Effective implementation and easy compliance of any law requires drafting of such laws in an unambiguous manner. In India, tax laws have always been embroiled in disputes and are presently the major contributor to the huge pendency of cases in various courts of law. Service Tax laws are not an exception to this situation. Being a law which is still considered to be at a nascent stage, the provisions lacks clarity and have therefore been subjected to numerous amendments. Issues requiring interpretation in this law have also assigned a bigger role to the judiciary.
The levy of Service Tax on management, a maintenance and repair service which was introduced from 01.07.2003 has also seen its share of disputes and litigations. The definition of this service requires the presence of a contract or agreement with the service provider for management, maintenance or repair service. A plain reading of the definition gave the impression that for levy of service tax on management, maintenance or repairs, the contract or agreement needs to be in writing and no levy is attracted where the contract or agreement do exist or where the service is provided in pursuance of verbal contracts or agreements.
The Customs, Excise & Service Tax Tribunal at New Delhi in the case of M/s Stallion Rubbers Ltd reported in STO 2011 CESTAT 232 held a contrary view and have in effect brought a number of such service providers within the tax bracket. In the said case the Hon’ble Tribunal, who were required to rule on the levy of Service Tax on retreading of tyres undertaken without the presence of a contract or agreement in writing, held that any service provided under maintenance contract or agreement between the parties were taxable service. While deciding the issue the Hon’ble Tribunal opined that any service provided by a manufacturer or any person authorised by him in relation to the maintenance or repair or servicing of any goods or equipment, excluding motor vehicle were liable to service tax. That the parties to the contract are recipient in one hand and the service provided on the other, or recipient in one hand or manufacturer or other person authorised by him on the other. The maintenance contract or agreement may be written or oral and that the format or document does not decide the taxability while substance of the contract decides incidence of the contract.
The Tribunal further held that there is no doubt that retreading of tyre is a service provided consuming certain goods in the process to add economic life to the used tyre and make the same usable. There was economic activity carried out for consideration. The activity was repair of old tyre for making the same usable. Totality of reading of contract and supply order suggests that there was a commercially viable and feasible contract between parties prescribing obligations of each other recognising services to be provided by the appellant was the essence of the contract followed by certain penalties and warranty clauses in the contract. The meaning of ‘repair or maintenance’ under section 65 (64) of Finance Act, 1994 during the material period does not necessarily require a written contract or agreement to be entered into by the parties. When need of one and the contribution of the other to fulfill the need of the former surfaces and promise recognising such contribution followed by consideration payable binds each other, that results in a contract or agreement. The offer and acceptance of the proposition of retreading of tyre resulted in binding contract of the parties to carry out their promise. Therefore, there was no need of any written contract or agreement to bring the appellant to the fold of law. Even the Board by its circular, nowhere spells out that the contract or agreement shall necessarily be in writing. In the absence of legislative mandate that the contract should necessary be in writing, there is no scope to grant relief.
Another school of thought is that the impact of this ruling will be felt even in the cases of other levies under the Service Tax law and will have a far reaching effect. The use of the words “contract or agreement” in the definition of “Management, Maintenance or Repair Services” signifies the legislative intent. These words since not defined in the Service Tax laws, the Hon’ble Tribunal should have sought recourse from the Indian Contract Act, 1872 which primarily deals with agreements and contracts. Since the Service Tax laws do not clarify whether such agreements or contracts needs to be in writing or otherwise, the above view of the Hon’ble Tribunal without ascertaining the status of such terms in the Indian Contract Act, 1872, may not be a correct measure in the right direction.