Tax - Legislative Liability cannot be Transferred by Contract
IN an interesting case, the Commissioner had adjudicated and confirmed a demand of over seven crore rupees with consequent penalty and interest on the Delhi Transport Corporation which provided the taxable service of sale of space or time for advertisement to several advertising agencies but failed to obtain registration, file returns or remit service tax on the consideration received for rendition of the taxable service.
Delhi Transport Corporation contended that agreements entered with the advertisers contained a specific clause that the liability to tax, including service tax would be borne by the recipient of the service/the other party to the agreement; that they were 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.
While dismissing the appeals of the Corporation, CESTAT President, Justice Raghuram observed (2014-TIOL-898-CESTAT-DEL),
1. A bona fide belief is a belief entertained by a reasonable person.
2. 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.
3. It 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.
4. It is axiomatic that no person can harbour a "bona fide belief" that a legislated liability could be excluded or transferred by a contract.
5. The appellant was clearly and exclusively liable to service tax on rendition of the taxable service of "sale of space or time for advertisement".
6. 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.
7. These were the core and essential obligations the appellant should have complied with.
8. We therefore find no basis for the claim that the appellant harboured a bona fide belief.
The Delhi Transport Corporation took the road to the High Court. The High Court agreed with the CESTAT that the plea of "bona fide belief" is devoid of substance and observed, "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."
However the High Court was lenient on penalty. It observed, "given the explanation about poor financial position in which the appellant was placed, possibly on account of highly subsidized transport facilities provided and the dependence on the grants from the government, reasonable cause had been shown for the default in paying service tax within the prescribed time ---- the imposition of penalty of Rs.7,19,01,910/- (Rupees Seven Crores Nineteen Lacs One Thousand Nine Hundred Ten Only) under Section 78 of the Finance Act, 1994 is unjust and uncalled for." ()
Is the bus on its way to the Supreme Court?
The point is many assessees believe that:
1. They are not liable to pay Service Tax if there is an agreement with the service recipient that tax liability is on the recipient.
2. They need not (or did not) pay Service Tax as it was not reimbursed by the recipient.
And there are many service recipients who refuse to reimburse the service tax paid/payable by the service provider. But that does not absolve the service provider from his statutory mandate of paying the tax.