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. _