Service tax incidence may be passed on by a municipality to tenants absent statutory bar or constitutional exemption.

Service tax, as an indirect tax, may be passed on by a Municipality to tenants unless the statute expressly prohibits shifting the incidence, and contractual silence does not defeat that statutory entitlement. The text also states that levy of service tax on a Municipality does not breach Article 289 because a Municipality is not a State for that constitutional exemption, and the challenge based on Article 268A was unsupported. On that reasoning, the demand was upheld and the constitutional objections were rejected.

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Issues: (i) whether service tax, being an indirect tax, could be passed on by the Municipality to the tenants; (ii) whether the absence of an express contractual stipulation prevented the Municipality from recovering service tax from the tenants; (iii) whether levy of service tax on the Municipality violated Article 289 of the Constitution of India; and (iv) whether the demand was unsustainable with reference to Article 268A of the Constitution of India.

Issue (i): whether service tax, being an indirect tax, could be passed on by the Municipality to the tenants.

Analysis: Service tax was treated as an indirect tax and therefore as a tax on the service rather than exclusively on the service provider. The statutory scheme did not contain any prohibition against passing the burden to the recipient, unlike provisions where the legislature expressly prevents such transfer of incidence. The reasoning also drew support from the settled view that service tax can be passed on to the beneficiary of the service.

Conclusion: The Municipality could pass on service tax to the tenants.

Issue (ii): whether the absence of an express contractual stipulation prevented the Municipality from recovering service tax from the tenants.

Analysis: The right to recover the tax arose from the statute and not merely from contract. Since the tax could lawfully be passed on, the absence of an express clause in the tenancy arrangement did not extinguish the Municipality's entitlement to demand it. The writ jurisdiction was not the proper basis to defeat a statutory incidence of tax by relying only on contractual silence.

Conclusion: The absence of a contractual clause did not bar recovery from the tenants.

Issue (iii): whether levy of service tax on the Municipality violated Article 289 of the Constitution of India.

Analysis: Article 289 protects the property and income of a State from Union taxation, but a Municipality is not a State within the meaning of that Article. The constitutional scheme separately deals with Municipalities in Part IXA, and the definition of Municipality as an institution of self-government could not be extended to equate it with a State for the purpose of Article 289. Therefore, the levy on the Municipality did not attract the constitutional exemption.

Conclusion: Article 289 was not violated.

Issue (iv): whether the demand was unsustainable with reference to Article 268A of the Constitution of India.

Analysis: The challenge based on Article 268A was neither specifically pleaded nor supported by any sustainable basis in the record. In the absence of a substantiated constitutional infirmity, no ground was made out to invalidate the demand on this score.

Conclusion: The challenge based on Article 268A failed.

Final Conclusion: The demand for service tax was upheld, the constitutional challenges were rejected, and the writ petitions were dismissed.

Ratio Decidendi: Service tax, being an indirect tax, may be passed on to the recipient unless the statute expressly prohibits such transfer, and a municipality is not a State for the purpose of Article 289 of the Constitution of India.

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