2010 (10) TMI 137 - HC - Service Tax

Lessee bears service tax burden in favor of plaintiff, granted declaratory relief

PEAREY LAL BHAWAN ASSOCIATION Versus SATYA DEVELOPERS PVT LTD

The court ruled in favor of the plaintiff, holding that the burden of service tax falls on the lessee (defendant). The plaintiff was granted declaratory ... Right to recover service tax from the recipient of services - that unless a different intention appears from the terms of the contract, in case of the imposition or increase in the tax after the making of a contract, the party shall be entitled to be paid such tax or such increase. Although there is no explicit provision to that effect, enabling lessors such as the plaintiff, to the service tax component, this Court is of the view that there is sufficient internal indication in the Act, through Section 83 read with Section 12-A and Section 12-B suggesting that the levy is an indirect tax, which can be collected from the user (in this case, the lessee) User / recipient of services latter is liable to pay and refund the service tax liability. The plaintiff (service provider) is also entitled to the amounts claimed Issues Involved:1. On whom does the incidence of taxation fall, in this case, having regard to the materials and documents on the record.2. Is the plaintiff entitled to the money decree, as claimed, or any other relief.3. Relief.Issue-wise Detailed Analysis:Issue No. 1: Incidence of TaxationThe primary issue is whether the burden of service tax, levied on the service or facility of leasing the suit premises, should be borne by the lessor (plaintiff) or the lessee (defendant). The plaintiff argues that service tax is an indirect tax on the service, not the service provider, and thus should be borne by the user of the service, i.e., the lessee. They rely on several judgments, including those from the Madras High Court, Madhya Pradesh High Court, Supreme Court, and Allahabad High Court, which support the view that service tax is to be collected from the user of the service.The defendant, however, contends that according to the lease agreement, all taxes should be borne by the plaintiff. They cite specific clauses in the lease deed that stipulate the lessor's responsibility to pay all taxes. The defendant also argues that service tax is a tax on property and that any grievance regarding its imposition should be directed to the Central Government.The court notes that the parties did not anticipate this kind of levy when entering their agreement. The Supreme Court's interpretation in All India Federation of Tax Practitioners v. Union of India clarifies that service tax is an indirect tax, suggesting that it should be borne by the service user. Additionally, Section 64-A of the Sale of Goods Act, 1930, supports the view that increased taxes after a contract should be borne by the user unless the contract states otherwise.The court concludes that service tax is an indirect tax to be borne by the user, i.e., the lessee, thus ruling in favor of the plaintiff on this issue.Issue No. 2: Entitlement to Money DecreeThe plaintiff seeks a declaration and consequential injunction that the service tax liability should be borne by the defendant, along with money decrees for specific amounts paid towards service tax. The plaintiff has provided documents showing the amounts paid for service tax liability for the period from 01.06.2007 to 31.03.2008. The court acknowledges that the levy had been held unconstitutional during the pendency of the suit but notes that this judgment is pending appeal.Given the findings on the first issue, the court determines that the plaintiff is entitled to the declaration and injunctions claimed, as well as the amounts specified in the money decrees. Therefore, the second issue is resolved in favor of the plaintiff.Issue No. 3: ReliefIn light of the findings on Issues 1 and 2, the court decrees the suits in favor of the plaintiffs, granting the reliefs sought. It is clarified that this is subject to the final outcome of the appeal regarding the constitutionality of the service tax levy. The plaintiff is also awarded costs in both suits.Conclusion:The court rules that the service tax burden falls on the lessee (defendant) and grants the plaintiff the declaratory and injunctive reliefs sought, along with the money decrees for the amounts paid towards service tax. The judgment is subject to the final decision on the appeal regarding the service tax levy's constitutionality.