PERSON LIABLE TO PAY SERVICE TAX CAN ONLY CHALLENGE LEVY.

[C.A. DEV KUMAR KOTHARI]

Relevant references and links:

U.P.S.R.T.C. Versus CCCE 2011 -TMI - 201649 / [2011] 30 STT 402 (SC), 2011 (21) S.T.R. 357 (SC) Decided on  12 January 2011

Eearlier article by author titled “

Tenant has no locus standi to challenge levy of service tax on commercial renting – a new twist.”  Webhosted at

DEVYANI INTERNATIONAL Versus UNION OF INDIA & OTHERS in  W.P. NO.30344/2010 W.P. NOS. 32261-68/2010(T-RES) 2011 -TMI - 202415 /  2011 (22) S.T.R. 262 (Kar.)

decided on

Other judgments referred to in earlier article referred above.

Dated -

Challenge of a levy on ground of being ultra virse:

14 March 2011.

We find many judgments in which virse of a tax provision is challenged on ground of being unconstitutional or being ultra virse the constitution or ultra virse the main enactment etc. We find that challenges are made by any party who is directly or indirectly affected by such levy. In many cases the petitioner is the trade union or association of affected party. As per little understanding of the provisions which the author have, he considered that any citizen of India can challenge provision of a tax law on ground of being ultra virse. This is because he may not like that the government should levy tax in an illegal manner, that his fellow citizens should not suffer due to illegal levy or that he may be affected in future if he is required to bear such tax and there can be many other such reasons which can be considered as ‘cause of action’ to challenge levy of any tax on ground of being unconstitutional, unreasonable, having restrictive impact impairing different type of freedoms granted under the Constitution.

Generally service provider is liable to pay tax under law:

We find that levy of service tax is on service, thus basically it is on service provider. However , there are some exceptions where service receiver is made liable to pay service tax on a reverse charge method. Therefore, generally show cause notices or demands are issued on service provider.

Burden may be borne by service receiver:

Service receiver may have to bear the burden of service tax. This may be as per trade practices or agreement between parties. However, the service provider is generally liable to pay service tax. When as per agreement or as per trade practices service receiver is liable to pay service tax ( though to the service provider) he is really affected party due to such levy.

Challenge can be by person liable to pay to government:

When levy is applicable on service provider, show cause notices, notice to file return of tax and demand notice etc. shall be issued on service provider. Therefore, service provider is the a party who is affected and therefore only such party (who is affected under law) can only challenge the levy. This is as per the judgment of the Supreme Court in the case of  U.P.S.R.T.C. Versus CCCE 2011 -TMI - 201649 / [2011] 30 STT 402 (SC), 2011 (21) S.T.R. 357 (SC) Decided on  12 January 2011 and as discussed below:

Case of  U.P.S.R.T.C:

U.P.S.R.T.C , is a State Road Transport Corporation carrying activities of Road Transportation by Stage Carriage. For such activities U.P.S.R.T.C. hires buses/ other vehicles from other bus owners under agreement.

Author assumes that as per agreement and trade practices   U.P.S.R.T.C. may be liable to pay service tax on vehicle hire charges payable to vehicle owners. Thus, U.P.S.R.T.C. is not liable to pay service tax as a service provider, though it may have to bear the burden of service tax, if the vehicle owners are asked to pay service tax on hire charges for vehicles payable by it to vehicle owners.

Service Tax department asked   U.P.S.R.T.C.  to supply  list of agreements / copies of  contractual agreements entered into between the private parties who have offered their buses on rent basis to the U.P.S.R.T.C.  /appellant. However, any Show Cause Notice (SCN) was not issued on appellant for payment of Service Tax or to file return etc.

U.P.S.R.T.C.  filed Writ Petition before   the Allahabad High Court, Lucknow Bench, challenging the communication of the Service Tax Department  sent to them  requesting to supply the list of contractual assignment entered into between the private parties who have offered their buses on rent basis to the appellant. In the said writ petition, the contention that was raised by the appellant was that no service tax could be imposed by the respondents on the buses hired by the appellant in view of the fact that no service tax is imposed by the respondents on the buses owned and possessed by the appellant and, therefore, similar treatment is also to be afforded to the buses hired by the appellant.  The Writ Petition was dismissed  on the ground that the appellant has no locus standi since they are not liable to pay service tax and any SCN etc. have not been issued on them. The department has only asked them to furnish details of vehicle owners / private parties  who provide them vehicles and who can be liable to pay service tax as service providers. Therefore, only parties liable to pay service tax can challenge levy of service tax.

On appeal before the Supreme Court the Supreme Court also dismissed appeal as not maintainable. Supreme Court concluded that since payment of such tax is demanded from the private bus operators, if anybody is really aggrieved, it is the private bus operators. In our considered opinion, if any challenge is to be made to such notice issued by the respondents, the same has to be done by the aggrieved party like the private bus operators. It is only they who can challenge the issuance of the aforesaid notices by taking recourse to the appropriate remedy as provided under the Finance Act, 1994.

Observations and order of the Supreme Court:

The Supreme Court observed and held as follows:

1. On going through the record, we find that no notice was issued by the respondents to the appellant demanding payment of service tax from it.
2. According to the respondents, the liability to pay such service tax under the provisions of Section 65 of the Finance Act is that of the private bus operators.
3. Show cause notices were also issued to the private bus operators by the respondents which are also placed on record.  
4.  In that view of the matter, we find no reason to interfere with the order passed by the High Court holding that the appellant has no locus standi to file the  present appeal as also the writ petition.
5. Since payment of such tax is demanded from the private bus operators, if anybody is really aggrieved, it is the private bus operators.
6. In our considered opinion, if any challenge is to be made to such notice issued by the respondents, the same has to be done by the aggrieved party like the private bus operators.
7. It is only they who can challenge the issuance of the aforesaid notices by taking recourse to the appropriate remedy as provided under the Finance Act, 1994.
8. In case the said aggrieved parties take recourse to such statutory remedy, they would be entitled to take and urge all issues which may be available to them in accordance with law.
9. The said issues as and when raised shall be considered and decided in accordance with law.  
10. With the aforesaid observations, the appeal stands disposed of.  

Cases in respect of Service Tax on Rent of Commercial Properties:

We find that in large number of cases tenants have challenged levy of service tax and the Writ Petitions were admitted and have been decided on the basis of petitions of tenants. In case of rent of such properties also the tenants are not service provider and they are not liable to pay service tax to the Government. The landlords are liable to pay the same to the Government, however, as per agreement or otherwise, the tenants were under obligation to pay service tax as an extra levy over and above agreed rent. 

We find that in one case Karnataka High Court dismissed the Writ Petition  on the ground that the tenant has no locus standi to challenge the levy. The case is of 

DEVYANI INTERNATIONAL Versus UNION OF INDIA & OTHERS in  W.P. NO.30344/2010 W.P. NOS. 32261-68/2010(T-RES) 2011 -TMI - 202415 /  2011 (22) S.T.R. 262 (Kar.) decided on Dated - 14 March 2011.

Though this judgment is after the Judgment of the Supreme court in case of U.P.S.R.T.C. however, we find no mention of the judgment in that case. In view of the judgment of the Supreme Court in case of U.P.S.R.T.C. it can be said that the judgment of Karnataka High Court is correct and judgments of other High Courts admitting and deciding on Writ Petitions filed by tenants are not correct.

Earlier article:

Readers may refer to earlier article by author titled “

Tenant has no locus standi to challenge levy of service tax on commercial renting – a new twist.”  Webhosted at

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1257

In this article the author had discussed in detail various aspect of service tax charged from tenants, collected, and paid by landlord to government. The author had also suggested that when tenant file a petition the landlord should also join as a petitioner and in case of pending cases landlords may be added as petitioners with permission of concerned court. In that case list and references of other cased admitted by High Courts were also given.

Authors point of view on the issue before the Supreme Court:

With due respect to the counsels of U.P.S.R.T.C.  the author feels that perhaps  counsels of U.P.S.R.T.C. could not press the basic fact that in case  service tax is levied on hire charges of vehicle, they will be party really affected by such levy as they have to pay the same to the vehicle owners/ providers who are service providers and liable to collect and deposit the same but have right to recover from appellant such tax.

That Service Tax imposed on them will be payable by appellant / Writ Petitioner that is U.P.S.R.T.C. as per agreement and /or trade practices.

The Counsels should have shown that under agreement U.P.S.R.T.C.  will be liable to pay the service tax, and that the  private vehicle providers are only a conduit to collect the tax and deposit with government. Therefore, appellants are affected party.

Had that been pressed strongly, author hope that the Supreme Court could have considered the challenge to the levy of service tax and the appeal against judgment of Allahabad High Court for the reason that appellant are the party who are finally and fiscally affected by the levy of service tax on hire of vehicles.    

Comments of author:

Common trade practices and general understanding in trade circles is that service tax is payable by service receiver, in addition to agreed value of services. In various clauses found in tenancy agreements entered into during last many years, particularly after attempts to levy service tax started in thinking process of government, it has been specifically provided that any such levy will be payable/ reimbursable by the tenant. Thus, the petitioners  who hire vehicle or tenants who take on rent premises are ultimately liable to pay service tax and also any other liability. Though the  vehicle owners or landlords are assessed to service tax, however service tax will be payable by service receivers / tenants, in addition to  hire or rent in case the courts ultimately held the levy of service tax on rent as valid.

Let us hope that the Service Tax Department shall not contend that various petitions filed by tenants which have been admitted and are pending are not maintainable in view of ruling of the Karnata High Court.

Landlords may be added as party and petitioners:

Various petitioners can take steps to add their landlords also as a party to the case as a petitioners to avoid controversy.