengal Shrachi Housing Development Limited which had held that “Service tax is an indirect tax and therefore it can be passed on by the service provider to the recipient of service.”

The HC noted that under the terms of a contract between the two parties, a condition was incorporated that the service provider has to pay all taxes. However, there was also an exception to the rule in the Contract which said that “In case of failure by the lessors to pay the said amount dues as above, the lessee shall have the right to pay the said amounts upon receipt of the notice on it by the said authorities and deduct the same out of the monthly rent payable to the lessors."

Considering the Delhi High Court judgement in Meattles Pvt Ltd vs. HDFC Bank, the HC noted that “The legislative intent, therefore, is quite clear i.e. the service tax is to be ultimately borne by the recipient of the service, though it is the service provider who is statutorily liable to pay the said tax to the exchequer."

Disposing the Appeal, the HC said that LIC, after paying the tax, was still open for it to recover the money from the service provider b y way of reimbursement.