ONUS OF LIABILITY TO PAY SERVICE TAX

Preliminary

Service providers often face practical difficulties (due to financial constraints, non-recoveries from clients etc.) in paying service tax to the Government in time resulting in interest and other penal consequences. In such situations, issues arise as to whether service providers can direct service tax authorities to recover tax dues from their debtors. This aspect and related issues are discussed hereafter with the help of a Delhi High Court ruling, special leave petition against which has been dismissed by the Supreme Court.

Relevant Extracts from the Finance Act, 1994 as amended (“Act”)

– Section 68 of the Act (payment of service tax)

(1)  Every person providing taxable service tax to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

(2)  Notwithstanding anything contained in s/s. (1), in respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service;

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.

– Section 87 of the Act (recovery of any amount due to Central Government)

Where any amount payable by a person to the credit of the Central Government under any of the provisions of this Chapter or of the rules made thereunder is not paid, the Central Excise Officer shall proceed to recover the amount by one or more of the modes mentioned below:

(a) the Central Excise Officer may deduct or may require any other Central Excise Officer or any officer of customs to deduct the amount so payable from any money owing to such person which may be under the control of the said Central Excise Officer or any officer of customs;

(b) (i)   the Central Excise Officer may, by notice in writing, require any other person from whom money is due or may become due to such person, or who holds or may subsequently hold money for or on account of such person, to pay to the credit of the Central Government either forthwith upon the money becoming due or being held or at or within the time specified in the notice, not being before the money becomes due or is held, so much of the money as is sufficient to pay the amount due from such person or the whole of the money when it is equal to or less than that amount;

     (ii)  every person to whom a notice is issued under this section shall be bound to comply with such notice, and in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary to produce any pass book, deposit receipt, policy or any other document for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary;

    (iii) in a case where the person to whom a notice under this section is sent, fails to make the payment in pursuance thereof to the Central Government, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and all the consequences of this Chapter shall follow;

                        …………….

Delhi High Court Ruling in Delhi Transport Corporation (DTC) vs. CST (2015) 51 GST 511 (DEL) (2015-TIOL-961-HC-DEL-57

Facts in Brief

With the objective of augmenting its revenue, DTC entered into contracts with seven agencies (contractors/advertisers) providing space to such parties for display of advertisements on bus queue shelters and time keeping booths. Two of the said contracts contained similar stipulations including clause No 9 which reads as under:

“It shall be responsibility of the contractor/advertiser to pay direct to the authority and MCD concerned the advertisement tax or any other taxes levy payable or imposed by any authority and this amount will be in addition to the license fee quoted above”

According to the Revenue, on the basis of inputs received from its anti-evasion branch, DTC having engaged itself in aforementioned contracts had failed to pay tax on services. Hence show cause notices were issued by the revenue demanding service tax on receipts by DTC on account of “sale of space or time for advertisement” along with interest and penalty.

DTC submitted replies to the effect that it is an autonomous body of government of NCT of Delhi created under the Road Transport Act and had no intention to violate the provisions of the taxing statutes. They further submitted that the obligation for registration under the Service Tax Rules had escaped the notice of its accounts department and chartered accountant/auditors and thus, the omission was neither intentional nor deliberate. It was submitted that after the requirement had come to its notice, DTC had taken requisite steps for registration. It further stated that since it was obliged to provide transport services to the public at large at subsidised rates, it was incurring losses and consequently depended on grants from the government and for this reason it was moving the Central Government to grant exemption. DTC further stated that in terms of the contractual arrangement, the liability towards statutory taxes, including service tax, was to be borne by the contractors engaged by it and that all such contractors, except the two mentioned above, were paying the service tax chargeable in their respect pursuant to supplementary bills raised from time to time and further that all such remittances received were duly deposited with the service tax department.

DTC resisted the show cause notices also on the ground that the two contractors  had taken a stand contradictory to the contractual terms in such regard, failing to abide by their obligation in terms of clause 9 (as quoted earlier), in spite of directions of this Court on the petitions u/s. 9 of Arbitration and Conciliation Act, 1996. DTC informed the Revenue that it intended to institute contempt/execution proceedings against the said contractors for failure to deposit the service tax in spite of contractual obligation and the directions of the High Court. It added that the amount of service tax to the extent realized from the contractors was deposited with the service tax department.

The show cause notices were confirmed upon adjudication. In reaching at conclusions, the adjudicating authority repelled the contentions of DTC objecting to the assessment for the extended period of five years holding that the assessee contravened the relevant statutory provisions thereby indulging in “suppression of material facts”. In addition to penalty u/s. 77 of the Act, penalty was imposed u/s. 78 of the Act, declining benefit of section 80, referring in this context to the facts that the assessee had neither applied for service tax registration nor discharged its service tax liability even though it had been made aware of the obligations.

Appeal before CESTAT

The order of Commissioner (Adjudication), service tax was challenged before CESTAT. As noted by the CESTAT in (para 5 of) the impugned order, DTC did not assail the conclusion of the adjudicating authority as to the classification of the service nor impeached the quantum of service tax that was confirmed. Its contentions were restricted to the following (para 11) :

“5. … that since under agreements with advertisers, the reciprocal obligation of the parties covenanted that the recipient of the service would be liable for tax, the appellant was under a bona fide belief that the liability to remit service tax stood transferred to the recipient qua the agreements; that this was a bona fide belief which caused the failure to file returns and remit service tax. Therefore, the extended period of limitation invoked while issuing the first show cause notice dated 04/01/2008 is unjustified and for the same reasons, penalty u/s. 78 of the Act should not have been imposed, by exercising discretion u/s. 80 of the Act.”

The appellant relied on the Supreme Court Ruling in Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran (2012) 35 STT 664 (SC) to urge that having entered into the contracts in the nature mentioned above, it was a legitimate expectation that the service tax liability would be borne by the contractors/advertisers and thus, there was no justification for the appellant being held in default or burdened with the penalty u/s. 78 of the Act. It was argued that in the wake of orders of this Court on the applications of the two contractors u/s. 9 of Arbitration and Conciliation Act, 1996, fastening the liability of service tax (in the event of it being imposed) on such contractors, the revenue ought not to insist upon such payment by DTC. The CESTAT, however, held that such considerations would not transfer the substantive and legislatively mandated liability to service tax from the appellant (the service provider) to the advertisers (the service recipients).

The CESTAT rejected the claim of DTC as to “bona fide belief” by observing in para 13 as under:

“6. A bona fide belief is a belief entertained by a reasonable person. The appellant is a public authority and an instrumentality of the State and should have taken care to ascertain whether it was liable to tax in terms of the provisions of the Act. There is neither alleged, asserted nor established that there is any ambiguity in the provisions of the Act, which might justify a belief that the appellant/service provider, was not liable to service tax. It is axiomatic that no person can harbour a “bona fide belief” that a legislated liability could be excluded or transferred by a contract. The appellant was clearly and exclusively liable to service tax on rendition of the taxable service of “sale of space or time for advertisement”. This liability involved the non-derogable obligation to obtain registration, file periodical ST-3 returns and remit service tax on the consideration received during the period covered by such ST-3 returns. These were the core and essential obligations the appellant should have complied with. We therefore find no basis for the claim that the appellant harboured a bona fide belief.”

Accordingly, the appeals of DTC were dismissed by CESTAT.

OBSERVATIONS AND FINDINGS OF THE DELHI HIGH COURT

–   There is no dispute that services provided are taxable within the meaning of section 65 (105) (zzzn) and that the appellant is liable to pay service tax thereupon. We, however, do not agree with the views of CESTAT that the service tax liability could not have been transferred by way of a contract. The reliance of DTC on the ruling in Rashtriya Ispat case (supra) on this score was correct and it appears that the same has not been properly appreciated by CESTAT. Noticeably, the claim of the assessee in that case was also founded on contractual terms similar to the one relied upon by the appellant here. [Para 17]

–   The service tax liability in Rashtriya Ispat case arose out of contract given out for transportation of goods. The contractor engaged had undertaken to “bear and pay all taxes, duties and other liabilities in connection with discharge of his obligation”. The contractor had invoked the arbitration clause for raising a dispute as to its liability to pay service tax. The claim petition was dismissed by the arbitrator which award was challenged by a petition u/s. 34 of Arbitration and Conciliation Act before a Single Judge of Bombay High Court. The learned Judge held that insofar as the service liability is concerned, the appellant (Rashtriya Ispat which had given the contract was the assessee and liable to tax. The appeal preferred against the said order on the petition was dismissed by the division bench of the High Court. [Para 18]

–   Against the backdrop of the above-noted facts in civil appeal carried to Supreme Court, it was observed as under:-

     “37. As far as the submission of shifting of tax liability is concerned, as observed in para 9 of Laghu Udyog Bharati vs. Union of India, (1999) 6 SCC 418, service tax is an indirect tax and it is possible that it may be passed on. Therefore, an assessee can certainly enter into a contract to shift its liability of service tax.

 ……………

39. The provisions concerning service tax are relevant only as between the appellant as an assessee under the statute and the tax authorities. This statutory provision can be of no relevance to determine the rights and liabilities between the appellant and the respondent as agreed in the contract between two of them. There was nothing in law to prevent the appellant from entering into an agreement with the respondent handling contractor that the burden of any tax arising out of obligations of the respondent under the contract would be borne by the respondent.” [Para 19]

–  The above ruling of Supreme Court in the case of Rashtriya Ispat, however, cannot detract from the fact that in terms of the statutory provisions it is the appellant which is to discharge the liability towards the Revenue on account of service tax. Undoubtedly, the service tax burden can be transferred by contractual arrangement to the other party. But, on account of such contractual arrangement, the assessee cannot ask the Revenue to recover the tax dues from a third party or wait for discharge of the liability by the assessee till it has recovered the amount from its contractors. [Para 20]

–   The directions of this Court on the two petitions u/s. 9 of Arbitration and Conciliation Act (instituted by the two contractors) would only govern the rights and obligations arising out of the contracts entered upon by DTC with the contractors. It may be that in terms of the said orders, DTC would be in a position to recover the amount of service tax paid by it to the Revenue respecting the services in question. The fastening of liability on such account by such order on the contractors is, thus, a matter restricted to claims of the appellant against such parties. It would have no bearing insofar as the claim of the Revenue against the appellant for recovery of the tax dues is concerned. [para 21]

–   We agree with the observations of CESTAT that the plea of “bona fide belief” is devoid of substance. The appellant is a public sector undertaking and should have been more vigilant in compliance with its statutory obligations. It cannot take cover under the plea that contractors engaged by it having agreed to bear the burden of taxation, there was no need for any further action on its part. For purposes of the taxing statute, the appellant is an assessee, and statutorily bound to not only get itself registered but also submit the requisite returns as per the prescription of law and rules framed thereunder. [Para 22]

For the foregoing reasons, it was held that the imposition of service tax liability and the levy of interest thereupon cannot be faulted. For the same reasons, the penalties imposed under sections 76 and 77 of the Act, were upheld. However, penalty u/s. 78 of the Act  was dropped invoking provisions of section 80 of the Act.

SLP before the Supreme Court

–   SLP against the foresaid ruling of Delhi High Court ruling was dismissed by the Supreme Court through a short order [Ref (2016) 55 GST 763 (SC)].

Recovery of service tax by the service providers from the service recipient – Some judicial considerations.

–   Since the commercial understanding is between the service provider and service recipient, if service recipient does not pay taxes to the service provider, the latter is entitled to file civil suit in terms of applicable commercial laws and obtain appropriate orders. As far as service tax department is concerned, it should, ordinarily deal only with person liable to pay service tax, who is an ‘assessee’ under the Act. In this regard attention is drawn to a Court ruling in Damodar Valley Corpn. vs. CCE&ST (2014) 41 taxmann.com 58 (JHARKHAND), wherein the High Court set aside a direction of the department to the service recipient to pay Service tax to the service provider, essentially because no opportunity of hearing was given by department to the service recipient.

–   In Bhagwati Security Services vs. UOI [2013] 31 STR 537 (All), it was held that that, since service tax is an indirect tax and is a statutory liability, even if agreement between parties is silent as to levy of service tax, service providers may bring suit before Courts to seek collection of service tax from the service recipient, inasmuch as service providers are merely a collecting agency who collect service tax from recipient and pay it to Government.

–   As regards recovery of levy / increase in service tax, useful reference can be made to the ruling in Satya Developers Pvt. Ltd. vs. Pearey Lal Bhawan Association (2015) 39 STR 429 (DEL) and 39 STR J173 (SC). In the said ruling in particular, it was held that, section 64A of the Sale of Goods Act, 1930 is also applicable for service tax. However, in a contrary view, it was held in Multi Engg & Scientic Corp. vs. Bihar State Electricity Board (2015) 39 STR 414 (PAT) that liability to pay service tax is on service provider and in absence of any agreement to the contrary, reimbursement of service tax cannot be claimed from service recipient. Section 64A of the Sale of Goods Act, 1930 was held inapplicable to services. 

Summation

In light of foregoing discussions, it can be reasonably summed up as under :

–   Under the service tax law service provider is liable to pay service tax, excepting in cases notified in terms of section 68 (2) of the Act read with Notification No. 30/2012 – ST dated 20/06/2012 (as amended), in which case the persons liable to pay service tax shall be as prescribed in Rule 2(d) of Service Tax Rules, 1994 (Rules).

–   In terms of section 65B (12) of the Act, ‘assessee’ means a person liable to pay tax and includes his agent. Hence, in appropriate cases, agents of service providers / persons specified in Rule 2(d) of Rules could be liable to pay service tax.

–   Being an indirect tax, service tax can be recovered by the service provider from the service receiver, subject to commercial understanding to the contrary.

–   Though service tax burden can be transferred by contractual agreement by a service provider to the service receiver, such consideration would not transfer the substantive and legislatively mandated liability to service tax from a service provider to the service recipients. Further, service providers cannot ordinarily ask the service tax department to recover tax dues from a third party or wait for discharge of their liability till it has recovered the amounts from their clients.

–   In appropriate cases, service providers can in terms of applicable commercial laws seek directions / orders from the Court as regards tax amount due to them which is not paid by their clients.

–   Section 87 of the Act which in particular empowers service tax department to recover service tax from an assessee’s debtors can be usually invoked in extreme cases where a service provider fails to pay service tax to the government. _