In the case in hand Indian Coast Guard
had taken the premises owned by the Respondent on Lease and a lease deed was
entered upon by the parties. Under clause 6 of the Lease Deed it was mentioned,
“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 the matter was challenged in the High Court and it came to
Supreme Court in appeal to the decisions of the High Court.
Who is liable to bear the burden of
service tax in the matter of renting out of commercial premises?
It was pointed out by the court in the
earlier portion of its judgement that, by virtue of Rule 2(1)(d) of the Service
Tax Rules R/w Section 68 of the Finance Act, it is the provider of the service
alone who is liable for paying service tax. The question primarily before the
Court was as to on whom the service tax was to be primarily leviable upon.
While answering this question the Apex
Court had observed that service tax being an indirect tax, can be passed on by
the service provider to the recipient of service and it shall depend upon the
taxable event and taxable person. The Court pointed out that in the case in
hand the “taxable event” is the service of renting out immovable property and
“taxable person” is the person liable to pay the tax, namely the lessor.
It was observed by the Court that the
expression ‘levy’ will include assessment also. The Court pointed out that the
levy is always based on the specific aspect which ought to be taxed and not
based on the assessment of any individual. In the case in hand the expression
“primarily leviable” is used in relation to a person and not an activity and
hence it refers to the assessee upon whom the assessment is made under the Act.
Thus the Court construed that the person liable to pay the tax is the Assessee
under the Act, who is the service provider and not the recipient of service.
However if the Lease Deed for renting
out the premises contains an undertaking by any of the parties to the
agreement, contrary to the liability imposed under the Act, the Court seems to
have a different view. Mentioning the decision of High Court of Delhi in, Satya
Developers P Ltd v Pearey lal Bhawan Association[1], it was pointed out
that a contract has to be construed by looking at the document as a whole and
the meaning of the document has to be what the parties intended to give to the
document keeping the background in mind and conclusion that flouts business commonsense
must yield unless expressly stated. It was observed by the Court that since
payment of service tax was not contemplated by the parties and it was agreed
that the lessor shall continue to pay taxes, it was evident that the parties
contemplated only existing taxes and not taxes which may arise in the future.
Based on the Sanction Letter of DIG Coast Guard which specifically stated that
all the registration charges, stamp duty, service taxes etc will be the
liability of the Lessee, the Court upheld the Single Bench Decision of the High
Court that lessee should be made to pay service tax.
From the rationale of this decision it
may be presumed that if a lease deed categorically requires the Lessee to pay
the service tax and there is no ambiguity as to the intention of parties, then
the Lessee will have to bear the burden of service tax even though the
provisions of the Finance Tax imposes the liability on the Lessor, i.e., the
service provider.
