Service Tax

TRANSFERRING OF SERVICE TAX LIABILITY

UNDER A CONTRACT

 

 

An assessee can certainly enter into a contract to shift his liability of tax and no law prohibits this despite casting a responsibility of tax under reverse charge mechanism.  In a tendered contract, it is the responsibility of a contractor to estimate such liability by himself while participating in the bidding process and even he is enabled to seek clarification on this to employer while doing so.

This applies to any indirect tax laws. For example, it is open to a seller, under his contract with the buyer, to recover the Sales Tax from the buyer, and to pass on the tax burden to him and this is a fully legal and valid contract term.

 

It is in this connection, if there are clauses for shifting of tax liability and inclusion of service tax liability to this, as observed by Supreme Court in Laghu Udyog Bharati v Union of India (AIR 1999 SC 2596), service tax being an indirect tax, it is possible that it may be passed on.

 

Therefore, there cannot be any difficulty in accepting that the liability of a service recipient can be shifted to the provider and vice versa through a contract for the purpose. The provisions concerning service tax are relevant only as between the Assessee under the statute and the tax authorities. The statutory provisions under Finance Act or Service Tax Rules can be of no relevance to determine the rights and liabilities between the contracting parties as agreed in the contract between two of them. To reiterate, there is nothing in law to prevent one party  from entering into an agreement with the contractor that the burden of any tax arising out of obligations of such party under the contract would be borne by the contractor.

 

If there are clauses in contract meaning that a particular party only would be liable to honour its tax liabilities under this contract as per law, and not as per the obligations under the contract, there was no need to make such a provision in a bilateral commercial document executed by the parties, since such party would be otherwise also liable for the same. Therefore, these clauses forming indispensable part of a contract will have to be read as incorporated only with a view to provide for contractor’s acceptance of the tax liability arising out of his obligations under the contract.

 

It is very much a conventional and accepted commercial practice adopted by many organisations to shift such liability to the contractor. In the case of Numaligarh Refinery Ltd. vs. Daelim Industrial Co. Ltd., reported in 2007 (8) SCC 466 the Supreme Court itself has held that by virtue of a clause “All taxes and duties in respect of job mentioned in the aforesaid contracts shall be the entire responsibility of the contractor…” the contractor was liable to pay and bear the ‘countervailing duty’ on the imports though this duty came into force subsequent to the relevant contract. This demonstrates that similar clause in contract will bind the contractor of all tax liabilities including service tax, even if it is on reverse charge basis.

 

In the circumstance, it is felt that there is no manner of doubt left that when there is a clause to that effect, all the taxes and levies shall be borne by the designated party including the service tax portion to be paid by the other (being the recipient of services).