Refund Of Service Tax Cannot Be Decided Before Determining Nature Of Contract: Kerala High Court

The Kerala High Court on 27 July held that the question of refund or adjustment of Service Tax cannot be decided before the Assessing Authority determines whether the underlying contract is a works contract or a service contract, as the nature of the contract determines the applicable tax liability.

A Division Bench of Justices Devan Ramachandran and Basant Balaji partly allowed the appeals filed by Gaiagen Technologies Private Limited (formerly Pest Control India Private Limited) and set aside the Single Judge's finding that the Service Tax already paid could neither be adjusted nor refunded. The Bench observed:

“....As indited above, this conclusion was not necessary; and was, in fact, premature. This is more so because, such declaration obtains a speculative element, since it is the nature of the contract that will determine whether one tax or the other is leviable or payable.”

The dispute arose after Gaiagen Technologies challenged the Single Judge's order in proceedings concerning the tax treatment of its contract. The company contended that Service Tax and Value Added Tax (VAT) are mutually exclusive levies and cannot both be imposed on the same transaction.

It also argued that if the Assessing Authority ultimately concluded that the contract was a works contract (a contract involving both the supply of goods and the provision of services) liable to VAT, the Service Tax already paid should either be adjusted against the VAT liability or refunded.

The Single Judge had remanded the matter to the Assessing Authority to determine whether the contract was a works contract or a service contract (a contract involving only the provision of services). However, while doing so, the Single Judge also observed that the Service Tax already paid could neither be adjusted nor refunded.

The Division Bench held that the Single Judge's finding on refund or adjustment was unnecessary because that issue could arise only after the Assessing Authority determines the true nature of the contract. It observed that the determination would decide whether Service Tax or VAT was legally payable.

It also noted that both Gaiagen Technologies and the State fairly conceded that the question of refund or adjustment should remain open until the Assessing Authority completes the exercise directed by the Single Judge.

The Bench vacated the Single Judge's findings on the issue of refund or adjustment of Service Tax and clarified that both parties are free to pursue their respective claims after the Assessing Authority determines whether the contract is a works contract or a service contract.

Accordingly, the High Court partly allowed the appeals.

For Appellant: Shri Rijo Domy, Rishab S., Bharath Rai Chandani and Hare Krishna, Advocates

For Respondent: Sanjana R. Nair, Special Government Pleader; Suvin R. Menon, Senior Panel Counsel for the Union of India; and Sudhish Kumar, Special Government Pleader (Taxes)