REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.9952 OF 2017
UNION OF INDIA & ORS. …APPELLANTS
VERSUS
BENGAL SHRACHI HOUSING
DEVELOPMENT LIMITED & ANR. ...RESPONDENTS
J U D G M E N T
R.F. Nariman, J.
1. The present appeal arises from service tax payable under
a clause in the deed of lease dated 1.9.2012, between the
Appellants (lessee) and the Respondents (lessor). By this deed
of lease between the lessor and the lessee for a period of three
years at a rent of Rs.16,34,967/- per month, it was agreed that:
“6. 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
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primarily leviable upon the occupier shall be paid by
the Government.”
2. Since disputes and differences arose between the parties
as to who was liable to pay service tax for the aforesaid
commercial premises, a writ petition was filed by the
Respondents-herein before the Calcutta High Court, in which it
was prayed that a Writ of Mandamus be issued commanding
the Appellants to make payment of service tax for the aforesaid
premises. The learned single Judge by his judgment dated
15.5.2014, referred to the aforesaid Clause 6 in the deed of
lease between the parties, and further went on to refer to a
judgment of the Delhi High Court in Pearey Lal Bhawan
Association v. M/S. Satya Developers Pvt. Ltd., (2010) 173
DLT 685, in which it was held that as the authorities in that case
did not visualize that a service tax levy would be made in
respect of lease or rentals of commercial properties and that
since the levy was made effective only from 2007 onwards, it
was held that as service tax is essentially an indirect tax, the
user of the premises who avails the service has to bear it. This
being the case, on the facts of that case, it was held that the
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lessee should be made to pay service tax. A judgment of the
Allahabad High Court dated 16.01.2013 in M/s Bhagwati
Security Services (Regd.) v. Union of India, to the same
effect was also followed by the learned single Judge. The
single Judge, therefore, held that liability to bear service tax
being that of the recipient of the service, there cannot be an
escape from the conclusion that the Appellants i.e. the Union of
India would be liable to pay the said tax.
3. An appeal to the Division Bench yielded the same result.
The Division Bench, in the impugned judgment dated 9.9.2014,
referred to various provisions of the Finance Act, 1994 and
adopted the same reasoning as that of the learned single Judge
and, therefore, held that Clause 6, if properly construed, would
yield the same result as was found by the learned single Judge
and, therefore, dismissed the appeal.
4. Shri A.K. Sanghi, learned senior counsel appearing on
behalf of the Appellants, has referred in detail to various
provisions of the Finance Act, 1994 along with amendments
thereto and has argued that the person primarily liable to pay
3
service tax under the Act read with the Service Tax Rules, 1994,
is the service provider i.e. the lessor in the present case. He,
therefore, stated that on a proper reading of Clause 6, it is clear
that service tax being “primarily leviable on the lessor” within
the meaning of Clause 6, would have to be borne by the lessor
alone and not his client.
5. On the other hand, Shri Jaideep Gupta, learned senior
counsel appearing on behalf of the Respondents, supported the
judgments of the courts below. According to him, on a proper
reading of the said clause, since service tax, by its essential
nature is an indirect tax, being nothing other than a value added
tax on consumption of service, the levy under the Service Tax
Act of 1994, as amended, would fall upon the lessee. In any
case, according to the learned counsel, on a reading of various
judgments of this Court, it is clear that the person on whom this
tax is primarily leviable is the lessee and that, therefore, it is the
Appellant who should bear this tax.
6. Having heard learned counsel for both the parties, it is
necessary to first advert to the relevant statutory provisions.
4
Service tax was introduced by Chapter 5 of the Finance Act of
1994. Under Section 65 thereof, an assessee is defined to
mean:
“Section 65. Definitions
In this Chapter, unless the context otherwise
requires, --
(7) "assessee" means a person liable to pay the
service tax and includes his agent;”
Under Section 65 (105), "taxable service" means any
service provided or to be provided -
“…..
(zzzz) to any person, by any other person, by
renting of immovable property or any other service
in relation to such renting, for use in the course of or
for furtherance of, business or commerce.”
7. Under Section 66, as it stood substituted by the Finance
Act of 2007, the tax was leviable in the following manner:
“66. Charge of service tax – There shall be levied
a tax (hereinafter referred to as the service tax) at
the rate of twelve per cent of the value of taxable
services referred to in sub-clauses (a), (d), (e), (f),
(g,) (h), (i), (j),(k), (l), (m), (n), (o), (p), (q), (r), (s), (t),
(u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi),
(zj), (zk),(zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt),
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(zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc),
(zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl),
(zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt),
(zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb),
(zzzc), (zzzd), (zzze), (zzzf), (zzzg,) (zzzh), (zzzi),
(zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp),
(zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw),
(zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc),
(zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi),
(zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo),
(zzzzp),(zzzzq) (zzzzr) (zzzzs) (zzzzt),(zzzzu),
(zzzzv) (zzzzv) and (zzzzw) of clause (105) of
section 65 and collected in such manner as may be
prescribed:
Provided that the provisions of this section shall not
apply with effect from such date as the Central
Government may, by notification, appoint.”
8. On and from 1.7.2012, under Section 66B, the tax was
levied in the following manner:
“66B. Charge of Service Tax - There shall be
levied a tax (hereinafter referred to as the service
tax) at the rate of twelve per cent on the value of all
services, other than those services specified in the
negative list, provided or agreed to be provided in
the taxable territory by one person to another and
collected in such manner as may be prescribed.”
It is this last Section with which we are directly concerned as
the lease deed between the parties is dated 1.9.2012.
9. Section 68 is important and reads as follows:-
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“68. Payment of service tax. – (1) Every person
providing taxable service 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 subsection
(1), in respect of such taxable service 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."
10. The Service Tax Rules, 1994 have been made in exercise
of powers under the rule making Section, namely, Section 94 of
the Finance Act, 1994 which came into force on 1.4.1994. Rule
2(1)(d) is important from our point of view and reads as follows:-
“2. Definitions
(1) In these rules, unless the context otherwise
requires, -
….
(d) "person liable for paying service tax", -
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(i) in respect of the taxable services notified under
sub-section (2) of section 68 of the Act, means,-
…….
(E) in relation to services provided or agreed to be
provided by Government or local authority except,-
(a) renting of immovable property, and
(b) services specified sub-clauses (i), (ii) and (iii) of
clause (a) of section 66D of the Finance Act,1994,
to any business entity located in the taxable
territory, the recipient of such service;
……
(ii) in a case other than sub-clause (i), means the
provider of service.”
11. Under Rule 4 of the aforesaid Rules, every person liable
to pay service tax is to apply for registration under the Act, and
under Rule 7, every such assessee shall submit a half yearly
return in the relevant form prescribed therein.
12. A reading of the Act and the Rules, therefore, makes it
clear that “assessee”, as defined, means the person liable to
pay service tax under the Act. In the present case, we are
concerned with the taxable service of renting of immovable
property. It is clear that under Section 66B, the levy of service
tax at the rate of 12% is on the value of the service of renting of
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immovable property that is provided or agreed to be provided
by one person to another and collected in such manner as may
be prescribed. Section 68 whose marginal note reads -
“payment of service tax”, makes it clear that it is the person
providing the taxable service to another, who is to pay service
tax at the rate specified in Section 66B, in such manner and
within such period as may be prescribed, unless otherwise
specified by the Central Government. Therefore, the person
liable for paying service tax is to be determined on a reading of
the Rules.
13. When we come to the Rules, it is clear that under Rule
2(1)(d), the person liable for paying service tax, where the
service of renting immovable property is agreed to be provided
by the Government, is the provider of such service. Even in a
converse situation, which is the situation in the facts of the
present case, it is the provider of the service alone, who is
liable for paying service tax.
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14. The question with which we are faced is the meaning to
be given to the expression “primarily leviable on the lessor” in
Clause 6 of the deed of lease dated 1.9.2012.
15. This Court has, in several judgments delineated the
extent of and the meaning of service tax. Thus, in Tamil Nadu
Kalyana Mandapam Assn v. Union of India & Ors., (2004) 5
SCC 632 at 637, this Court held as follows:-
“4. Service tax is an indirect tax and is to be paid on
all the services notified by the Government of India
for the said purpose. The said tax is on the service
and not on the service provider. However, under
Section 68 of the Finance Act, 1994 as amended by
the Finance Act, 1997 read with Rule 2(1)(d)(ix) of
the Service Tax Rules, 1994, the service provider (in
the present case the mandap-keeper) is expected to
collect the tax from the client utilizing his services.”
16. In All India Federation of Tax Practitioners & Ors. v.
Union of India & Ors., (2007) 7 SCC 527 at 536, 542, this
Court held as follows:
“Reason for imposition of service tax
4. Service tax is an indirect tax levied on certain
services provided by certain categories of persons
including companies, associations, firms, body of
individuals, etc. Service sector contributes about
64% to GDP. “Services” constitute a heterogeneous
spectrum of economic activities. Today services
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cover wide range of activities such as management,
banking, insurance, hospitality, consultancy,
communication, administration, entertainment,
research and development activities forming part of
retailing sector. Service sector is today occupying
the centre stage of the Indian economy. It has
become an industry by itself. In the contemporary
world, development of service sector has become
synonymous with the advancement of the
economy. Economists hold the view that there is no
distinction between the consumption of goods and
consumption of services as both satisfy the human
needs.
5. In the late seventies, the Government of India
initiated an exercise to explore alternative revenue
sources due to resource constraints. The primary
sources of revenue are direct and indirect taxes.
Central excise duty is a tax on the goods produced
in India whereas customs duty is the tax on imports.
The word “goods” has to be understood in
contradistinction to the word “services”. Customs
and excise duty constitute two major sources of
indirect taxes in India. Both are consumption
specific in the sense that they do not constitute a
charge on the business but on the client. However,
by 1994, the Government of India found revenue
receipts from customs and excise on the decline
due to WTO commitments and due to rationalisation
of duties on commodities. Therefore, in the year
1994-1995, the then Union Finance Minister
introduced the new concept of “service tax” by
imposing tax on services of telephones, non-life
insurance and stockbrokers. That list has increased
since then. Knowledge economy has made
“services” an important revenue earner.
Findings
(i) Meaning of “service tax”
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22. As stated above, the source of the concept of
service tax lies in economics. It is an economic
concept. It has evolved on account of service
industry becoming a major contributor to the GDP of
an economy, particularly knowledge-based
economy. With the enactment of the Finance Act,
1994, the Central Government derived its authority
from the residuary Entry 97 of the Union List for
levying tax on services. The legal backup was
further provided by the introduction of Article 268-A
in the Constitution vide the Constitution (Eightyeighth
Amendment) Act, 2003 which stated that
taxes on services shall be charged by the Central
Government and appropriated between the Union
Government and the States. Simultaneously, a new
Entry 92-C was also introduced in the Union List for
the levy of service tax. As stated above, as an
economic concept, there is no distinction between
the consumption of goods and consumption of
services as both satisfy human needs. It is this
economic concept based on the legal principle of
equivalence which now stands incorporated in the
Constitution vide the Constitution (Eighty-eighth
Amendment) Act, 2003. Further, it is important to
note, that “service tax” is a value added tax which in
turn is a general tax which applies to all commercial
activities involving production of goods and
provision of services. Moreover, VAT is a
consumption tax as it is borne by the client.”
17. In Association of Leasing & Financial Service
Companies v. Union of India, (2011) 2 SCC 352 at 367-368,
this Court under the caption “nature and character of service
tax” held as follows:-
12
“38. In All-India Federation of Tax Practitioners
case [(2007) 7 SCC 527] this Court explained the
concept of service tax and held that service tax is a
value added tax (“VAT”, for short) which in turn is a
destination based consumption tax in the sense that
it is levied on commercial activities and it is not a
charge on the business but on the consumer. That,
service tax is an economic concept based on the
principle of equivalence in a sense that
consumption of goods and consumption of services
are similar as they both satisfy human needs. Today
with the technological advancement there is a very
thin line which divides a “sale” from “service”. That,
applying the principle of equivalence, there is no
difference between production or manufacture of
saleable goods and production of
marketable/saleable services in the form of an
activity undertaken by the service provider for
consideration, which correspondingly stands
consumed by the service receiver. It is this principle
of equivalence which is inbuilt into the concept of
service tax under the Finance Act, 1994. That
service tax is, therefore, a tax on an activity. That,
service tax is a value added tax. The value addition
is on account of the activity which provides value
addition, for example, an activity undertaken by a
chartered accountant or a broker is an activity
undertaken by him based on his performance and
skill. This is from the point of view of the
professional. However, from the point of view of his
client, the chartered accountant/broker is his service
provider. The value addition comes in on account of
the activity undertaken by the professional like tax
planning, advising, consultation, etc. It gives value
addition to the goods manufactured or produced or
sold. Thus, service tax is imposed every time
service is rendered to the customer/client. This is
clear from the provisions of Section 65(105)(zm) of
the Finance Act, 1994 (as amended). Thus, the
taxable event is each exercise/activity undertaken
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by the service provider and each time service tax
gets attracted.
39. The same view is reiterated broadly in the
earlier judgment of this Court in Godfrey Phillips
India Ltd. v. State of U.P. [(2005) 2 SCC 515] in
which a Constitution Bench observed that in the
classical sense a tax is composed of two elements:
the person, thing or activity on which tax is imposed.
Thus, every tax may be levied on an object or on
the event of taxation. Service tax is, thus, a tax on
activity whereas sales tax is a tax on sale of a thing
or goods.”
18. It is thus clear, on a conspectus of the authorities of this
Court, that service tax is an indirect tax, meaning thereby that
the said tax can be passed on by the service provider to the
recipient of the service. Being a tax on service, it is not a direct
tax on the service provider but is a value added tax in the
nature of a consumption tax on the activity which is by way of
service. It is settled by various judgments of this Court that, in
order to have conceptual clarity, the taxable event and the
taxable person are distinct concepts. Thus, in Babu Ram
Jagdish Kumar & Co. v. State of Punjab, (1979) 3 SCC 616,
this Court made it clear that, in the case of a purchase tax, the
“taxable event” is the purchase of paddy, whereas the “taxable
person”, who is the person liable to pay the tax, is the
14
purchaser. In the present case, therefore, the “taxable event” is
the provision of the service of renting out immovable property,
and the “taxable person”, that is the person liable to pay tax, is
the service provider, namely the lessor.
19. It needs to be clarified at this juncture that our
Constitution, unlike the British North America Act of 1867,
makes no distinction, constitutionally speaking, between direct
and indirect taxes.1
20. In Chhotabhai Jethabhai Patel and Co. v. The Union of
India and Anr.,1962 Supp. (2) SCR 1 at 20-21, this Court was
faced with the challenge of the levy of a retrospective excise
duty. One of the arguments made against the levy of such duty
is that excise duty being indirect, which is that it is ultimately to
be passed on to the consumer, a retrospective levy would be
ultra vires the legislative competence of Parliament as it could
not possibly be passed on. This argument was repelled in the
following terms:
1 Section 92(2) provides for a provincial legislature exclusively making laws in relation to
direct taxation within the province “in order to the raising of a revenue for provincial
purposes”.
15
“There is no doubt that excise duties have been
referred to by the economists and in the judgments
of the Privy Council as well as in the Australian
decisions as an instance of an "indirect tax", but in
construing the expression "duty of excise" as it
occurs in Entry 84 we are not concerned so much
with whether the tax is "direct" or "indirect" as upon
the transaction or activity on which it is imposed. In
this context one has to bear in mind the fact that the
challenge to the legislative competence of the taxlevy
is not directed to the imposition as a whole but
to a very limited and restricted part of it. This
challenge is confined (a) to the operation of the tax
between the period March 1, 1951, and April 28,
1951, and (b) even in regard to this limited period, it
is restricted to the imposition of the additional duty
of six annas per lb. which was levied, beyond the
eight annas per lb. collected from the appellants by
virtue of the Finance Bill under the provisions of the
Provisional Collection of Taxes Act, 1931. It would
seem to be rather a strange result to achieve that
the tax imposed satisfies every requirement of a
"duty of excise" in so far as the tax operates from
and after April 28, 1951, but is not a "duty of excise"
for the duration of two months before that date.
Learned Counsel conceded, as he had to, that even
on the decision relied upon by him, the fact that
owing to the operation of economic forces it was not
possible for the taxpayer to pass on the burden of
the tax, did not alter the nature of the imposition and
detract from its being a "duty of excise". For
instance, the state of the market might be such that
the duty imposed upon and collected from the
producer or manufacture might not be capable of
being passed on to buyers from him. Learned
Counsel urged that this would not matter, as one
had to have regard to "the general tendency of the
tax" and "the expectation of the taxing authority"
and to the possibility of its being passed on and not
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to the facts of any particular case which impeded
the operation of natural economic forces.
The impediment to the duty being passed on might
be due not merely to private bargains between the
parties or abnormal economic situations such as the
market for a commodity being a buyers' market.
Such impediments may be brought about by the
operation of other laws which Parliament might
enact, such for instance, as control over prices. If in
such a situation where the price which the producer
might charge his buyer is fixed by the statute, say
under the Essential Supplies Act, and a "duty of
excise" is later imposed on the manufacturer, it
could not be said that the duty imposed would not
answer the description of an "excise duty". Learned
Counsel had really no answer to the situation
created by such a control of economy except to say
that it would be an abnormal economic situation. It
could hardly be open to argument that a tax levied
on a manufacturer could be stated not to be a "duty
of excise", merely because by reason of the
operation of other laws the tax payer was not
permitted to pass on the tax-levy. The retrospective
levy of a tax would be one further instance of such
inability to pass on, which does not alter the real
nature or true character of the duty.”
21. It is thus clear that the judgments of this Court which
referred to service tax being an indirect tax have reference only
to service tax being an indirect tax in economic theory and not
constitutional law. The fact that service tax may not, in given
circumstances, be passed on by the service provider to the
recipient of the service would not, therefore, make such tax any
17
the less a service tax. It is important to bear this in mind, as the
main prop of Shri Jaideep Gupta’s argument is that service tax
being an indirect tax which must be passed on by virtue of the
judgments of this Court, would make the recipient of the service
the person on whom the tax is primarily leviable.
22. Let us now examine some of the judgments relating to
another indirect tax, namely excise duty. Like service tax,
excise duty is also in the economic sense, an indirect tax. The
levy is on manufacture of goods; and the taxable person is
usually the manufacturer of those goods. In the matter of the
Central Provinces and Berar Sales of Motor Spirit and
Lubricants Taxation Act, 1938 RCP, A.I.R. 1939 Federal Court
1, the Federal Court decided, through Chief Justice Maurice
Gwyer, that excise duty under the Government of India Act,
1935 is a power to impose duty of excise upon the
manufacturer of excisable articles at the stage of or in
connection with manufacture or production. In a separate
judgment, Jayakar J. held that all duties of excise are levied on
manufacture of excisable goods and can be levied and
collected at any subsequent stage up to consumption.
18
23. In R.C. Jall vs. Union of India, 1962 Supp. (3) SCR 436
at 451, this Court after referring to the judgment in Central
Provinces and Berar Sales (supra) and certain other
judgments held:
“With great respect, we accept the principles laid
down by the said three decisions in the matter of
levy of an excise duty and the machinery for
collection thereof. Excise duty is primarily a duty on
the production or manufacture of goods produced or
manufactured within the country. It is an indirect
duty which the manufacturer or producer passes on
to the ultimate consumer, that is, its ultimate
incidence will always be on the consumer.
Therefore, subject always to the legislative
competence of the taxing authority, the said tax can
be levied at a convenient stage so long as the
character of the impost, that is, it is a duty on the
manufacture or production, is not lost. The method
of collection does not affect the essence of the duty,
but only relates to the machinery of collection for
administrative convenience. Whether in a particular
case the tax ceases to be in essence an excise
duty, and the rational connection between the duty
and the person on whom it is imposed ceased to
exist, is to be decided on a fair construction of the
provisions of a particular Act.”
24. In the present case, it is clear that the expression
“primarily leviable upon” has reference to the “taxable person”,
i.e. the person who is liable to pay the tax. The tax that is
levied on “service” may be collected either from the service
19
provider or the recipient of the service. The person assessed to
tax, who is primarily liable to pay the tax is, on the facts of this
case, the lessor.
25. Shri Gupta cited a judgment of this Court in Peekay ReRolling
Mills (P) Ltd. v. Assistant Commissioner and
another, (2007) 4 SCC 30, for the well worn distinction
between levy and collection of a tax. What is important to note
from this judgment is that the expression “levy” would include
“assessment”, though it would not include “collection”. This
being the case, it is clear that the expression “primarily leviable
upon the lessor” makes it clear that the lessor should be the
person upon whom levy takes place - in the sense that
“assessment” has to be of such person. “Levy”, in all cases of
indirect taxes, is never upon an individual – it is upon a specific
aspect of what is sought to be taxed. In the case of a service
tax, like the present, the activity of renting out immovable
property is sought to be taxed. Therefore, when the expression
“primarily leviable” is used in relation to a person and not an
activity, it has reference to the assessee upon whom
20
assessment is made under the Act. Thus construed, it is clear
that, in the present case, the person liable to pay the tax, who is
the assessee under the said Act, in all cases like the present, is
only the service provider and not the recipient of the service.
26. Shri Gupta then referred to Section 83 of the Finance Act,
1994, by which Section 12B of the Central Excise Act, 1944, so
far as may be, would apply in relation to service tax as it applies
in relation to a duty of excise. Section 12B is set out
hereinbelow:
“12B - Presumption that incidence of duty has
been passed on to the buyer - Every person who
has paid the duty of excise on any goods under this
Act shall, unless the contrary is proved by him, be
deemed to have passed on the full incidence of
such duty to the buyer of such goods.”
27. Based on this Section, Shri Gupta has argued, in support
of the Division Bench judgment, that since there is a
presumption that the incidence of duty has been passed on to
“the buyer”, who is the recipient of the service in the present
case, unless the contrary is proved, such passing on shall be
deemed in law to have occurred and, therefore, it is the
21
Appellant before us who is the person on whom the duty is
primarily leviable. This argument, which found favour with the
Division Bench, is again incorrect for the basic reason that the
reason for extending Section 12B of the Central Excise Act to
service tax is for the reason that when refund of service tax is
claimed in case the tax paid is found to be in excess or not
payable at all, the same cannot be made over to the assessee
unless the assessee proves that the said tax is not passed on
to the recipient of the service. This Section only casts the
burden of proof upon the service provider to prove negatively
that he has not passed on the incidence of the tax to the
recipient of the service. This Section, which is part of the
machinery for refund, can in no way help Shri Gupta to
determine as to who is the person primarily liable to pay service
tax which has to be determined on a reading of the Act and the
Rules.
28. Shri Gupta then relied upon the judgment of the learned
Single Judge in Pearey Lal (supra). In that case, clause 5 of
the lease deed read as follows:
22
“5. That the lessor shall continue to pay all or any
taxes, levies or charges imposed by the MCD, DDA,
L&DO and/or Government, Local Authority, etc.”
29. In para 12, the learned Single Judge made the significant
observation that there is no dispute that the parties did not
visualize that service tax would be imposed when they entered
into the lease. This being the case, the learned Single Judge
held:
“It is true, that the contracts entered into between
the parties in this case, spoke of the Plaintiff lessor's
liability to pay municipal, local and other taxes, in at
least two places. The Court, however, is not
unmindful of the circumstance that service tax is a
species of levy which the parties clearly did not
envision, while entering into their arrangement. It is
not denied that leasing, and renting premises was
included as a "service" and made exigible to service
tax, by an amendment; the rate of tax to be
collected, is not denied. If the overall objective of
the levy - as explained by the Supreme Court, were
to be taken into consideration, it is the service which
is taxed, and the levy is an indirect one, which
necessarily means that the user has to bear it. The
rationale why this logic has to be accepted is that
the ultimate consumer has contact with the user; it
is from them that the levy would eventually be
realized, by including the amount of tax in the cost
of the service (or goods).”
30. In an appeal to the Division Bench of the Delhi High
Court, the Delhi High Court was more specific in rejecting the
23
plea that service tax should be borne by the lessor. Thus, the
Division Bench in Satya Developers Pvt. Ltd. and Ors. v.
Pearey Lal Bhawan Association and Ors, (2015) 225 DLT
377 stated:
“31. Thus 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.
In the present case it will also have to borne in mind
whether the parties intend to include taxes which
were not contemplated at the time of the agreement
as indubitably the agreements between the parties
in the three suits were entered into prior to the
Finance Act, 2007 coming into force w.e.f. June 01,
2007.
xxx xxx xxx
33. As regards the lease deed and the agreement of
maintenance of common services and facilities
between Satya and PLBA Clause 5 of the lease
deed as noted above provides that the lessor shall
continue to pay all or any taxes, levies or charges
imposed by the MCD, DDA, L&DO and or
Government, Local Authority etc. By use of the
words "Lessor shall continue to pay" it is evident
that the parties contemplated the existing taxes,
levies or charges and not future. Even as per the
agreement of maintenance of common service
facilities though the same has no application to the
service tax however, still the said clause II(1) cannot
be said to exclude HDFC Bank from paying future
service tax.”
24
A reading of these two judgments would, therefore, show
that, on facts, it was held 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. This being the overwhelming circumstance in that
case, any observations made on law have to be read in light of
the facts of that case.
31. Shri Gupta then adverted to another judgment of the
Division Bench of the Delhi High Court in Raghubir Saran
Charitable Trust v. Puma Sports India Pvt. Ltd., 2013 SCC
OnLine Del 1972, decided on 15.5.2013. In this judgment,
clauses 7 and 9 of the lease deed read as follows:
“7. MAINTENANCE, ELECTRICITY; WATER
7.1. It is agreed by and between the Parties that the
Lessor shall be liable to pay property taxes and
other outgoings in respect of the Premises,
whatsoever payable and as levied from time to time
promptly and timely, including any revisions thereto,
directly to the authorities concerned and no claim
for contribution towards such taxes, cesses, levies
and increases shall be made by the Lessor or be
entertained by the Lessee.
25
xxx xxx xxx
9. COVENANTS OF THE LESSEE
The Lessee, for itself, its successors and permitted
assigns and to the intent that its obligations may
continue through the term hereby created, but not
exceeding the Initial Term, covenants with the
Lessor as follows:
xxx xxx xxx
(d) To pay all taxes necessary for carrying on its
business within the Premises, other than municipal
taxes and other related property taxes.”
32. An arbitration award construed the aforesaid clauses
stating that service tax would have to be paid by the lessor.
This, according to the Division Bench, was not a possible
construction inasmuch as the Division Bench bifurcated taxes
that were payable by the lessor and the lessee. Clause 7
being confined to property taxes and clause 9 referring to taxes
other than property taxes, the judgment of the Division Bench
stated:
“………Thus, Clause 7.1 is clearly confined to
property taxes or other outgoings in respect of the
'premises'. It has to be a tax on the premises or the
property. Such a tax may be of any nature
whatsoever and thus even a new tax on the
premises would be covered by this clause and
absolves the lessee of the liability in this behalf, this
clause nowhere envisaging an indirect tax of the
26
nature of a service tax. The aforesaid view is further
reinforced by Clause 9 (d) which in fact puts the
responsibility on the lessee to pay all taxes
necessary for carrying on its business within the
premises other than the municipal taxes and related
property taxes. Thus, any tax on the business
activity is on the lessee and the only exclusion
made is of municipal tax and related property taxes
for which there is a specific Clause 7.1. It is not as if
there is a singular clause relating to taxes in the
agreement being the Lease Deed which puts the
burden on the lessor alone. The nature of taxes if
bifurcated into two categories; one borne by the
lessor and the other to be borne by the lessee. The
aforesaid becomes important in the context of the
nature of service tax which is a tax on the
commercial activity and to that extent would, thus,
fall within the parameters of Clause 9 (d) and not
Clause 7.1.
We thus have not the slightest of doubt that
these are not clauses which can brook of any two
interpretations, but there can by only one
interpretation on a plain reading of the clauses. The
language of a clause cannot be twisted to come to a
conclusion as is sought to be done by the learned
Arbitrator. It appears that Clause 9 (d) seems to
have been completely lost by the learned Arbitrator.
……….”
33. In this view of the matter, the arbitration award was set
aside. This judgment again turned on the language of the
particular clauses in the lease deed and would have no
application to the facts of the present case.
27
34. At the fag end of the argument, however, Shri Gupta
referred us to a sanction letter dated 27th April, 2012 and a letter
dated 30th April, 2012. The sanction letter of 27th April, 2012
issued by the Government of India conveying sanction for hiring
of the lease premises in the present case to the Director
General, Indian Coast Guard, specifically states:
“…… The registration charges, stamp duty, service
taxes, etc. (if applicable) is the liability of the
lessee……”
35. The letter dated 30th April, 2012, written by the Deputy
Inspector General, Chief Staff Officer, to the Respondent, in
turn, in paragraph 3(c) reiterated the same position as that of
the sanction letter. The learned single Judge in dealing with the
letter dated 30th April, 2012 has held:
“12. Turning to the facts of the present case, it
appears that clause 6 extracted supra delineated
the respective obligations of the lessor and the
lessees. The parties agreed that the rates and taxes
primarily leviable upon the occupier would be paid
by the Government. That the respondents were not
oblivious of their obligation to bear service charge is
reflected from the letter dated April 30, 2012.
Although the said deed does not specifically refer to
service tax, the letter dated April 30, 2012 expressly
28
provides that Government of India had sanctioned
the terms and conditions of hiring including, inter
alia, the liability of the “lessee in respect of
registration charges, stamp duty, service tax etc., (if
applicable)”. The words “if applicable” in brackets
follows “etc.” and not “service tax”. Therefore, it is
not a case that if obligation to make payment of
service tax arises, the respondents would have
discretion to foist the responsibility on the lessor
(the first petitioner). Liability to bear service tax
being that of the person receiving service, there can
be no escape from the conclusion that the
respondents are liable to bear service tax.”
36. This being the case, though in law and under clause 6 of
the lease deed the Appellant is not required to pay service tax,
we are loathe to upset the finding of the learned single Judge
based upon a letter by the Appellant to the Respondent in
which the Appellant has expressly stated that it was liable to
pay service charges. Having thus clarified the legal position,
given the sanction letter of 27th April, 2012 and the letter dated
30th April, 2012, in which it was made clear that the Union of
India alone will bear the service charges, we refuse to exercise
our discretion under Article 136 of the Constitution of India in
favour of the Union of India. Thus, the impugned Division
29
Bench judgment is set aside on law, but the appeal fails on the
facts of the present case.
…………………………..J.
(R.F. Nariman)
…………………………..J.
(Sanjay Kishan Kaul)
New Delhi;
November 07, 2017.
30
