2012 (4) TMI 577 - HC - Service Tax

Property lease dispute: Tax liability, res judicata principles upheld. Review applications dismissed.

The respondent, as the property owner, leased portions of a property to the appellant with clauses on tax payment. Disputes arose over service tax ... Liability to pay service tax on renting of immovable property - contractual allocation of indirect tax liability - effect of subsequent lease agreement altering tax liability - res judicataLiability to pay service tax on renting of immovable property - contractual allocation of indirect tax liability - effect of subsequent lease agreement altering tax liability - Construction of the lease deeds and the party liable to bear the service tax payable on rent - HELD THAT: - The Court examined the lease deeds dated 09.10.2006 and 14.05.2009. Clause-5 of the 09.10.2006 lease recorded the lessor undertaking to pay taxes, but the 14.05.2009 lease contained clause-2 expressly stating that any tax, penalty or demand imposed on the lease by any statutory authority shall be payable by the lessee. The Finance Act, 2007 (introducing service tax on renting for business use) had come into force before the 14.05.2009 lease was executed. The Court held that parties, being conscious of the new statutory levy, contracted accordingly in the later lease. As the service tax is an indirect tax, its ultimate incidence can be fixed by contract between the parties; accordingly, the clear contractual stipulation in the 14.05.2009 lease that the lessee shall pay taxes governs the liability for the service tax in respect of that lease. [Paras 24, 25, 26, 27, 28]The clause in the lease dated 14.05.2009 fixing taxes on the lessee governs the liability for the service tax; appeals dismissed in limine.Res judicata - Applicability of earlier judgment (res judicata) adverse to the appellant in respect of leases executed before and after the Finance Act, 2007 - HELD THAT: - The Court noted that the earlier judgment (dated 20.10.2010) concerning the 09.10.2006 lease had restricted clause-5 to taxes levied as of that date, because the Finance Act, 2007 was not then in contemplation. Although the appellant argued that res judicata could not apply to the 14.05.2009 lease executed after the Finance Act, the Court observed that it would be pointless to remit the matter for fresh adjudication because the 14.05.2009 lease expressly allocates tax liability to the lessee. Therefore, any contention on res judicata was rendered academic by the clear subsequent contractual provision. [Paras 13, 21, 22, 24]The question of res judicata in relation to the earlier lease was noted but rendered academic by the express allocation in the later lease; no fresh adjudication ordered.Final Conclusion: The appeals are dismissed: the lease dated 14.05.2009, executed after the Finance Act, 2007, expressly makes the lessee responsible for taxes/demands on the lease including the service tax, and therefore the lessee is liable to reimburse the respondent; the Court declined to remit the matter for fresh adjudication. Issues involved: Interpretation of lease deeds, liability for service tax, res judicata, review application dismissalInterpretation of Lease Deeds:- The respondent, as the property owner, leased two portions of a property to the appellant at an agreed rent.- The lease deeds contained clauses regarding the payment of taxes and levies imposed by authorities.- A subsequent lease executed after the insertion of a service tax provision led to a dispute over the reimbursement of service tax paid by the respondent.- The respondent filed suits seeking reimbursement based on the interpretation of the lease deeds.- The Single Judge decreed the suits, interpreting the clause in the lease deed to mean that the lessor undertook the liability for taxes levied at the time of lease execution.- Further suits were filed by the respondent for subsequent periods, which were also decreed based on the principle of res judicata.Liability for Service Tax:- The insertion of a service tax provision post-lease execution led to a disagreement between the parties on who should bear the burden of the tax.- The appellant argued that the lease deed clause placed the responsibility on the lessor to pay all taxes and levies.- The respondent contended that the service tax could be passed on to the lessee based on the lease agreement terms.Res Judicata:- The issue of liability for service tax was deemed to be covered by a previous judgment, invoking the principle of res judicata.- The parties agreed to be bound by the decision in a related case, subject to their rights of appeal.Review Application Dismissal:- Review applications were filed by the appellant but were dismissed without merit, despite the issuance of notices.- The appellant raised grievances regarding the dismissal, arguing that the concessions recorded in previous orders were not made by them.This summary provides a detailed breakdown of the judgment, highlighting the key legal issues and outcomes related to the interpretation of lease deeds, liability for service tax, application of res judicata, and the dismissal of review applications.