Supreme Court Upholds Lessee's Service Tax Liability Based on Communications

The Supreme Court set aside the Division Bench judgment on legal interpretation but upheld the factual finding that the lessee (Union of India) was liable to pay the service tax based on letters and communications between the parties. The appeal was dismissed, reinforcing the lessee's obligation to bear the service tax as per their own communications.

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Issues Involved:
1. Liability to pay service tax under the lease agreement.
2. Interpretation of Clause 6 of the lease deed.
3. Applicability of relevant statutory provisions and rules to determine the liable party.
4. Judicial precedents and their relevance to the case.
5. Letters and communications between the parties affecting liability.

Detailed Analysis:

1. Liability to Pay Service Tax Under the Lease Agreement:
The core issue revolves around who is responsible for paying the service tax under the lease agreement dated 1.9.2012. The lease agreement stipulated that the lessor would pay all rates, taxes, and charges primarily leviable upon them, while the lessee (Government) would pay those primarily leviable upon the occupier. Disputes arose, leading to a writ petition by the lessor, which was decided by the Calcutta High Court in favor of the lessor. The single judge and the Division Bench both concluded that the lessee (Union of India) was liable to pay the service tax.

2. Interpretation of Clause 6 of the Lease Deed:
Clause 6 of the lease deed is pivotal, stating: “The lessor/lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes primarily leviable upon the occupier shall be paid by the Government.” The appellants argued that service tax, being primarily leviable on the lessor, should be borne by the lessor. The respondents contended that service tax, as an indirect tax, should be borne by the lessee, who is the recipient of the service.

3. Applicability of Relevant Statutory Provisions and Rules:
The court examined various provisions of the Finance Act, 1994, including Sections 65, 66, 66B, and 68, along with the Service Tax Rules, 1994. The Act and Rules indicated that the service provider (lessor) is the person liable to pay service tax. The court emphasized that service tax is an indirect tax, meaning it can be passed on to the recipient of the service, but the primary liability remains with the service provider.

4. Judicial Precedents and Their Relevance to the Case:
The court referred to several precedents, including Tamil Nadu Kalyana Mandapam Assn v. Union of India, All India Federation of Tax Practitioners v. Union of India, and Association of Leasing & Financial Service Companies v. Union of India, which clarified that service tax is an indirect tax and a value-added tax on the activity of providing service. The court distinguished between the taxable event (provision of service) and the taxable person (service provider). The court also discussed cases like Pearey Lal Bhawan Association v. M/S. Satya Developers Pvt. Ltd. and Raghubir Saran Charitable Trust v. Puma Sports India Pvt. Ltd., noting that these cases turned on specific contractual language and facts.

5. Letters and Communications Between the Parties Affecting Liability:
The court examined a sanction letter dated 27th April 2012 and a letter dated 30th April 2012, which indicated that the lessee (Government) would bear the service tax. The learned single judge relied on these letters to conclude that the lessee was liable to pay the service tax. Despite the legal interpretation of Clause 6, the court decided not to overturn the finding based on these letters, emphasizing the specific acknowledgment by the lessee of their liability to pay service tax.

Conclusion:
The Supreme Court set aside the Division Bench judgment on the legal interpretation but upheld the factual finding that the lessee (Union of India) was liable to pay the service tax based on the letters and communications between the parties. The appeal was dismissed on the facts of the case, reinforcing the lessee's obligation to bear the service tax as per their own communications.

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