Service Tax is not leviable on services provided to Governmental Authority

The Hon'ble Supreme Court in Commissioner, Customs Central Excise and Service Tax, Patna v. M/s. Shapoorji Paloonji and Company Pvt. Ltd. &Ors.[Civil Appeal No. 3991-3992/2023 dated October 13, 2023] allowed the appeal and held that Service Tax is not leviable on the services provided to the Governmental Authority which includes an authority or board or any other body set up by an Act of Parliament or State Legislature; or established by Government with 90 per cent or more participation through equity or control to carry out any function entrusted to the municipality.

Facts

M/s. Shapoorji Pallonji and Company Pvt. Ltd. ("the Respondent") is engaged, in the business of providing construction services. The Respondent was awarded the contract for construction works from NBCC India Ltd. ("NBCC"), appointed as Project Management Consultant by IIT Patna vide Letter of Award dated December 20, 2012, for a total contract price of Rs. 167,70,09,043/-. As per the Letter of Award, the rates mentioned do not include Service Tax and the Respondent would be reimbursed for the Service Tax paid by IIT Patna. Similarly, vide order dated February 22, 2013, NIT Rourkela awarded a works contract for the construction project in campus for Rs. 302,82,39,866/-. 

The Respondent duly registered itself with Central Excise and Service Tax and discharged Service Tax liability of Rs. 9,73,25,398.23/- for the period of March, 2013 to April, 2015 by integrating the amount of Service Tax in monthly bills for IIT, Pune and Rs. 5,79,17,168/- for NIT Rourkela. The Respondent submitted the bill, which was approved and paid by IIT Patna and NIT Rourkela respectively, thereby IIT Patna and NIT Rourkela being liable for payment of Service Tax. However, no Service tax was paid by NIT, Rourkela claiming that the work executed by the Respondent is exempt from the payment of Service Tax. 

On June 30, 2015, the Indian Audit and Account Department ("IAAD") raised an objection that as per clause 12(c) of Notification No. 25/2012 dated June 20, 2012("Exemption Notification"), IIT Patna being a Governmental Authority is not required to pay Service Tax. Also, directions were issued to IIT Patna to undertake action to recover or adjust the Service Tax paid to the Respondent. 

Thereafter, IIT Patna notified NBCC, vide letter dated August 27, 2015, that the Commissioner ("the Appellant") has issued clarification for the definition of Auxiliary Education Services. The clarification enumerated various services received by educational institutions which are exempt from Service Tax. However, IIT Patna expressed its intention to establish a method for the recovery of Service Tax reimbursement. 

Apprehensive of the initiation of recovery proceeding of Service Tax already paid, the Respondent filed a writ petition before the Hon'ble Patna High Court. The High Court vide order dated March 03, 2016("the Impugned Order 1"), allowed the writ petition holding that, as per Clause 2(s) of the Exemption Notification, IIT Patna would be covered within the definition of Governmental Authority. Therefore, the Respondent is exempt from payment of Service Tax, followed by the direction that Service Tax collected by the Appellant shall be refunded to the Respondent or IIT Patna, as the case may be. 

Aggrieved by the decision of NIT, Rourkela, the Respondent filed an appeal before the Hon'ble Orissa High Court. The High Court vide order ("the Impugned Order 2") directed the Appellant to dispose of the pending application for refund of service tax within 2 months from the order. 

Aggrieved by the Impugned Orders, the Appellant filed an appeal before the Hon'ble Supreme Court for setting aside the Impugned Orders. 

Issue

Whether Service Tax is leviable on services provided to Governmental Authority?

Held

The Hon'ble Supreme Court in Civil Appeal No. 3991-3992/2023 held as under:

• Observed that, as per Exemption Notification, the exemption was extended only to those entities that fulfil three conditions: a) have been established with 90% or more participation by way of equity or control by government, b) set up by an Act of Parliament or State Legislature and c) carrying out any function entrusted to a municipality under Article 243W of the Constitution of India. However, the exemption being restrictive in nature, the Appellant issued a clarification expanding upon the definition of "Governmental Authority" vide Notification No. 2/2014 dated January 30, 2014("Clarification Notification") through which amendment was made in "Governmental Authority" providing an exemption from payment of Service Tax to any authority or board or any other body, set up by an Act of Parliament or State Legislature, thereby widening the exemption base.
• Noted that, the conjunction "or" between sub-clauses (i) and (ii), divides the two clauses into parts, wherein the first part is independent of the second part, therefore, it is capable of operating independently. It was further noted that the proviso in Clause 2(s) of Exemption Notification stating that "90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under Article 243W of the Constitution" would be applicable only with respect to sub-clause (ii) of Clause 2(s), i.e. "Governmental Authority" which is established by Government. 
• Opined that, merely because the statute does not yield the intended or desired result for the Respondent, it would not be a reason to overstep and cross the Lakshman Rekha by employing tools of Interpretation. Tools of Interpretation are intended to make a statute workable, not to achieve a particular outcome. 
• Held that there is no merit in the Appeal, the Impugned Orders are upheld and the Appeal is dismissed. 

Relevant Provisions

Clause 12(c) of the Exemption Notification

"12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of – 

(a) ……………………
(b) …………………..
(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;"

Clause 12(s) of Exemption Notification

"(s) "governmental authority" means an authority or a board or any other body;

(i) set up by an Act of Parliament or a State Legislature; or 

(ii) established by Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution."

Article 243W of the Indian Constitution

"243W. Powers, authority and responsibilities of Municipalities, etc.—Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow—

(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to—

(i) the preparation of plans for economic development and social justice;
(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;

(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule"