What is the validity of a provision in an agreement entitling one of the parties to terminate the agreement at its sole discretion?

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The Supreme Court of India (SC) has in several cases considered the validity of provisions in agreements empowering any of the contracting parties to terminate the agreement at their sole discretion and has held such provisions valid and enforceable, subject to certain conditions. In a 1965 judgment, the sc upheld the validity of a clause in an insurance contract authorising a party to terminate the agreement at any time, since such term was held to be 'reasonable and common' in insurance contracts and the termination did not affect the liabilities incurred by the terminating party before termination. While in a 1964 case, the sc held that voluntary termination of agreement by a party did not apply to obligations already performed by parties, in a recent 2000 judgment, the sc held "under the general law of contract, once the contract is entered into, any clause giving absolute power to one party to override or modify the terms of the contract at its sweet will or to cancel the contract-even if the opposite party is not in breach, will amount to interfering with the integrity of the contract" (and therefore by implication voidable). However, in 2001, the sc overruled its 2000 judgment and upheld the 1965 judgment while stating "under general law of contracts any clause giving absolute power to one party to cancel the contract does not amount to interfering with the integrity of the contract". In view of these judgments, a provision in an agreement conferring on one party the sole discretion to terminate the agreement may be valid provided (i) such provision has been accepted as 'reasonable and common' in a particular business (as in insurance, marketing or distributorship contracts), (ii) termination does not effect previous liabilities, and (iii) the exercise of discretion to terminate the agreement is prudent, right, and proper (i.e., with reasonable notice and prospective effect), since "discretion" is a discernment of what is prudent, right and proper and should not be construed as giving absolute power to a party to terminate the agreement.

We are a Singapore-based placement consultancy firm providing services to a company in India. We do not have any offices in India. Is service tax applicable on the consultancy fee payable to us by our Indian client? If yes, how should we pay service tax?

Placement consultancy services are subject to service tax as services by a "manpower recruitment agency", which means "any commercial concern engaged in providing any service, directly or indirectly, in any manner for recruitment of manpower to a client". Even if your firm does not have an office in India but is providing placement consultancy services here, it will be liable to pay service tax of 5 per cent on gross amount of the fees charged. You can charge the service tax to your client by stating and adding the same in your invoice.

Rule 6 of the Service Tax Rules, 1994, permits your firm to authorise any person in India (including your client) to pay service tax in India on its behalf. Your client can pay the applicable service tax to the Commissioner of Central Excise within whose jurisdiction you delivered the services (for example, where your client has its offices) by demand draft in favour of the Commissioner together with (i) the service tax return providing your firm's name and address, the client's name and address, category of taxable service and service tax liability, (ii) copy of the invoice raised on your client, and (iii) copy of the agreement regarding provision of such services to the client. The return should be submitted within 30 days from the date of your invoice to your client. Alternatively, you can issue a demand draft in favour of the Commissioner and arrange submission of the returns and documents with the Commissioner through the authorised person.

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