Indirect tax burden can be contractually shifted where leases do not clearly exclude later-imposed service tax liability.

Service tax on renting of immovable property was treated as an indirect, destination-based consumption tax that could be contractually shifted between the parties, with Section 12B of the Central Excise Act as applied by Section 83 of the Finance Act creating a rebuttable presumption that the incidence had been passed on. On that basis, and applying the contractual allocation of burden, the recipient could be made to bear the tax absent a contrary term. The lease and maintenance clauses, read in their commercial setting, were held not to exclude a service tax introduced after execution, because references to municipal and local taxes did not extend to a later government levy. The tenants therefore remained liable to reimburse the service tax.

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Issues: (i) Whether service tax on renting of immovable property could, in the absence of a contrary contractual stipulation, be passed on to and recovered from the service recipient; (ii) Whether the lease deed and maintenance agreement excluded liability for service tax that arose after the agreements were executed.

Issue (i): Whether service tax on renting of immovable property could, in the absence of a contrary contractual stipulation, be passed on to and recovered from the service recipient.

Analysis: Service tax was treated as an indirect tax and a destination-based consumption tax. Section 83 of the Finance Act, 2007 made Section 12B of the Central Excise Act, 1944 applicable to service tax, creating a rebuttable presumption that the incidence of duty has been passed on to the buyer or recipient. The Court also relied on the equitable principle underlying Section 64A of the Sale of Goods Act, 1930 and on the settled position that, while the statute governs liability vis-a -vis the tax authorities, the parties may contractually shift the economic burden of the tax.

Conclusion: The service tax burden could be contractually shifted, and in the absence of a contrary term, the recipient would bear the burden as between the contracting parties.

Issue (ii): Whether the lease deed and maintenance agreement excluded liability for service tax that arose after the agreements were executed.

Analysis: The clauses relied upon by the tenants were construed as a whole and in their commercial setting. A clause requiring the lessor to pay taxes imposed by municipal and local authorities did not extend to service tax payable to the Government. The expression that the lessor shall "continue to pay" taxes was read as covering existing levies and not future imposts not contemplated when the contracts were made. Applying commercial interpretation and business commonsense, the Court held that the agreements did not exempt the tenants from the service tax liability introduced later.

Conclusion: The contractual clauses did not exclude liability for the subsequently introduced service tax, and the tenants remained liable to reimburse it.

Final Conclusion: The decrees in favour of the landlords were sustained because the contractual language did not displace the general rule permitting passing on of service tax and did not exempt the tenants from the later levy.

Ratio Decidendi: Service tax, being an indirect consumption tax, may be contractually shifted, and where the contract does not clearly exclude a later-imposed tax, the burden is recoverable from the recipient consistent with the contractual allocation of liability and the statutory presumption of passing on.

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