2025 (6) TMI 1270 - HC - Service Tax

Liability to pay service tax - rent received for a commercial building - service provider or service receiver is liable to pay - terms of the expired lease agreement be relied to fix the liability to pay the service tax on the service receiver or not - application of principle of deeming fiction - HELD THAT - The Hon ble Supreme Court had explained the reason for imposing service tax and the meaning of service tax in All India Federation of Tax Practitioners vs- Union of India and others 2007 (8) TMI 1 - SUPREME COURT . Following this judgement in Association of Leasing and Financial Service Companies vs- Union of India and otheres 2010 (10) TMI 4 - SUPREME COURT and Union of India vs- Bengal Shrachi Housing Developmnt Limited and another r 2017 (11) TMI 444 - SUPREME COURT the circumstances under which the duty of taxpayer be passed on to the recipient of the service. In all these Judgments the Apex Court had unequivocally held that service tax is an indirect tax meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. There is no legal impediment for the parties by agreement pass on the liability. This Court on considering the submissions in the light of the judicial pronouncements and the expression found in the lease agreement holds that after the lease deed expired due to efflux of time the surviving covenants are deemed to be in force and enforceable. Conclusion - For letting premises for rent to be used for commercial purpose the service tax to be paid by the service provider/landlord. The responsibility to pay the service tax can be passed on to the service receiver/tenant by agreement. In the instance case there is neither explicit nor implicit agreement to that effect. Appeal suit dismissed.

Summary

The core legal questions considered by the Court are:

(1) Whether the liability to pay service tax under the Finance Act, 1994, for rent received for a commercial building, rests on the service provider (landlord) or the service receiver (tenant);

(2) Whether the terms of an expired lease agreement can be relied upon, applying the principle of deeming fiction, to fix the liability to pay service tax on the service receiver.

Regarding the first issue, the Court examined the statutory framework under the Finance Act, 1994, particularly Sections 65 and 68, and related Service Tax Rules. Renting immovable property for commercial purposes became a taxable service effective 1 June 2007, classified under Section 65(105). Section 68(1) clearly places the liability to pay service tax on the service provider, i.e., the landlord. Rule 2(1)(d) of the Service Tax Rules, 1994, reinforces this by specifying that the person liable for service tax on renting/leasing commercial buildings is the service provider.

The Court referred to authoritative Supreme Court decisions to elucidate the nature of service tax as an indirect tax. In All India Federation of Tax Practitioners v. Union of India, the Court explained the rationale for imposing service tax and its character. Subsequent decisions, including Association of Leasing and Financial Service Companies v. Union of India and Union of India v. Bengal Shrachi Housing Development Ltd., clarified that although the service provider is primarily liable for service tax, the tax being indirect may be passed on to the service recipient by agreement. The Supreme Court emphasized that unless there is an explicit or implicit agreement to that effect, the legal liability to pay service tax remains with the service provider.

In the present case, the trial court rightly held that the landlord, as the service provider, is liable to pay the service tax. The respondents (tenants) had vacated the premises pursuant to a compromise agreement which was silent on any transfer of service tax liability. The Court noted that the landlord did not claim service tax reimbursement during negotiations or vacating, further supporting the conclusion that no agreement existed to shift liability.

On the second issue, the Court analyzed whether the expired lease agreement's terms could impose service tax liability on the tenant by applying the principle of deeming fiction, which holds that certain covenants survive expiration of the lease. The lease agreement dated 22.05.2003, last renewed for five years, predated the introduction of service tax on rent in 2007. Consequently, the agreement did not specifically address service tax liability.

Clause 4 of the lease deed required the lessee to pay "all charges, payable for consumption of electricity and water charges payable to the concerned authorities and all other outgoings for its business." The appellant contended that "all other outgoings" included service tax, relying on the Delhi High Court decision in Meattles Pvt. Ltd. v. HDFC Bank Ltd., where the court held that the expression "outgoing" was wide enough to encompass service tax.

The respondents argued that the phrase "all other outgoings for its business" should be interpreted restrictively by the ejusdem generis rule, limiting liability to charges connected with the tenant's business operations, excluding service tax on rent, which relates to the premises rather than the business.

The Court distinguished the Meattles case, noting that the covenant there referred to "charges and other outgoings in respect of the premises," a broader phrase encompassing service tax. In contrast, the present lease's language confines outgoings to those "for its business," which does not naturally include service tax on rent. Hence, the Court held that the expired lease's terms do not impose service tax liability on the tenant by implication or deeming fiction.

In applying the law to the facts, the Court found no explicit or implicit agreement transferring service tax liability to the tenant. The landlord's failure to register for service tax or obtain a registration number, coupled with the absence of any contractual clause or compromise term shifting the burden, reinforced the conclusion that the landlord alone is liable to pay the service tax.

The Court considered competing arguments thoroughly: the appellant's reliance on the broad interpretation of "outgoings" and the Delhi High Court precedent versus the respondents' narrower interpretation grounded in ejusdem generis and the statutory scheme. The Court favored the latter, emphasizing the necessity of clear contractual language to pass on indirect tax liability.

Ultimately, the Court concluded that service tax on renting commercial premises is payable by the service provider unless there is an explicit or implicit agreement to the contrary. Since such agreement was absent, the trial court's dismissal of the landlord's suit for recovery of service tax from the tenants was upheld.

Significant holdings include the following verbatim excerpt from the judgment:

"For letting premises for rent to be used for commercial purpose, the service tax to be paid by the service provider/landlord. The responsibility to pay the service tax can be passed on to the service receiver/tenant by agreement. In the instant case, there is neither explicit nor implicit agreement to that effect. Therefore, dismissal of the suit by the Trial Court is confirmed."

The Court reaffirmed the principle that service tax is an indirect tax primarily leviable on the service provider, and passing on the liability to the service recipient requires clear contractual consent. It clarified that expired lease covenants survive only to the extent that they do not conflict with statutory provisions and must be interpreted in light of the language used and the nature of the charges involved.

In conclusion, the Court held:

(1) The liability to pay service tax on rent for commercial premises under the Finance Act, 1994, lies with the service provider (landlord) by statutory mandate;

(2) The expired lease agreement's terms do not impose service tax liability on the tenant by deeming fiction or implication, given the language confines outgoings to business-related charges;

(3) There was no explicit or implicit agreement between the parties to shift service tax liability to the tenant;

(4) The trial court's dismissal of the landlord's suit for recovery of service tax from the tenant is affirmed.