Contract of clearing and forwarding agent’s services entered into in 1998 providing that liability to pay service tax vested in service provider. Law amended retrospectively in 2000 to come into effect from 16-7-1997 to shift the liability to service recipient. The issue whether the change in legal provisions alter the legal rights or obligation arising out of contractual terms and whether or not the principal could deduct service tax from the bills of contractor — Held, nothing in law prevents<

Contract of clearing and forwarding agent’s services entered into in 1998 providing that liability to pay service tax vested in service provider. Law amended retrospectively in 2000 to come into effect from 16-7-1997 to shift the liability to service recipient. The issue whether the change in legal provisions alter the legal rights or obligation arising out of contractual terms and whether or not the principal could deduct service tax from the bills of contractor — Held, nothing in law prevents the parties from agreeing that burden of tax would be borne by the service provider — Hence, arbitrator took possible view of the relevant clause in the contract which could not be interfered by the High Court.

The appellant, a Government undertaking manufactures steel products and the respondent firm provided transportation service under a contract for handling goods from the stockyard of the appellant. The terms of contract provided that the contractor would have to bear all duties and taxes. However, the appellant was held ‘assessee’ under the law as the service tax law was retrospectively amended in the year 2000, whereby the recipient of ‘clearing and forwarding service’ was required to pay service tax to the Government as ‘assessee’. The appellant deducted such service tax paid by it to the Government from payments made to the respondent-contractor. According to the respondent, since the appellant was the ‘assessee’ under the law in terms of retrospective amendment made in the service tax law, the tax payment was the responsibility of the contractee-appellant and the terms in the agreement of the respondent’s responsibility of payment of tax was only in accordance with the provisions of law prevailing at the time of entering into agreement. (At the time of entering into agreement, the service provider had to discharge the obligation of service tax.) Arbitration award given in favour of the appellant was earlier set aside by the High Court with the observation that the purpose of the relevant clause in the agreement was not to shift the burden of taxes from the assessee who is liable under the law to pay taxes to a person who is not liable to pay taxes under the law. The petition against the said decision of the High Court (given by the Single Member Bench) was dismissed by the Division Bench of the Bombay High Court and this was challenged in the Supreme Court.

Held:

The Finance Act, 1994 provisions determine the liability of the assessee towards tax authorities and it is irrelevant to determine rights and liabilities under the contract. Nothing in law prevents them from entering into contract regarding burden of tax arising under the contract between the parties. The Supreme Court after considering the submissions from both the sides also observed that assuming that the relevant clause in the agreement was capable of two interpretations, the view taken by the arbitrator was clearly a possible view if not plausible one. It cannot be said that the arbitrator travelled outside his jurisdiction or the view taken was against the contract. The High Court therefore had no reason to interfere with the award. Thus allowing the appeal, it was held that the appellant could not be faulted for deducting service tax.