Whether the Service Tax Liability can be transferred to Third Party?

The concept of service tax was introduced
in the year 1994 by Chapter V of Finance Act, 1994.  According to the
provisions of the Act and the rules made there under every person providing
taxable services to any person is liable to pay service tax at the rates
specified now and then, to the credit of the Central Government. Now in certain
cases the service receiver is also liable to pay service tax at the rates
specified by the Government in this regard.  Every person paying the
service tax is required to register with the Central Excise Department and
liable to file returns in ST-3 form periodically.

The issue to be
considered in this article is whether the service tax liability can be
transferred to third party with reference to decided case laws.

In ‘Rastriya
Ispat Nigam Limited V. Dewan Chand Ram Saran’ – 2012 (4) – Supreme Court of
India  the appellant is a Government of India undertaking engaging in the
manufacture of steel products and pig iron for sale in the domestic and export
markets. In 1997 the appellant appointed the respondent as the handling
contractor. A formal contract was entered into between both parties. Clause 9.3
of the contract provides that the contractor shall bear and pay all taxes,
duties and other liabilities in connection with the discharge or obligation
under this order. Later the contractor invoked the arbitration clause for
raising a dispute as to its liability to pay service tax. The claim petition
was dismissed by arbitrator. The same was challenged by means of a petition
before the High Court which held that insofar as the service tax liability is
concerned the Rastriya Ispat Nigam Limited which had given the contract was the
assessee and liable to tax. Against this order the appellant filed the present
appeal before the Supreme Court.
The Supreme
Court held that service tax is an indirect tax and it is possible that it may
be passed on.  Therefore an assessee can certainly enter into a contract
to shift its liability of service tax. The Supreme Court further held that the
provisions concerning service tax are relevant only as between the appellant as
an assessee under the statute and the tax authorities. This statutory provision
can be o no relevant to determine the rights and liabilities between the
appellant and the respondent as agreed in the contract between two of them.
There was nothing in law to prevent the appellant from entering into an
agreement with the respondent handling contractor that the burden of any tax
arising out of obligations of the respondent under the contract would be borne
by the respondent. 
In ‘Delhi
Transport Corporation V. Commissioner of Service Tax’ – 2015 (4) – DELHI HIGH
COURT  the appellant entered into contracts with seven agencies to provide
space to such parties for display of advertisements on bus queue shelters and
time keeping booth. The agreement made with all the contractors are the same.
Clause 9 of the contract provides that it shall be the responsibility of the
contractor/advertiser to pay direct to the authority and MCD concerned the
advertisement tax or any other taxes levy payable or imposed by any authority
and the amount will be in addition to the licence fee quoted above. 
The Department
on the basis of information received from anti evasion branch found that the
appellant did not pay the service tax for the services rendered by it and
called for additional details/documents from the appellants which have been
promptly complied with by the appellant. The Department directed the appellant
to apply for service tax registration and also to pay the service tax and for
this purpose the Department directed the appellant to depute its officers for
computation of tax. Show cause notices were issued to the appellant. In its
reply the appellant contended that it is an autonomous body of Government of
NCT of Delhi created under the Road Transport Act and had no intention to
violate the provisions of the taxing statutes. The obligation for registration
under the Service Tax Rules had escaped the notice of its accounts department
and Chartered Accountant/auditors and thus, the omission was neither
intentional nor deliberate. After brought the same to the notice, the appellant
took steps for registration.  Since the appellant had been incurring
losses and depending on the grants given by the Government, the appellant moved
the Government for granting exemption from service tax. The appellant further
contended that in terms of the contractual agreement by the contractors engaged
by itr and that all such contractors, except the two, had been paying the
service tax chargeable in their respect pursuant to supplementary bills rose
from time to time and further that all such remittances received had been duly deposited
with the service tax department. The amount received from the contractors has
been shared with Delhi Municipal authority and as such the liability of service
tax is to be apportioned to the extent of 50%. The Adjudicating Authority
confirmed the demand along with interest and penalty.  The Tribunal upheld
the demand.
Before the High
Court the appellant relied on the judgment of the Supreme Court in ‘Rastriya
Ispat Nigam Limited’ (supra) in which the Supreme Court held that it is
possible that it may be passed on.  The appellant contended that having
entered into contracts in the nature, it was a legitimate expectation that the
service tax liability would be borne by the contractors/advertisers and thus
there was no justification for the appellant being held in default or burdened
with the penalty. 
The High Court
considering the contentions of the appellant held that the ruling of Supreme
Court could not be detracted from the fact that in terms of the statutory
provisions it is the appellant which is to discharge the liability towards the
Revenue on account of service tax. Undoubtedly the service tax burden can be
transferred by contractual agreements to the other party. The High Court held
that on account of such contractual arrangement the assessee cannot ask the
Department to recover the tax dues from a third party or wait for discharge of
the liability by the assessee till it has recovered the amount from its
contractors. 
The High Court
agreed with the findings of the Tribunal that the plea of ‘bona fide belief’ is
devoid of substance. 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 the part.
For purposes of 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 made there under. The High Court
upheld the order of the Tribunal except the penalty under Section 78 which was
set aside invoking Section 80 of the Chapter V of Finance Act.
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