Case: Rashtriya Ispat Nigam Ltd Vs. M/S Dewan Chand Ram Saran

4. The appellant – a Govt. of India undertaking is engaged in the manufacture of steel products and pig-iron for sale in the domestic and export markets. The respondent is a partnership firm carrying on the business of transportation of goods. In the year 1997, the appellant appointed the respondent as the handling contractor in respect ofiron and steel materials from their stockyard at Kalamboli, Navi Mumbai. A formal contract was entered into between the two of them on 17.6.1998. ‘Terms and conditions for handling of iron and steelThe Contractor shall bear and pay all taxes, duties and other liabilities in connection with discharge of his obligations under this order. Any income tax or any other taxes or duties which the company may be required by law to deduct shall be deducted at source and the same shall be paid to the Tax Authorities for the account of the Contractor and the Company shall provide the Contractor with required Tax Deductionof service tax:5. Service Tax was introduced for the first time under Chapter V of the Finance Act, 1994. Section 66 of the Act was the charging section and it provided for the levy of service tax at the rate of five per cent of the value of the taxable services.as defined in Section 65 to include only three services namely any service provided to an investor by a stockbroker, to a subscriber by the telegraph authority, and to a policy-holder by an insurer carrying on general insurance business. Section 68 required every person providing taxable service to collect the service tax at specified rates. Section 69 of the Finance Act, 1994 provided for registration of the persons responsible for collecting service tax. Sub-sections (2) and (5) indicated that it was the provider of the service who was responsible for collecting the tax and obliged to get registered.6. By the Finance Act, 1997 the first amendment to Section 65 of the Finance Act, 1994 was made, inter alia, by extending the meaning ofom three services to 18 different services categorized in Section 65(41), sub-clauses (a) to (r). Sub-clause (j) made service to a client by clearing and forwarding agents in relation to clearing and forwarding operations, a taxable service. Similarly, service to a customer of a goods transport operator in relation to carriage of goods by road in a goods carriage was, by sub-clause (m), also included within the umbrella of taxable service. The phrasesds transportwere defined as(10) ‘clearing and forwardingmeans any person who is engaged in providing any service, either directly or indirectly, connected with clearing and forwarding operations in any manner to any other person and includes a consignment agent;***(17)means any commercial concern engaged in the transportation of goods but does not include a courierThe service tax was brought into force on 5.11.1997 vide Notification No.44/77 with effect from 16.11.1997. Consequent thereupon, the appellant deducted 5% tax on the bills of the respondent for the period 30.11.1997 to 6.8.1999. The respondent, however, refused to accept the deductions, and raised a dispute for arbitration under clause 15 of the terms and conditions mentioned above. This dispute was referred for the arbitration of a sole arbitrator, a retired Judge of the Delhi High Court.8. Rules 2 (xii) and 2 (xvii) of the Service Tax Rules, 1994 as amended in 1997 made the customers or clients of clearing and forwarding agents and ofrs as assesses. These amended rules were challenged and were held ultra vires the Act by this Court in Laghu Udyog Bharati vs. Union of India reported in 1999 (6) SCC 418.  The Court examined the provisions of the Act and particularly Section 68 and the definition ofresponsible for collecting the servicein Section 65(28) and in terms held in paragraph 9 thatservice tax is levied by reason of the services which are offered. The imposition is on the person rendering service.To overcome the law laid down in Laghu Udyog Bharati (supra), the Finance Act 2000 brought in an amendment on 12.5.2000 (effective from 16.7.1997) in the manner indicated in Section 116 which reads asAmendment of Act 32 of 1994. — During the period commencing on and from the 16th day of July, 1997 and ending with the 16th day of October, 1998, the provisions of Chapter V of the Finance Act, 1994 shall be deemed to have had effect subject to the following modifications, namely—(a) in Section 65,—(i) for clause (6), the following clause had been substituted, namely—‘(6)means a person liable for collecting the service tax and includes—(i) his agent; or(ii) in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such services to the said agent; or(iii) in relation to services provided by ar, every person who pays or is liable to pay the freight either himself or through his agent for the transportation of goods by road in a goodsafter clause (18), the following clauses had been substituted, namely—‘(18-A)as the meaning assigned to it in clause (14) of Section 2 of the Motor Vehicles Act, 1988;(18-B)s any commercial concern engaged in the transportation of goods but does not include a courierin clause (48), after sub-clause (m), the following sub-clause had been inserted, namely—‘(m-a) to a customer, by aor in relation to carriage of goods by road in a goodsin Section 66, for sub-section (3), the following sub-section had been substituted, namely—‘(3) On and from the 16th day of July, 1997, there shall be levied a tax at the rate of five per cent of the value of taxable services referred to in sub-clauses (g), (h), (i), (j), (k), (l), (m), (m-a), (n) and (o) of clause (48) of Section 65 and collected in such manner as may bein Section 67, after clause (k), the following clause had been inserted, namely—‘(k-a) in relation to service provided byor to a customer, shall be the gross amount charged by such operator for services in relation to carrying goods by road in a goods carriage and includes the freight charges but does not include any insuranceprior to this appeal:10. The respondent contended before the learned arbitrator that its dominant work was of transporting and forwarding of goods by road, and not of a handling contractor, and that the mere fact that it may be required to handle the goods in a manner and to the extent provided in the contract between the parties, was merely incidental. The learned arbitrator, however, noted that the contract between the parties dated 17.6.1998 referred the respondent as the ‘handlingwho shall undertake the job of handling iron and steel materials at the yard of the company on the terms and conditions stipulated therein as also in the manner and in all respects as mentioned in the contract. He referred to the notice inviting tender, the declaration of particulars relating to the tender, the schedule of rates, the provision relating to scope of work and the obligations of the contractor detailed in clause 6. In that connection, he referred to the letter dated 27.11.1997 received from the office of Commissioner of Central Excise, Chennai wherein he had also held the work of the handling contractor as that of the clearing and forwarding agent liable to pay service tax. The arbitrator therefore held that the respondent was forwarding and clearing contractor.11. Thereafter, he dealt with the question of liability to pay the service tax, and by a detailed award dated 25.5.2004 rejected the contentions of the respondent and dismissed the Claim Petition. In the penultimate paragraph, the learned arbitrator held as9.3 of the Tender Terms and Conditions of the Contract, to my mind is clear & unambiguous. Thus it is the Respondent who is the assessee. It is also true that liability is of the Respondent to pay the tax. But then, under the contract, under clause 9.3 to be more precise, it was agreed that it would be the claimant who shall beartaxes, duties and otherwhich accrue or become payableconnection with the discharge of hisService tax was one such tax/duty or a liability which was directly connected withdischarge of hisas the clearing & forwarding agent. It is this contractual obligation which binds the claimant and though under the law it is the respondent who is the assessee, it can & rightly did deduct the service tax from the bills of the claimant in terms of the said contractual obligation, the validity and legality of which has not been challenged before me.This award led the respondent to file a petition under Section 34 of the Arbitration and Conciliation Act, 1996 being Arbitration Petition No.364/2004 before the High Court of Judicature at Bombay. A Learned Single Judge of the High Court allowed that petition, and set aside the award with costs by judgment and order dated 4.7.2005. The learned Judge while arriving at that conclusion referred to the definition of the termand held that insofar as service tax under the Finance Act, 1994 is concerned, the appellant as the assessee was liable to pay the tax. The learned Judge observed aspurpose of clause 9.3 is not to shift the burden of taxes from the assessee who is liable under the law to pay the taxes to a person who is not liable to pay the taxes under the law. In my opinion, the award therefore suffers from total non-application of mind and therefore, it is required to be set aside.The appellant preferred an appeal to a Division Bench of Bombay High Court against the said judgment and order. The appeal was numbered as Appeal No. 188/2006. The Division Bench dismissed the appeal by holding as……..As noted, the Respondents are notunder the Service Tax Act. The Appellants are, being recipients, resisted and have filed the return. It is, therefore, theobligation to pay the Service Tax and not that of the Respondents, there is no specific clause that such service tax, liability would be deductible from the amount payable by the Appellants to the Respondent pursuant to the contract in question. The deduction as claimed and as directed by the award in absence of any agreement or clause, therefore, is not correct.Being aggrieved by the said judgment and order, the present appeal has been filed. Mr. S. Ganesh, learned Senior Counsel has appeared for the appellant, and Mr. K.K. Rai, learned Senior Counsel has appeared for the respondent.The appellant – a Govt. of India undertaking is engaged in the manufacture of steel products and pig-iron for sale in the domestic and export markets. The respondent is a partnership firm carrying on the business of transportation of goods. In the year 1997, the appellant appointed the respondent as the handling contractor in respect ofiron and steel materials from their stockyard at Kalamboli, Navi Mumbai. A formal contract was entered into between the two of them on 17.6.1998. ‘Terms and conditions for handling of iron and steele Contractor shall bear and pay alltaxes, duties and otherliabilities in connection withdischarge of hisobligations under this order. Any income tax or any other taxes or duties which the company may be required by law to deduct shall be deducted at source and the same shall be paid to the Tax Authorities for the account of the Contractor and the Company shall provide the Contractor with required Tax Deductionof service tax:5. Service Tax was introduced for the first time under Chapter V of the Finance Act, 1994. Section 66 of the Act was the charging section and it provided for the levy of service tax at the rate of five per cent of the value of the taxable services.as defined in Section 65 to include only three services namely any service provided to an investor by a stockbroker, to a subscriber by the telegraph authority, and to a policy-holder by an insurer carrying on general insurance business. Section 68 required every person providing taxable service to collect the service tax at specified rates. Section 69 of the Finance Act, 1994 provided for registration of the persons responsible for collecting service tax. Sub-sections (2) and (5) indicated that it was the provider of the service who was responsible for collecting the tax and obliged to get registered.6. By the Finance Act, 1997 the first amendment to Section 65 of the Finance Act, 1994 was made, inter alia, by extending the meaning ofom three services to 18 different services categorized in Section 65(41), sub-clauses (a) to (r). Sub-clause (j) made service to a client by clearing and forwarding agents in relation to clearing and forwarding operations, a taxable service. Similarly, service to a customer of aor in relation to carriage of goods by road in a goodscarriage was, by sub-clause (m), also included within the umbrella of taxable service. The phrasesds transporte defined as) ‘clearing and forwardings any person who is engaged in providing any service, either directly or indirectly, connected with clearing and forwarding operations in any manner to any other person and includes a consignment agent;***(17)s any commercial concern engaged in the transportation of goods but does not include a couriere service tax was brought into force on 5.11.1997 vide Notification No.44/77 with effect from 16.11.1997. Consequent thereupon, the appellant deducted 5% tax on the bills of the respondent for the period 30.11.1997 to 6.8.1999. The respondent, however, refused to accept the deductions, and raised a dispute for arbitration under clause 15 of the terms and conditions mentioned above. This dispute was referred for the arbitration of a sole arbitrator, a retired Judge of the Delhi High Court.8. Rules 2 (xii) and 2 (xvii) of the Service Tax Rules, 1994 as amended in 1997 made the customers or clients of clearing and forwarding agents and ofrs as assesses. These amended rules were challenged and were held ultra vires the Act by this Court in Laghu Udyog Bharati vs. Union of India reported in 1999 (6) SCC 418.  The Court examined the provisions of the Act and particularly Section 68 and the definition ofresponsible for collecting the servicein Section 65(28) and in terms held in paragraph 9 thatservice tax is levied by reason of the services which are offered. The imposition is on the person rendering service.o overcome the law laid down in Laghu Udyog Bharati (supra), the Finance Act 2000 brought in an amendment on 12.5.2000 (effective from 16.7.1997) in the manner indicated in Section 116 which reads ast of Act 32 of 1994. — During the period commencing on and from the 16th day of July, 1997 and ending with the 16th day of October, 1998, the provisions of Chapter V of the Finance Act, 1994 shall be deemed to have had effect subject to the following modifications, namely—(a) in Section 65,—(i) for clause (6), the following clause had been substituted, namely—‘(6)s a person liable for collecting the service tax and includes—(i) his agent; or(ii) in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such services to the said agent; or(iii) in relation to services provided by ar, every person who pays or is liable to pay the freight either himself or through his agent for the transportation of goods by road in a goodsafter clause (18), the following clauses had been substituted, namely—‘(18-A)as the meaning assigned to it in clause (14) of Section 2 of the Motor Vehicles Act, 1988;(18-B)s any commercial concern engaged in the transportation of goods but does not include a courierin clause (48), after sub-clause (m), the following sub-clause had been inserted, namely—‘(m-a) to a customer, by aor in relation to carriage of goods by road in a goodsin Section 66, for sub-section (3), the following sub-section had been substituted, namely—‘(3) On and from the 16th day of July, 1997, there shall be levied a tax at the rate of five per cent of the value of taxable services referred to in sub-clauses (g), (h), (i), (j), (k), (l), (m), (m-a), (n) and (o) of clause (48) of Section 65 and collected in such manner as may bein Section 67, after clause (k), the following clause had been inserted, namely—‘(k-a) in relation to service provided byor to a customer, shall be the gross amount charged by such operator for services in relation to carrying goods by road in a goods carriage and includes the freight charges but does not include any insuranceprior to this appeal:10. The respondent contended before the learned arbitrator that its dominant work was of transporting and forwarding of goods by road, and not of a handling contractor, and that the mere fact that it may be required to handle the goods in a manner and to the extent provided in the contract between the parties, was merely incidental. The learned arbitrator, however, noted that the contract between the parties dated 17.6.1998 referred the respondent as the ‘handlingwho shall undertake the job of handling iron and steel materials at the yard of the company on the terms and conditions stipulated therein as also in the manner and in all respects as mentioned in the contract. He referred to the notice inviting tender, the declaration of particulars relating to the tender, the schedule of rates, the provision relating to scope of work and the obligations of the contractor detailed in clause 6. In that connection, he referred to the letter dated 27.11.1997 received from the office of Commissioner of Central Excise, Chennai wherein he had also held the work of the handling contractor as that of the clearing and forwarding agent liable to pay service tax. The arbitrator therefore held that the respondent was forwarding and clearing contractor.11. Thereafter, he dealt with the question of liability to pay the service tax, and by a detailed award dated 25.5.2004 rejected the contentions of the respondent and dismissed the Claim Petition. In the penultimate paragraph, the learned arbitrator held as9.3 of the Tender Terms and Conditions of the Contract, to my mind is clear & unambiguous. Thus it is the Respondent who is the assessee. It is also true that liability is of the Respondent to pay the tax. But then, under the contract, under clause 9.3 to be more precise, it was agreed that it would be the claimant who shall beartaxes, duties and otherh accrue or become payableconnection with thedischarge of hise tax was one such tax/duty or a liability which was directly connected withdischarge of hisas the clearing & forwarding agent. It is this contractual obligation which binds the claimant and though under the law it is the respondent who is the assessee, it can & rightly did deduct the service tax from the bills of the claimant in terms of the said contractual obligation, the validity and legality of which has not been challenged before me.s award led the respondent to file a petition under Section 34 of the Arbitration and Conciliation Act, 1996 being Arbitration Petition No.364/2004 before the High Court of Judicature at Bombay. A Learned Single Judge of the High Court allowed that petition, and set aside the award with costs by judgment and order dated 4.7.2005. The learned Judge while arriving at that conclusion referred to the definition of the termd held that insofar as service tax under the Finance Act, 1994 is concerned, the appellant as the assessee was liable to pay the tax. The learned Judge observed ase of clause 9.3 is not to shift the burden of taxes from the assessee who is liable under the law to pay the taxes to a person who is not liable to pay the taxes under the law. In my opinion, the award therefore suffers from total non-application of mind and therefore, it is required to be set aside.The appellant preferred an appeal to a Division Bench of Bombay High Court against the said judgment and order. The appeal was numbered as Appeal No. 188/2006. The Division Bench dismissed the appeal by holding ass noted, the Respondents are notunder the Service Tax Act. The Appellants are, being recipients, resisted and have filed the return. It is, therefore, then to pay the Service Tax and not that of the Respondents, there is no specific clause that such service tax, liability would be deductible from the amount payable by the Appellants to the Respondent pursuant to the contract in question. The deduction as claimed and as directed by the award in absence of any agreement or clause, therefore, is not correct.g aggrieved by the said judgment and order, the present appeal has been filed. Mr. S. Ganesh, learned Senior Counsel has appeared for the appellant, and Mr. K.K. Rai, learned Senior Counsel has appeared for the

Court's reasoning:
respondent as the contractor had to bear the service tax under clause 9.3 as the liabilityin connection withdischarge of hisobligations under the contract. The appellant could not be faulted for deducting the service tax from the bills of the respondent under clause 9.3, and there was no reason for the High Court to interfere in the view taken by the arbitrator which was based, in any case on a possible interpretation of clause 9.3. The learned single Judge as well as the Division Bench clearly erred in interfering with the award rendered by the arbitrator. Both those judgments will, therefore, have to be