2025 (5) TMI 1534 - HC - Service Tax

Scope of mutual contract regarding reimbursement of service tax paid - Entitlement to reimbursement of service tax restricted to daily maintenance charges - pendente lite interest - delay for payment under VCES 2013 - Interpretation of the commercial contracts entered into between the parties - Plaintiff seeking to take advantage of its own default and made a claim for interest on the defendant on a specious plea that the defendant reimbursed the amount after a considerable lapse of time - HELD THAT - Although the KoPT could not have insisted for the bank guarantee and indemnity bond cum undertaking as a condition precedent for release of the amount towards reimbursement the correspondence made with the authorities concerned by the parties independent of each other would show that all of them have been seeking clarifications with regard to the requirement of submitting original discharge certificate in VCES-3. We do not agree with the learned single judge that the original discharge certificate was a pre-requisite for claiming reimbursement. The payment of the service tax through the Scheme of 2013 has complicated the issue as it requires a valid discharge certificate so as to absolve the service provider from all liabilities. We accept the submission on behalf of the plaintiff that the production of the challans conforms to Rule 9 (1) (bb) and Rule 9 (1) (e) of the Cenvat Credit Rules 2004 and as regards admissibility of Cenvat credit the said rules are to be followed. However on consideration of the whole fact we cannot conclude that there has been an initial inexcusable neglect on the part of KoPT in releasing the amount. However it cannot be denied that in view of the clarification of the Service Tax Authorities on 20th July 2016 KoPT should have released the payment. The reimbursement was made on 10th March 2017. We do not find any satisfactory reason for not releasing the amount immediately after 20th July 2016. However it cannot be denied that in view of the clarification of the Service Tax Authorities on 20th July 2016 KoPT should have released the payment. The reimbursement was made on 10th March 2017. We do not find any satisfactory reason for not releasing the amount immediately after 20th July 2016. The contract does not stipulate payment of interest on account of delay. However the commercial nature of the transaction cannot be disputed. It also cannot be disputed that the plaintiff had paid the service tax and the debit notes disclosed and marked as Exhibits during trial clearly show payment towards service tax by the plaintiff in terms of the agreement. Debit notes were marked as Exhibits without any objection. The defendant also does not dispute that service tax has been paid on the dates reflected from challans enclosed with the debit notes. The defendant has accepted the order passed by the learned Single Judge with regard to reimbursing a sum of Rs. 3, 94, 34, 035/- against eight supplementary invoices raised by KoPT towards reimbursement of service tax. It was during the subsistence of the contract that the plaintiff availed of the Voluntary Compliance Encouragement Scheme 2013 and paid the service tax in terms of the scheme. The relevant circulars of the service tax department makes it clear that CENVAT Credit shall only be available after payment of entire service tax dues with interest if any and upon obtaining discharge certificate in Form of VCES-3 since the declaration made in the scheme becomes conclusive only on issuance of discharge certificate under Section 107 (7) of the VCES 2013.. The plaintiff had made balance payment of Rs. 1, 54, 34, 035/- under VCES and a further sum of Rs. 13, 97, 767/- on account of interest thereon. It was alleged by the plaintiff that the said interest had arisen solely due to the neglect and failure of the defendant to reimburse the first instalment of Rs. 2, 40, 00, 000/- to the plaintiff on time. In view of the clarification of the service tax department on 20th July 2016 the aforesaid amount was payable on the basis of the documents furnished. A timely payment would have saved the payment of interest. It is clear that the entire service tax liability has been cleared by the plaintiff and the defendant had also reimbursed the said service tax of Rs. 3, 94, 34, 035/- simultaneously with the respondent making the payment of Rs.3.94 crores to the appellant. In compliance with this court s order dated 24th July 2017 the appellant had also handed over the original discharge certificate in Form-VCES-3 dated 16th April 2015 issued by the Service Tax department. As is evident from the CENVAT registrar for the month of March 2017 and also the service tax return for the period of October 2016 to March 2017 the respondent had successfully availed of the CENVAT credit. The refusal on the part of the defendant was an apprehension of whether KoPT would be entitled to take advantage of the CENVAT Credit on the basis of the documents submitted by the plaintiff. The plaintiff had also addressed such query to the Department of Service Tax. On such consideration we upturn the order passed by the learned Single Judge. We are of the view that the plaintiff having regard to the facts and circumstances of the case and the disclosures made during the proceeding as also the order dated 24th February 2017 in W.P No.948 of 2016 shall be entitled to a sum of Rs.26.42 lacs on account of interest on Rs. 3, 94, 34, 035/- at the rate of 10% per annum. We have considered the communication dated 20th July 2016 and the failure of the defendant to release such amount immediately thereafter in allowing interest. There is a delay of almost eight months in releasing the amount since clarification. In the event the said sum is paid within two months from date it shall not carry any further interest in default the said sum shall carry interest at the rate of 10% per annum from the date of institution of the suit till payment. The suit is decreed accordingly. The appeal succeeds. The department is directed to draw up the decree as expeditiously as possible.

Summary

The core legal questions considered by the Court include:

1. Whether the plaintiff was entitled to reimbursement of service tax paid under the Voluntary Compliance Encouragement Scheme (VCES) 2013 by the defendant as per the terms of the contracts executed between the parties.

2. Whether the defendant was justified in withholding reimbursement pending production of the original discharge certificate in Form VCES-3 and/or insisting on furnishing bank guarantees and indemnity bonds.

3. Whether the plaintiff was entitled to interest on delayed reimbursement of the service tax paid, and if so, at what rate and from which dates.

4. The applicability and interpretation of contractual clauses relating to reimbursement of service tax and payment of interest, including Clause 3.12 (or 2.13) and Clause 6.8 of the contracts.

5. The relevance and effect of statutory provisions and rules, including the Finance Act 2013 (VCES Scheme), CENVAT Credit Rules 2004, and relevant circulars issued by the Service Tax Department.

6. The legal effect of the writ petition order directing reimbursement of service tax and the plaintiff's entitlement to further claims including interest.

Issue-wise Detailed Analysis:

1. Entitlement to Reimbursement of Service Tax under the Contracts:

The contracts between the parties contained Clause 3.12 (also referenced as Clause 2.13) which stipulated that the rate quoted by bidders was inclusive of all taxes and duties except Service Tax and Educational Cess, which were to be reimbursed by the defendant on production of documentary evidence. The plaintiff initially raised bills for reimbursement of service tax limited to daily maintenance charges, which were accepted and paid by the defendant. Later, upon merger and expert advice, the plaintiff paid the entire service tax liability under the VCES 2013 scheme.

The plaintiff submitted debit notes along with supporting documents including challans and Form GAR-7 evidencing payment of service tax. The defendant, however, withheld reimbursement pending production of the original discharge certificate in Form VCES-3 and insisted on bank guarantees and indemnity bonds.

The Court examined the contractual language and found that the clause required submission of "documentary evidence" of payment for reimbursement. The plaintiff's submission of debit notes accompanied by challans and invoices complied with Rule 9(1)(bb) and 9(1)(e) of the CENVAT Credit Rules, 2004, which govern admissibility of CENVAT credit on the basis of supplementary invoices and challans evidencing payment of service tax.

The affidavit filed by the Deputy Commissioner (Legal), Service Tax Department, clarified that the defendant was entitled to CENVAT credit on the basis of supplementary invoices issued by the plaintiff, supporting the plaintiff's contention that the documentary evidence submitted was sufficient.

The Court held that the defendant's insistence on the original discharge certificate as a precondition for reimbursement was not contemplated under the contract and was unreasonable. The VCES scheme and the discharge certificate were statutory provisions that did not form part of the contract's documentary evidence requirement.

2. Validity of Defendant's Demand for Bank Guarantee and Indemnity Bond:

The defendant's demand for an irrevocable bank guarantee and indemnity bond cum undertaking was challenged by the plaintiff through a writ petition. The writ court rejected the defendant's contention and directed reimbursement upon production of the discharge certificate, without demanding further security.

The Court observed that the defendant's demand was beyond the terms of the contract and was not justified. The plaintiff was entitled to reimbursement upon production of documentary evidence, which included the debit notes and challans.

3. Applicability and Interpretation of the VCES Scheme and Form VCES-3:

The VCES scheme, introduced by the Finance Act 2013, provided a mechanism for voluntary payment of service tax dues with immunity from penalty and interest upon declaration and payment within prescribed timelines, culminating in issuance of a discharge certificate in Form VCES-3.

The defendant argued that reimbursement was contingent upon production of this discharge certificate to avail CENVAT credit. However, the Court noted that the plaintiff was the declarant under the scheme and had paid the tax dues. The scheme's provisions regarding the discharge certificate were relevant for statutory compliance and credit availing but did not override the contractual obligation to reimburse on production of documentary evidence.

The Court further held that the plaintiff's entitlement to reimbursement was independent of the defendant's ability to avail CENVAT credit, and the contractual clause did not stipulate the discharge certificate as a condition precedent.

4. Claim for Interest on Delayed Reimbursement:

The plaintiff claimed interest at 18% per annum on the delayed reimbursement amount, corresponding to the interest rate charged by the Service Tax authorities for delayed payment of service tax under Section 75 of the Finance Act, 1994.

The defendant contended that Clause 6.8 of the contract barred payment of interest on sums payable and that there was no contractual or statutory basis for interest. The defendant also argued that the delay was not willful but due to the plaintiff's failure to produce the discharge certificate earlier.

The Court analyzed Clause 6.8 in conjunction with Clause 6.1 and found that Clause 6 related to payments "due to the contractor" in respect of work, certified by the Engineer, and did not cover reimbursement of service tax. Hence, Clause 6.8's bar on interest did not apply to reimbursement claims.

Considering the commercial nature of the transaction, the plaintiff's payment of service tax, and the defendant's delay in reimbursement after clarification from the Service Tax Department on 20th July, 2016, the Court found that the plaintiff was entitled to interest, but not at the claimed 18% per annum.

The Court exercised its discretion under Section 34 of the Code of Civil Procedure, 1908, to award interest at 10% per annum on Rs. 3,94,34,035/-, allowing for an equitable rate considering the circumstances. The Court noted an approximately eight-month delay by the defendant in releasing the amount after the clarification and ordered interest accordingly.

5. Treatment of Competing Arguments and Evidence:

The Court carefully considered the parties' arguments on contractual interpretation, statutory provisions, and documentary evidence. It rejected the defendant's strict reliance on the discharge certificate as a condition precedent and the demand for bank guarantees, viewing these as beyond the contract's scope.

The Court also acknowledged the plaintiff's initial confusion regarding applicability of service tax and the voluntary compliance under the scheme, which complicated the issue but did not absolve the defendant from timely reimbursement once documentary evidence was furnished.

The affidavit of the Service Tax Department was pivotal in clarifying admissibility of CENVAT credit and the sufficiency of supplementary invoices and challans as documentary evidence.

6. Final Conclusions:

The Court upheld the plaintiff's entitlement to reimbursement of service tax paid under the VCES scheme upon production of debit notes and supporting documents, overruling the defendant's demand for the original discharge certificate as a precondition.

The Court found that the defendant was responsible for delay in reimbursement after 20th July, 2016, when the Service Tax Department clarified admissibility of CENVAT credit on the submitted documents.

Accordingly, the plaintiff was entitled to interest on the reimbursed amount at 10% per annum from the date of suit institution until payment, with no further interest if paid within two months of the judgment.

Significant Holdings:

"The Court held that the defendant's insistence for furnishing the original discharge certificate in Form VCES-3 as a precondition for reimbursement was not contemplated under the contract and was unreasonable."

"The plaintiff having fulfilled contractual obligations by submitting debit notes with challans and invoices evidencing payment of service tax is entitled to reimbursement as per Clause 3.12 of the contract."

"Clause 6.8 of the contract which bars payment of interest applies only to payments 'due to the contractor' in respect of work certified by the Engineer and does not apply to reimbursement of service tax."

"In exercise of equitable jurisdiction under Section 34 CPC, the plaintiff is entitled to interest at 10% per annum on the reimbursed sum for delay caused by the defendant after the Service Tax Department's clarification dated 20th July, 2016."

"The VCES scheme and the statutory discharge certificate do not form part of the contractual documentary evidence required for reimbursement."

"The affidavit of the Service Tax Department clarifying admissibility of CENVAT credit on supplementary invoices and challans is binding and supports the plaintiff's entitlement."

"The defendant cannot withhold reimbursement on the ground of apprehension regarding CENVAT credit, once documentary evidence as per the contract is furnished."