ST - It would be too much to assume that a tax which did not exist at time when bid was submitted would also be a liability of Petitioner - Railways to reimburse: High Court
By TIOL News Service
NEW DELHI, SEPT 07, 2018: IN response to the Tender Notice floated by the Railways, the petitioner had submitted his bid on 11th January 2003 and the relevant portion of the bid document reads -
"Our quoted price is incisive [sic inclusive] of Central Taxes Duty, Sales Tax and Works contract Tax. The present rate of Central Excise duty and Sales Tax is Nil. The present rate of works contract tax is 1%. Any revision in these rates will be to Railway accounts. Further in case Excise Duty is levied by government on this work, the same shall be reimbursed by Railways."
Bid successful - A contract was subsequently entered into by the petitioner with the Railways on 15th July, 2003 and was deemed to come into force on 7th July, 2003.
The total cost of the contract was Rs.7.22 crores.
By the Finance (No.2) Bill, 2004 introduced on 8th July 2004, the Finance Act, 1994 was sought to be amended. Inasmuch as the scope of certain existing services was extended. Business Auxiliary Service was proposed to be expanded so as to include service relating to procurement of inputs, production of goods or provision of services on behalf of the client; however, activities amounting to manufacture were excluded from the scope of service tax.
The Petitioner then addressed a letter dated 9th August 2004 to the Railways informing them of the said proposal made in the Finance Bill and also took the stand that the Railways is liable to pay the same, as and when it becomes applicable.
Vide letter issued on 28th August, 2004 the Railways clarified that the price agreed in the contract was inclusive of all statutory levies of the Central/ State Governments.
The Finance (No.2) Bill, 2004 was enacted on 10th September 2004 and consequently service tax at 10% and cess on tax at 2% became applicable on the expanded definition of Business Auxiliary Services.
Thereafter, the Railways further obtained a clarification from the Ministry of Finance on 18th August, 2006 which mentions -
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2. The issue has been examined in consultation with the Ministry of Finance (Department of Revenue)/Central Board of Excise and Customs who have clarified that since the activity of welding rails into long length rails would amount to production or processing of goods for or on behalf of the client, and activity taxable under Business Auxiliary Service; therefore, Service Tax is leviable on the gross amount charged by the Service provider for such service provided or to be provided.
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Pursuant to the receipt of the said clarification, the Petitioner raised a claim with the Railways seeking reimbursement of the service tax payable along with the interest.
The said claim was for a total sum of Rs. 1.10 crores along with interest of Rs.90.70 lakhs.
The Railways rejected this claim and the matter came to be referred to arbitration.
The arbitral tribunal, after discussing the various issues raised by the Petitioner, in its award dated 9th November, 2012 came to the conclusion that since the liability to deposit service tax is on the Petitioner u/s 68 of the FA, 1994 and the price quoted by it was inclusive of all taxes, neither the service tax nor the interest component was liable to be reimbursed.
The present petition challenges the said award.
The petitioner places reliance on the apex court decision in Numaligarh Refinery Ltd. vs. Daelim Industrial Co. Ltd. (2007) 8 SCC 466 in support of their claim.
The counsel for the Respondent submitted that the clause in the agreement was quite clear that the price includes all statutory levies which may be imposed by the Central or State governments and under these circumstances, the Railways cannot be saddled with the liability to reimburse service tax; that the arbitral Tribunal had rightly held that the liability of service tax is on the service provider, and hence the Railways cannot be made to reimburse the same.
Incidentally, upon a query by the Court, the Petitioner clarified that though the contract was executed in 2003 and the services were rendered thereafter, till date, there has been no demand from the service tax department to the Petitioner for payment of service tax on the contracted amount. It is also admitted that no deposit of service tax has been made by the Petitioner .
The High Court, therefore, observed -
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"11. In this background, firstly, it is noticed that the contract between the parties clearly stated that all taxes have to be paid by the Petitioner. However, it would be too much to assume that a tax which did not exist at the time when the bid was submitted would also be a liability of the Petitioner. In fact, a perusal of the clause clearly indicates that excise duty, if levied, was to be reimbursed by the Railways. On services, no excise duty is imposed, however, service tax was imposed subsequent to the conclusion of the agreement."
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Relying upon the apex court judgment in Numaligarh Refinery Ltd. (supra) where it is held that if countervailing duty came into existence after the execution of the agreement, the same would not be the bidder's responsibility or obligation, the High Court concluded that the intention of the parties, in the present case, was not to pass on the liability of the service tax to the Petitioner; that the Petitioner was liable to the extent of the obligations which existed on the Bid date but not beyond that; that as service tax was imposed subsequently, the same would be reimbursable.
Nonetheless, the High Court added -
++ The fact that for more than 15 years, the Petitioner has not deposited the service tax, but is merely raising a claim for the entire service tax amount and the interest therein, shows that the Petitioner has not complied with the obligation under Section 68 of the Finance Act.
++ Since the entire issue is in the realm of fiction at this point inasmuch as the Petitioner has not deposited the service tax and obviously cannot claim reimbursement of an amount which it has not deposited, no monetary claim is allowable in this matter.
++ It is directed that if a demand is raised in future by the Service tax department, for the amount which is covered under this contract, upon the Petitioner depositing the said amount, it can approach the Railways for reimbursement at that stage.
The Petition was disposed of.
(See 2018-TIOL-1843-HC-DEL-ST)
