Service tax deduction from contractor bills requires express contractual authority; arbitral award set aside for misreading the contract.

Where a service recipient was treated as the assessee under the service tax regime, it could not unilaterally deduct service tax from the contractor's bills in the absence of an express contractual stipulation authorising such recovery. The contract generally placed tax burdens on the contractor, but it contained no specific deduction clause, and Clause 9.3 did not create a right of reimbursement by deduction. The arbitral award allowing the deduction was founded on misreading the agreement and ignoring the statutory incidence of service tax, so the HC held it was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

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Issues: Whether, in the absence of an express contractual stipulation, the service recipient who was treated as the assessee under the service tax regime could deduct service tax paid to the department from the contractor's bills, and whether the arbitral award allowing such deduction was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

Analysis: The agreement placed the liability to bear taxes and duties generally on the contractor, but it contained no specific clause authorising deduction of service tax from amounts payable to the contractor. The service tax scheme treated the recipient of the notified service as the assessee, so the legal incidence of payment fell on the appellant as recipient, not on the respondent contractor. Clause 9.3 did not create a right of recovery by deduction in favour of the appellant, and the arbitrator's contrary reading of the contract ignored the statutory scheme and the absence of an express deduction clause. An award founded on such misinterpretation of the basic document and disregard of the governing law was unsustainable.

Conclusion: The respondent contractor was not liable to reimburse the service tax by deduction from its bills, and the arbitral award was rightly set aside.

Ratio Decidendi: In the absence of an express contractual term, a party legally liable as service tax assessee cannot recover that tax from the other contracting party by unilateral deduction from bills, and an arbitral award based on such recovery is liable to be interfered with for misinterpretation of the contract and the governing statute.

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