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

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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.

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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  sub- section (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  (Eighty- eighth  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:-

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“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”.

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“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 tax- levy 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.  

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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

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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 Re-

Rolling  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

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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

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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:

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“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

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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.”

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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.

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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

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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.   

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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 27 th 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

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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

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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.

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