Service Tax can not be withheld if contractor services are exempt : HC

Ms. Manmeet Arora, Sarad K. Sunny, Ms. Pavitra Kaur and Harkirat Singh, Advs. for the Petitioner. Ms. Mini Pushkarna, Ms. Swagata Bhuyan, Ms. Khushboo Nahar and Ms. Latika Malhotra, Advs. for the Respondent.

JUDGMENT

Jayant Nath, J. – This writ petition is filed by the petitioner seeking to quash the letter dated 15-5-2015 issued by the respondent/SDMC. By the said letter the respondent had asked the petitioner to submit the paid receipt/challan through which the service tax on the amounts released by the respondent for the period of 2012-13 and 2013-14 were deposited by the petitioner to the competent authority. Other connected reliefs are also sought.

2. The issue revolves around the act of the respondent in deducting the service tax amounts from the consideration payable to the petitioner on the alleged ground that the petitioner was liable to pay service tax under the contract but was exempted and hence, the consideration payable by the respondent gets reduced.

3. As per the petitioner, the respondent has withheld a sum of Rs.1,97,00,109/- towards the element of service tax from the running account bills raised by the petitioner for the period w.e.f. June, 2012 to May, 2016.

4. The case of the petitioner is that it was providing the services of lifting/collecting of municipal solid waste/garbage/malba/drain silt etc. and dumping the same to nearby designated site. It is pleaded that the services provided by the petitioner to the respondent under the said work order are exempted from taxable services as the same form part of the exempted list of services under section 93 of the Finance Act, 1994. It is also pleaded that the service tax was not applicable on the services provided by the petitioner to the respondent either at the time of award of the contract or presently.

5. On 15-3-2012, the MCD invited quotations for hiring of Light Motor Vehicle (hereinafter referred to as ‘LMV’) with auto tipping facility with driver of Gross Vehicle Weight of 1550 Kg. for narrow lanes with one labourer etc. The petitioner quoted a rate of Rs.1,972/- per vehicle per day. Vehicles were to be hired for the purpose of lifting/collecting of municipal solid waste/garbage/malba/drain silt etc. for a maximum period of five years or as required by the MCD. The rates could have been varied only in two eventualities, i.e. (i) increase/decrease in fuel; and (ii) increase/decrease in minimum wages. The rates were inclusive of all taxes and levies.

6. The respondent entered into an agreement on 27-8-2012 with the petitioner in pursuance to the work order that was issued on 2-6-2012 w.e.f. June 2012. The petitioner deployed 64 vehicles in West Zone and further 16 vehicles in Rohini Zone.

7. The petitioner raised running bills on the respondent for the work carried out under the said work order. The petitioner was duly paid as per the contractual rate i.e. Rs.1,934/- per day per vehicle.

8. However, on 15-5-2015, the respondent issued a letter to the petitioner to submit the paid receipt/challan vide which the service tax on the amounts released by the respondent for the period of 2012-13 and 2013-14 was deposited by the petitioner with the competent authority. It was stated in the same letter by the respondent that service tax is applicable on the services provided by the petitioner to the respondent under the said work order at the rate of 12.36% (including cess) and this element was considered and included in the justification of rates @ 10.36% by the respondent while awarding the work order. The said communication also states that an amount of Rs.50,20,461/- for the year 2013-14 have been irregularly released to the petitioner.

9. The respondent has filed a counter affidavit. In the counter affidavit, it is stated that contractual amount of Rs.1934/- per day per vehicle is payable to the petitioner including the component towards payment of service tax. The element of service tax had been considered and included in the justification of rates. As no service tax is applicable and payable by the petitioner, there was no justification for payment of the said amount to the petitioner. Hence, it is claimed that the municipal corporation has rightfully deducted an amount of Rs.1,10,29,902/- on account of service tax and total of Rs.1,28,56,647/- inclusive of deduction on account of service tax and labour cess.

Reliance is also place on a work order issued to the petitioner on 22-3-2016 where the petitioner agreed to receive at the rate of Rs. 1,830/- per day per vehicle. It is pleaded that this lesser amount does not include service tax, as none was payable.

It is further pleaded that the present writ petition is not maintainable as the petitioner ought to have filed a suit for recovery as the petitioner is claiming certain amounts as due and payable to it by the municipal corporation. It is also pleaded that disputed questions of facts arise and hence the present writ petition is not maintainable.

10. I have heard the learned counsel for the parties.

11. The learned counsel for the petitioner, Ms. Manmeet Arora has made the following submissions:

12. The learned counsel for the respondent, Ms.Mini Pushkarna confirms that it was pursuant to the auditor’s objection that the deductions have been made. She submits that the auditors are statutory auditors appointed under sections 204 and 205 of the DMC Act, 1957. Hence, their reports would be extremely relevant. She has reiterated the submissions made in the counter-affidavit.

13. I may first look at the relevant clause of the work order w.e.f. 2-6-2012 between the parties, which read as follows:

“Dear Sir,

With reference to inviting offer in the subject matter and your bid submission in the matter, your tender has been accepted on behalf of the competent authority in SDMC at your negotiated / finally offered tender rates [contract unit rate[fee]],which is described as here below:

The rates includes registration charges, parking charges, washing charges, insurance, service tax, Labour Cess, accident claims (if any), cost of fuel, lubricating oil, water.etc., Challan, salary to driver as well as labour, implementation of all labour relates law (in respect of driver & labours) and all repairs & maintenance etc.

Vehicles will be hired for a maximum period of 5years from the date of issue of the Work Order, on daily basis or as required by the department and the escalation on the awarded rate due to increase/ decrease in fuel and minimum wages, will be paid as follows by considering the rates of CNG@30/- per kg; petrol rate@63.70/- per ltr and minimum wages rate @297/- per day(Rate of one beldar comes to Rs. 238/- & Rs. 297/- as on date for general purpose &foul condition respectively)

The above terms also form part of the Agreement between the parties dated 27–8–2012.

14. It is clear from the perusal of the above that the agreed rate was of Rs.1934/- per day per vehicle for eight hours of working. The rate was all inclusive including service tax, labour cess, accident claims etc. Escalation on the awarded rate was allowed in case of increase /decrease in fuel and minimum wages as stipulated only.

15. The important thing that follows is that the aforesaid rate is all inclusive. It is subject to increase/decrease only in case of variation of fuel rates and minimum wages. There is no stipulation that in case service tax, insurance, registration charges, parking charges, etc. are varied, the charges payable will be increased/decreased. It is manifest that there is no stipulation in the agreement that the charges are in any manner linked with the service tax. In fact, there is nothing in the contract that even specifies what rate of the service tax is allegedly payable. The respondent is needlessly adding words to the agreement to try and justify the deductions for alleged nonpayment of service tax.

16. I may look at the Audit Objection which is the basis of the deduction from the agreed consideration. The said communication dated 20–3–2015 states that the respondent has been passing bills of the petitioner though service tax is not shown separately in the bills as having paid. It further notes that as per notification dated 20–6–2012, service tax is not payable whereas it is an included element in the rate. Hence, the report concludes that this amount has been wrongly released.

17. In my opinion the said conclusion of the Audit team is wrong and arrived at de hors the terms of the agreement dated 27–8–2012 between the parties. The agreed rate as per the agreement is fixed at Rs.1934/- per day all inclusive. The rate doe not vary based on increase or decrease of various stipulated components including service tax. The clear terms of the agreement do not warrant deduction of rates other than on account of full or minimum wages. Hence, there was no justification for the respondent to deduct the payments of the petitioner on account of exemption of service tax.

18. My above conclusion is fortified by another important fact. The petitioner has taken a stand that the service tax was exempt on the said service even prior to 20-6-2012. It pleaded that on 1-6-2017 Section 66 of Service Tax Finance Act came into effect. It provided that service shall be levied at the rate of 12% of the value of the taxable service which are listed in clause 105 of Section 65 of the said Act. It is stated that Section 65, clause 105 does not anywhere specify that Service of Collection of Municipal Solid Waste as a taxable service. Hence, it is pleaded that no service tax was payable on the service being provided by the petitioner at any stage. It may be noted that this plea is clearly raised by the petitioner in the writ petition. Respondent have not denied this in the counter-affidavit or in the course of arguments made in court. It is manifest that service tax was not payable throughout i.e. when the tender was flouted, when the rates were negotiated with the petitioner, who was the lower bidder, when the work order was issued on 2-6-2012 or when the agreement was executed on 27-8-2012. Hence, mere because in some internal working sheets/calculations, the respondent took into account some rate of service tax which did not exist, the same cannot be ground for the petitioner to unilaterally change the terms of the contract and reduce the negotiated rate payable to the petitioner.

19. It is also clear that the parties understood that the agreed rate payable to the petitioner does not include any component of service tax. This is manifest from the fact that subsequent to the work order dated 2–6–2012, the petitioner started raising invoices. None of the invoices stipulated a separate mention of service tax in the bills. The respondent continued to pay these bills. Payments have been made of the bills without any deductions of alleged service tax from June, 2012 to April, 2015. Suddenly thereafter solely on Audit Objections, the respondent decided to deduct amounts of alleged service tax component from the paid/future bills of the petitioner.

20. By the conduct of the parties, it is manifest that the parties understood that the service tax was not a component of the agreed rate.

21. In this context, reference may be had to the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. State of Gujarat & Anr., [1975] 1 SCC 199 where it was held as follows:

11. “In the process of interpretation of the terms of a contract, the court can frequently get great assistance from the interpreting statements made by the parties themselves or from their conduct in rendering or in receiving performances under it. Parties can, by mutual agreement, make their own contracts; they can also by mutual agreement remake them. The process of practical interpretation and application, however, is not regarded by the parties as a remaking of the contract; nor do the courts so regard it. Instead, it is merely a further expression by the parties of the meaning that they give and have given to the terms of their contract previously made. There is no good reason why the courts should not give great weight to these further expressions by the parties, in view of the fact that they still have the same freedom of contract that they had originally. The American Courts receive subsequent actings as admissible guides in interpretation. It is true that one party cannot build up his case by making an interpretation in his own favour. It is the concurrence therein that such a party can use against the other party. This concurrence may be evidence by the other party’s express assent thereto, by his acting in accordance with it, by his receipt without objection of performances that indicate it, or by saying nothing when he knows that the first party is acting on reliance upon the interpretation (see Corbin on Contracts, Vol. 3, pp.249 & 254-56).

15. In Deo v. Rias [(1832) 8 Bing 178, 186] Tindal, C.J. said:

“We are to look at the words of the instrument and to the acts of the parties to ascertain what their intention was; if the words of the instrument be ambiguous, we may call in the aid of the act done under it as a clue to the intention of the parties.”

And in Chapman v. Bluck [(1838) 4 Bing NC 187, 195] Park, J. said:

“The intention of the parties may be collected from the language of the instrument and may be elucidated by the conduct they have pursued.”

Odgers observes [ See Odgers’ Constrcution of Deeds and Statutes, 5th Edn. By Dworkin, p. 83] :

“In the case of an ambiguity, judicial notice will be taken of the way in which the parties themselves have interpreted their rights and duties under the document.”

22. Reference may also be had to the judgment of the Supreme Court in the case of Transmission Corporation of Andhra Pradesh Ltd. & Ors. v. GMR Vemagiri Power Generation Limited & Anr., [2018] 3 SCC 716 where it was held as follows:

21. “In the event of any ambiguity arising, the terms of the contract will have to be interpreted by taking into consideration all surrounding facts and circumstances, including correspondence exchanged, to arrive at the real intendment of the parties, and not what one of the parties may contend subsequently to have been the intendment or to say as included afterwards, as observed in Bank of India v. K. Mohandas [Bank of India v. K. Mohandas, (2009) 5 SCC 313]

“28. The true construction of a contract must depend upon the import of the words used and not upon what the parties choose to say afterwards. Nor does subsequent conduct of the parties in the performance of the contract affect the true effect of the clear and unambiguous words used in the contract. The intention of the parties must be ascertained from the language they have used, considered in the light of the surrounding circumstances and the object of the contract. The nature and purpose of the contract is an important guide in ascertaining the intention of the parties.”

23. Keeping in view the conduct of the parties, it is clear that the parties did not envisage deduction in the agreed rate from alleged service tax payment. The agreed rate was understood by the parties to be all inclusive and the same would bind the parties.

24. I may deal with the two other submissions of the petitioner. It was firstly urged that the parties had on 22-3-2016 entered into a fresh contract where the rate was agreed to be Rs.1830/- per day per vehicle i.e. less the service tax. This contention does not help the petitioner. The fresh work order dated 22–3–2016 has been done by the consent of parties. Parties while negotiating a fresh contract were free to agreed on any rate mutually convenient. Even in this case the petitioner was free under Section 73 of the Contract Act to operate the contract and by consent of parties modify the rates. No such thing was done here. The respondent unilaterally sought to reduce the rate.

25. The next contention raised by the learned counsel for the respondent is that the present writ petition for recovery of money does not lie. The petitioner was obliged to file a suit for recovery.

26. I may look at the legal position in this regard. Reference may be had to the judgment of the Supreme Court in the case of Godavari Sugar Mills Ltd. v. State of Maharashtra and Ors., [2011] 2 SCC 439. The Supreme Court held as follows:-

“8. The observations in Suganmal [AIR 1965 SC 1740] related to a claim for refund of tax and have to be understood with reference to the nature of the claim made therein. The decision in Suganmal [AIR 1965 SC 1740] has been explained and distinguished in several subsequent cases, including in U.P. Pollution Control Board v. Kanoria Industrial Ltd. [(2001) 2 SCC 549] and ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. [(2004) 3 SCC 553] The legal position becomes clear when the decision in Suganmal [AIR 1965 SC 1740] is read with the other decisions of this Court on the issue, referred to below:

We are therefore of the view that reliance upon Suganmal [AIR 1965 SC 1740] was misplaced, to hold that the writ petition filed by the appellant was not maintainable.”

27. Hence as per above judgment in clause v, the Court took the view that where facts are not in dispute and where the collection of money was without authorities of law, a reference may be ordered.

28. Similarly reference may be had to the judgment of the Supreme Court in the case of U.P. Pollution Control Board & Ors. v. Kanoria Industrial Ltd. and Anr., [2001] 2 SCC 549 where the Supreme Court held as follows:-

” 16. In support of the submission that a writ petition seeking mandamus for mere refund of money was not maintainable, the decision in Suganmal v. State of M.P. [AIR 1965 SC 1740 : (1965) 56 ITR 84 : (1965) 16 STC 398] was cited. In AIR para 6 of the said judgment, it is stated that

“we are of the opinion that though the High Courts have power to pass any appropriate order in the exercise of the powers conferred under Article 226 of the Constitution, such a petition solely praying for the issue of a writ of mandamus directing the State to refund the money is not ordinarily maintainable for the simple reason that a claim for such a refund can always be made in a suit against the authority which had illegally collected the money as a tax”.”

29. Hence, normally a writ petition would not lie for recovery of money. However, depending on the facts and circumstances of a case, the power to direct refund can be exercised sparingly. In my opinion the facts of this case warrant exercise of this power to direct the respondent to release amounts wrongly withheld for a non-existing service tax. The petitioner was the lowest bidder at Rs.1972/- per vehicle per day. This amount after negotiations was reduced to Rs.1934/- per day. When the tender was floated on 15-3-2012 or when the negotiation of rates took place or on 2-6-2012 when the work order was issued or on 27-8-2012 when the Agreement was executed, there was no service tax leviable on Service of Waste Collection or disposal. Simply because the existing position was re-interacted by the State by issue of a notification dated 20–6–2012 did not warrant the act of the respondent to in 2015 claim refund of payments already made on the plea that the petitioner is wrongly being paid an amount for service tax. The respondent has acted in a grossly arbitrary manner and cannot justify withholding the said amount.

30. Accordingly, in my opinion, the respondent have acted illegally, wrongly and malafidely withholding the amount on the alleged ground that service tax is not applicable to the agreed rate. A writ is issued to the respondent directing release all pending payments to the petitioner deducted on the ground of non-payment of service tax. Needful be done within two months from today.

31. The petition stands disposed of. All pending applications, if any, are also disposed of.

32. As the court is presently hearing matters vide video conferencing, the court master may also inform Ld. Counsels for the parties on phone about the present pronouncement.

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