The main legal point established in the judgment is that the interpretation of a contract, particularly regarding tax liabilities, is determined by the terms of the contract itself, and the intention of the parties as reflected in the contract governs the allocation of tax liabilities.

1. The challenge by Raghubir Saran Charitable Trust in this petition under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’) is to an Award dated 14th December 2011 passed by the learned Arbitrator in the dispute between the Petitioner and the Respondent, Puma Sports India Pvt. Ltd., in relation to the service tax liability arising out of the renting of premises belonging to the Petitioner by the Respondent. By the impugned Award, the learned Arbitrator has interpreted Clause 7.1 of the lease deed to mean that the service tax liability in respect of the renting of the premises would be that of the Petitioner.

Background Facts

2. The Petitioner Trust owns the premises at E-10, Block E, Inner Circle, Connaught Place, New Delhi (‘the premises’). The Petitioner leased out the said premises to the Respondent by a lease deed dated 25th April 2007. The lease was for an initial period of 60 months which was renewable at the sole option of the Respondent for a further period of 48 months on the same terms and conditions. For the initial period of 36 months the rent was fixed at Rs.19 lakhs per month. For the remaining 24 months, the rent was agreed to be enhanced at 20% to Rs.22,80,000. In the event of renewal, the rent payable for the initial period of 12 months out of the 48 months was to remain at Rs.22,80,000.

3. The lease stood terminated by consent of both the parties on 30th September 2011 and the premises was handed over to the Petitioner. The last rent paid to the Petitioner was Rs.22,80,000 per month. By virtue of the Finance Act, 2007 an amendment was introduced in the Finance Act, 1994 (‘Finance Act’) by incorporating in Section 65 (105) a sub-clause (zzzz). By virtue of the said amendment the renting of immovable property for commercial purposes was defined to be a ‘taxable service’ and attracted service tax. Consequent upon the said amendment, the Petitioner in its rent bill for June 2007 sent to the Respondent included service tax at 12.36% and cess thereon. The Petitioner continued to include service tax and cess in every rent bill thereafter till April 2009. However, the Respondent refused to pay the service tax component on the ground that under Clause 7.1 of the lease deed, the service tax liability was that of the Petitioner. The Petitioner issued a demand notice 27th December 2007 calling upon the Respondent to pay Rs. 12,00,031 being the service tax liability for the period 1st June till st December 2007. When the Respondent refused to pay, the Petitioner paid the said sum to avoid prosecution and penalty.

4. The Petitioner sent a notice dated 12th January 2008 to the Respondent invoking the arbitration clause under Clause 16.2 of the lease deed. When the Respondent did not concur on the appointment of an arbitrator, the Petitioner filed Arbitration Application No.92 of 2008 under Section 11 of the Act. By an order dated 21st November 2008, the Court appointed the sole Arbitrator. Before the learned Arbitrator, the Petitioner filed a claim on 27th October 2009 for a sum of Rs.37,42,954 being the service tax payable for the period from 1st June 2007 to 31st March 2009 along with interest at 18% per annum.

5. From April 2009 onwards the Petitioner stopped including the service tax component and cess in the rent bills issued to the Respondent as by a judgment dated 18th April 2009 in Home Solutions Retail India Ltd. v. Union of India 158 (2009) DLT 722 (DB) (hereafter Home Solutions-1)a Division Bench of this Court struck down as unconstitutional the aforementioned amendment to the Finance Act 1994. The challenge to the said judgment in the Supreme Court is stated to be pending. Later by the Finance Act 2010, the service tax liability for renting of premises for commercial purpose was reintroduced with retrospective effect from 1st June 2007. This was again challenged but the challenge was negatived by a Full Bench of this Court by a judgment dated 23rd September 2011 in Home Solutions Retails