Service Tax - Renting of Immovable Property – Service recipient is required to pay Service Tax to service provider even if contract did not specifically mention it: High Court
WHAT happens when you enter into an agreement to provide service (with no mention of Service Tax as there was no tax on the services at the time of providing the service) and Service Tax is imposed on the service and the client refuses to bear the tax as there was no contractual obligation?
And the clients can be multi national corporate giants or government departments. I know a frustrated retired Colonel of the Indian Army who is not able to get the Service Tax he paid on security services reimbursed from Defence Establishments, because the contract did not mention about the Service Tax.
In the recent controversial Service Tax on renting, several MNCs who have hired buildings are refusing to reimburse Service Tax to the building owners because the agreement entered into at the time of leasing did not mention about Service Tax, which actually did not exist at the time of entering into the contract.
When you rented your property prior to 1.6.2007, you did not visualize that there would be a Service Tax on renting (which any way the Delhi High Court struck down) and so you did not include it in the agreement. Now the Department wants the tax from you but your client will not pay you as your contract did not provide for it.
This is a problem faced by several service providers.
Now the Delhi High Court has come to their rescue.
In a recent case, the plaintiff, owner of the premises rented out, filed a civil suit against the tenant for payment of Service Tax that the plaintiff Service provider was required to pay.
Even though the agreement did not provide for payment of Service Tax (non-existent at the time of entering into the contract), the Delhi High Court relying on Section 64-A of the Sale of Goods Act, 1930 , which clearly states that unless a different intention appears from the terms of the contract, in case of the imposition or increase in the tax after the making of a contract, the party shall be entitled to be paid such tax or such increase, held that “Although there is no explicit provision to that effect, enabling lessors such as the plaintiff, to the service tax component, this Court is of the view that there is sufficient internal indication in the Act, through Section 83 read with Section 12-A and Section 12-B suggesting that the levy is an indirect tax, which can be collected from the user (in this case, the lessee). ”
The High Court has given a decree that the defendant tenant is liable to pay the Service Tax to the plaintiff service provider.
This landmark judgement of the High Court should be a big relief to the service providers and now they can demand the Service Tax from their clients.
This judgement almost went un-noticed as Union of India was not one of the parties and this was a civil suit between two private parties.
We bring you this very important judgement today.
Please see Breaking News