Contractors working for the Rajasthan Rajya Vidyut Prasaran Nigam have lost a legal battle against service tax with the Rajasthan High Court holding in a significant judgment that a contractors' association has no locus standi to challenge the Nigam's deduction of half of service tax payable by them for the civil construction work.

The Union Government, in its notification issued in June last year, had provided that 50 per cent of service tax would be paid by service providers - contractors in the case before the High Court - and the remaining 50 per cent by the service receiver or awarder of contracts, body corporates like the Nigam.

The Jodhpur Contractors' Association had contended that the contractors were earlier paid the reimbursement of service tax on the works which were included in the definition of taxable services from June 1, 2007. They were taken by surprise when the Nigam started making 50 per cent deduction of service tax from the running bills in respect of contracts executed before July 1, 2012.

The Nigam argued, on the other hand, that since the contractors were obliged to bear the brunt of service tax as service providers under the terms of contract, they could not challenge deductions from their bills.

Counsel representing the Nigam, R. K. Agarwal, pointed out that the change in law was brought from July 1 last year to plug loopholes and leakages in deposit of taxes by individual contractors who deliberately raised bills of gross amount without separately disclosing the service tax component.

“The liability to pay half of the amount was shifted to the Nigam. Half of the service tax is deducted from the gross bills of contractors and paid by the Nigam directly to the Central Excise Department entrusted with the responsibility to collect service tax, which is a huge source of indirect tax revenue introduced since 1994,” counsel said.

Finance Minister P. Chidambaram had widened the coverage net of service tax last year and made all services taxable unless specifically exempted by their inclusion in the negative list. The concept of reverse charge mechanism introduced in July 2012 permitted the Nigam to deduct part of service tax from the contractors' bills and pay it to the Union Government.

Mr. Agarwal questioned the locus of the association to challenge the impugned action as it depended on an individual's terms of contract and there was an arbitration clause in all contracts that prevented them from invoking the writ jurisdiction of the High Court in the matter.

Justice Vineet Kothari at the High Court's principal seat in Jodhpur upheld the objections raised by the Nigam in his judgment delivered earlier this week and dismissed the writ petition moved by the Jodhpur Contractors' Association.