Contractor Must Bear Service Tax Liability Under Contract Clauses 9.3 and 6, Not Service Recipient

The SC held that the service tax liability rested with the contractor (respondent) as per the contract terms. Clause 9.3, read with clause 6 of the contract, clearly imposed the obligation to bear service tax on the contractor for services rendered. The appellant, as the service recipient, was not liable to pay or reimburse the service tax. The respondent's refusal to accept deductions was unfounded since the contract explicitly assigned tax liability to the contractor. The HC's interference with the arbitrator's decision was unwarranted, and the SC upheld the arbitrator's ruling that the contractor must bear the service tax liability.

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Issues Involved:
1. Whether the appellant was right in deducting the service tax from the bills of the respondent under clause 9.3 of the contract.
2. Whether the interpretation of clause 9.3 by the arbitrator was against the terms of the contract and therefore illegal, or whether it was a possible view.

Issue-wise Detailed Analysis:

1. Deduction of Service Tax by the Appellant:

The core issue revolves around clause 9.3 of the contract, which states: "The Contractor shall bear and pay all taxes, duties and other liabilities in connection with discharge of his obligations under this order." The appellant, a government undertaking, deducted 5% service tax from the respondent's bills for the period 30.11.1997 to 6.8.1999. The respondent, a transportation firm, disputed these deductions, leading to arbitration.

The arbitrator held that the respondent was liable for the service tax as per clause 9.3, noting that the contract referred to the respondent as the 'handling contractor' responsible for handling iron and steel materials. The arbitrator concluded that the service tax was directly connected to the discharge of the respondent's obligations under the contract.

The High Court, however, set aside the arbitrator's award, stating that the appellant, as the assessee under the service tax law, was liable to pay the tax. The Division Bench upheld this view, emphasizing that there was no specific clause allowing the appellant to deduct service tax from the respondent's payments.

2. Interpretation of Clause 9.3 by the Arbitrator:

The appellant argued that clause 9.3 clearly stipulated that the contractor would bear all taxes arising from the discharge of his obligations, including service tax. The appellant contended that the arbitrator's interpretation was correct or at least a possible view. They cited precedents where courts refrained from interfering with arbitrators' interpretations of contract terms unless they were patently illegal or beyond jurisdiction.

The respondent countered that the appellant, as the assessee, was liable for service tax and that clause 9.3 did not imply a right to shift this tax liability. They argued that the arbitrator should have applied the principle of contra proferentem, interpreting any ambiguity against the drafter (the appellant).

The Supreme Court noted the evolution of service tax law, initially placing the liability on the service provider and later, through amendments, on the service recipient. The contract was signed before these amendments, and the parties' intention at the time was crucial. The Court found that clause 9.3 was meant to ensure the contractor bore all tax liabilities arising from their obligations, aligning with commercial practices where tax burdens are often shifted contractually.

The Court emphasized that the arbitrator's interpretation was a possible view, and courts should not substitute their evaluation for that of the arbitrator. They referenced multiple cases underscoring the limited scope of judicial intervention in arbitral awards, particularly regarding contract interpretation.

Conclusion:

The Supreme Court concluded that the appellant was justified in deducting the service tax under clause 9.3, as it was a liability arising from the respondent's contractual obligations. The arbitrator's interpretation was deemed a possible view, and the High Court erred in interfering with the award. The appeal was allowed, setting aside the High Court's judgments and upholding the arbitrator's award.

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