Vrindaban Construction vs. Commissioner Of Central Excise And Service Tax

Held

The Court held that the notices issued by the Accounts Officers of SBPDCL for recovery of Rs. 14,38,221/- and Rs. 10,65,698/- were wholly without jurisdiction. The Court found no provision under the Finance Act, 1994, that empowers a service recipient to deduct service tax from the bills of a service provider, nor did the agreement between the parties contain such a clause. While Section 68 of the Finance Act, 1994, casts responsibility on the service provider for collection and payment, amendments allowing distribution of liability did not alter the fundamental collection mechanism. The Court noted the SBPDCL's admission of being liable for 50% of the service tax under RCM, which was included in the contract value. However, the Court emphasized that the SBPDCL had no business enforcing the bank guarantee to recover its own share of service tax, especially in the absence of a contractual violation by the petitioner or a demand from the competent service tax authority. The Court quashed the recovery notices and directed the respondents to remit the recovered amount within eight weeks, confirming the interim order for restoration of the bank guarantee. The issue of whether the contract was exigible to service tax and the extent of liability was left to the wisdom of the competent authority under the Finance Act, 1994, to be decided in a duly constituted proceeding.

Facts

The petitioner, Vrindaban Construction, filed a writ petition challenging the action of the South Bihar Power Distribution Company Ltd. (SBPDCL) in recovering Rs. 25,03,919/- towards service tax by enforcing a bank guarantee. This action was taken based on an audit objection raised by the Accountant General, not on any adjudicatory order from the Service Tax Department. The petitioner argued that no service tax was payable on the contract executed for a Centrally Sponsored Scheme. The SBPDCL contended that the contract amount was inclusive of taxes, and under a Reverse Charge Mechanism (RCM) notification, they were liable for 50% of the service tax, which they had deducted and deposited. The Court noted that an earlier interim order had directed the restoration of the bank guarantee, but this had not been fully complied with.

Key Issues

1. Whether the South Bihar Power Distribution Company Ltd. (SBPDCL), as a service recipient, had the locus or lawful authority to issue a notice and proceed with the recovery of service tax amounting to Rs. 25,03,919/- based solely on an audit objection from the Accountant General, in the absence of any adjudicatory proceeding initiated by the competent authority under the Service Tax Act for assessment and quantification of liability, and to enforce a bank guarantee for such recovery? Petitioner's contention: No service tax was payable on the contract executed for a Centrally Sponsored Scheme, and the SBPDCL's action was illegal. The petitioner relied on the principle that the service provider is at best a collecting agent, and the liability rests with the service recipient. Revenue/State's contention: The contract amount was inclusive of taxes, including service tax. Under Notification No. 30 of 2012, the SBPDCL was liable for 50% of the service tax under the Reverse Charge Mechanism (RCM), and this portion was deducted from the petitioner's bills and deposited. The remaining 50% was to be paid by the petitioner.