Services provided by local authorities in terms of sovereign right not subject to service tax: Madras High Court

The Madras High Court recently clarified that services provided by Central government, State government or local authorities in terms of their sovereign functions, which are not substitutable by private entities, are outside the purview of service tax (Cuddalore Municipality v. The Joint Commissioner of GST & Central Excise). .Justice C Saravanan passed a ruling to this effect while setting aside service tax demands issued to the Virdhachalam Municipality and Cuddalore Municipality..In this regard, the Court took note of the law as it stood after July 1, 2012, when certain amendments to the Finance Act, 1994 kicked in. Certain services were made exempt from service tax under a Mega Exemption Notification No.25/2012 – ST dated June 20, 2012. Such exempted services included those relatable to municipal authorities i.e:(i) Services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal or toilets;(ii) Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under Article 243 W of the Constitution..Further, certain services were listed in a negative list for exemption from Service Tax. Under Section 66B of the Finance Act, 1994 no tax was payable for the services specified in the negative list. Most services provided by the Central or State Government or local authorities are in the negative list, the Court noted. .Moreover, a publication titled the "Taxation of Service, An Education Guide, the Central Board of Indirect Tax" clarified, inter alia that:(i) Most of the services provided by the Government or local authorities are in the negative list.(ii) Only those activities of Government or local authorities are taxed where similar or substitutable services are provided by private entities.(iii) Local authority includes a Municipality as referred to in clause (e) of Article 243P of the Constitution.."In Para 4.1 of the Education Guide, it was specifically explained that most of the services provided by Government and Local Authority are in the negative list and were outside the ambit of the service tax," Justice Saravanan observed..On an examination of relevant clauses in these provisions, the judge noted that most government services, save for certain kinds of support services, have been exempted from service tax. "Services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services," the Court said. .On this ground, the challenged service tax demand levied on the municipal authority before the Court was found to be without jurisdiction and set aside. .The Court was also called to decide on the levy of service tax prior to 2012 in respect of a demand made on the Virdhachalam Municipality for renting out certain immovable property. .As far as this was concerned, the Judge recalled that the Delhi High Court Home Solutions Retail India Ltd. & Others v. UOI (2009) had initially struck down the levy of service tax on renting of immovable property observing that renting of immovable property for use in the course of furtherance of business or commerce did not involve any value addition and therefore, cannot be regarded as service..The Finance Act, 2010 was, consequently, amended with retrospective effect to cure the defect pointed out by the Delhi High Court. With this, the definition of taxable service of “renting of immovable property” and “renting of immovable property” was amended..In 2nd Home Solutions Retails (India) Ltd. v. Union of India (2011) the Delhi High Court upheld the constitutional validity of the amended definition in Section 65(105)(zzzz) of the Act with retrospective effect. Similar views were taken by other High Courts as well. .However, merely because there was renting of immoveable property by the municipal authority, that by itself was not sufficient to attract the levy, Justice Saravanan observed. .He noted that the amended provision refers to the renting of immovable property by "any other person". He opined that this meant that the property has to be rented by a person other than the property owner for it to be made subject to service tax. ."To attract levy under Section 65(105) (zzzz) of the Finance Act 1994 there should be renting of immovable property or provision any other service in relation to such renting, for use in the course of or furtherance of, business or commerce to “any person”. Only if service was provided by “any other person”, i.e, by a person other than the owner, such service was liable to service tax ... The expression “any other person” can only mean any other person other than the owner of the property. Therefore, owner of the immoveable property is not liable to pay tax under Section 66 of the Finance Act, 1994 for the period up to 30.06.2012 ... In my view, service tax was payable only if such services were provided “by any other person” other than the owner, to any person by such renting, for use in the course of or in furtherance of, business or commerce," the Court said. .The Court, however, cautioned that this aspect should be examined by Courts on a case-to-case basis. "Since the interpretation given for the expression “any other person” in this order may have a large scale ramification, it is therefore made clear the interpretation given in this order for the expression “any other person” qua Section 65(105)(zzzz) cannot be uniformly applied to other provisions of the Finance Act,1994 unless they are examined separately and individually on case to case basis for the other services," the order said. .With these observations, the plea moved by the Vridhachalam Municipality challenging tax demands made for the period between April 2021-June 2012 for the renting of certain immovable property was allowed. "Since the petitioner municipality is the owner of property, question of it being made liable to pay service tax for any service in relation to such renting of immoveable property does not arise even if it had rented out its immoveable property for use in the course of or for furtherance of, business or commerce of the person who was renting it," the Court held..Advocate Joseph Prabakar appeared for the petitioners in the matter, whereas Senior Standing Counsel R Hemalatha and AP Srinivas appeared for the respondents..[Read Order]