Contractual reimbursement of sales tax on freight component upheld where tax was legally leviable under the agreement.

A contract clause stating that sales tax, if legally leviable, would be paid in addition to the contract price created a contractual obligation on the Central Government to reimburse tax on the freight component. As the freight component had already been treated as taxable under the Central Sales Tax Act, 1956 and the Rajasthan Sales Tax Act, 1954, the earlier observations denying any legal liability were based on the incorrect assumption that no such clause existed. Those observations could not stand where the contract expressly required payment of tax legally leviable from the supplier, and they were deleted to that extent.

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Issues: Whether the earlier observations denying any legal liability of the Central Government to reimburse sales tax on the freight component were required to be deleted in view of the contract clause providing payment of sales tax legally leviable.

Analysis: The review record showed that the rate contract contained a clause stating that sales tax, if legally leviable, would be paid in addition to the contract price. Since the freight component had been held taxable under the Central Sales Tax Act, 1956 and the Rajasthan Sales Tax Act, 1954, the contract created a liability on the Central Government to reimburse the sales tax on that component. The earlier observations proceeded on an incorrect assumption that no such contractual clause existed, and those observations could not stand where the contract expressly bound the Government to pay tax legally leviable from the supplier.

Conclusion: The review was allowed to the extent that the impugned observations were deleted insofar as they related to contracts containing such a reimbursement clause, and the Central Government was held bound to reimburse the sales tax on the freight component.

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