By TIOL News Service

NEW DELHI, NOV 08, 2017: BY a deed of lease between the lessor and the lessee (UOI) for a period of three years at a rent of Rs.16,34,967/- per month, it was agreed that:

"6. 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 ."

Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises, a writ petition was filed by the Respondents before the Calcutta High Court.

The single Judge, referred to the aforesaid Clause 6 in the deed of lease between the parties and further went on to refer to a judgment of the Delhi High Court in  Pearey Lal Bhawan Association v. M/S. Satya Developers Pvt. Ltd., =  2011-TIOL-114-HC-DEL-ST, in which it was held that as the authorities in that case did not visualize that a service tax levy would be made in respect of lease or rentals of commercial properties and that since the levy was made effective only from 2007 onwards, it was held that as service tax is essentially an indirect tax, the user of the premises who avails the service has to bear it . Accordingly, it was held that the lessee should be made to pay service tax . The Allahabad High Court judgment in M/s Bhagwati Security Services (Regd.) v. Union of India =  2014-TIOL-33-HC-ALL-ST was followed.

Inasmuch as it was held that liability to bear service tax being that of the recipient of the service, there cannot be an escape from the conclusion that the Appellants i.e. the Union of India would be liable to pay the said tax.

An appeal to the Division Bench yielded the same result.

Therefore, a Civil Appeal came to be filed before the Supreme Court by the Union of India.

Adverting to the relevant statutory provisions contained in the Finance Act, 1994 viz. section 65, 66, 66B, 68, the Service Tax Rules, 1994 namely rule 2(1)(d), 4, the Apex Court observed -

+ A reading of the Act and the Rules, therefore, makes it clear that "assessee", as defined, means the person liable to pay service tax under the Act. In the present case, we are concerned with the taxable service of renting of immovable property. It is clear that under Section 66B, the levy of service tax at the rate of 12% is on the value of the service of renting of immovable property that is provided or agreed to be provided by one person to another and collected in such manner as may be prescribed. Section 68 whose marginal note reads - "payment of service tax", makes it clear that it is the person providing the taxable service to another, who is to pay service tax at the rate specified in Section 66B, in such manner and within such period as may be prescribed, unless otherwise specified by the Central Government. Therefore, the person liable for paying service tax is to be determined on a reading of the Rules.

+ When we come to the Rules, it is clear that under Rule 2(1)(d), the person liable for paying service tax, where the service of renting immovable property is agreed to be provided by the Government, is the provider of such service. Even in a converse situation, which is the situation in the facts of the present case, it is the provider of the service alone, who is liable for paying service tax .

+ The question with which we are faced is the meaning to be given to the expression "primarily leviable on the lessor" in Clause 6 of the deed of lease dated 1.9.2012.

Referring to the decisions in Tamil Nadu Kalyana Mandapam Assn v. Union of India & Ors. =  2004-TIOL-36-SC-ST, All India Federation of Tax Practitioners & Ors. v. Union of India & Ors.=  2007-TIOL-149-SC-ST, Association of Leasing & Financial Service Companies v. Union of India =  2010-TIOL-87-SC-ST-LB, the Supreme Court noted -

++ It is thus clear, on a conspectus of the authorities of this Court, that service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service . Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts. Thus, in  Babu Ram Jagdish Kumar & Co. v. State of Punjab, (1979) 3 SCC 616, this Court made it clear that, in the case of a purchase tax, the "taxable event" is the purchase of paddy, whereas the "taxable person", who is the person liable to pay the tax, is the purchaser.

++ In the present case, therefore, the "taxable event" is the provision of the service of renting out immovable property, and the "taxable person", that is the person liable to pay tax, is the service provider, namely the lessor.

++ The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax.

++ In the present case, it is clear that the expression "primarily leviable upon" has reference to the "taxable person", i.e. the person who is liable to pay the tax . The tax that is levied on "service" may be collected either from the service provider or the recipient of the service. The person assessed to tax, who is primarily liable to pay the tax is, on the facts of this case, the lessor.

++ Therefore, when the expression "primarily leviable" is used in relation to a person and not an activity, it has reference to the assessee upon whom assessment is made under the Act. Thus construed, it is clear that, in the present case, the person liable to pay the tax, who is the assessee under the said Act, in all cases like the present, is only the service provider and not the recipient of the service .

Towards the end of the argument, the respondent referred to the sanction letter of 27th April, 2012 issued by the Government of India conveying sanction for hiring of the lease premises, in the present case, to the Director General, Indian Coast Guard, and which specifically states:

"…… The registration charges, stamp duty, service taxes, etc. (if applicable) is the liability of the lessee ……"

The Supreme Court, therefore, observed -

"36. This being the case, though in law and under clause 6 of the lease deed the Appellant is not required to pay service tax, we are loathe to upset the finding of the learned single Judge based upon a letter by the Appellant to the Respondent in which the Appellant has expressly stated that it was liable to pay service charges . Having thus clarified the legal position, given the sanction letter of 27th April, 2012 and the letter dated 30th April, 2012, in which it was made clear that the Union of India alone will bear the service charges, we refuse to exercise our discretion under Article 136 of the Constitution of India in favour of the Union of India. Thus, the impugned Division Bench judgment is set aside on law, but the appeal fails on the facts of the present case."

(See 2017-TIOL-414-SC-ST)