Whether service tax is leviable on the statutory/sovereign functions carried out under the provisions of the Act?

PJ/Case Law/2019-2020/3602

M/s Karnataka Industrial Areas Development Board (KIADB) Final Order No. 20357/2020 dated 09.06.2020
Issue: Whether service tax is leviable on the statutory/sovereign functions carried out under the provisions of the Act?
Brief Facts: KIADB are engaged in providing various taxable Services such as Renting of Immovable Property Services, Construction of Commercial and Residential Complexes, Business Support Services, Management, Maintenance or Repair Services, Manpower Recruitment and Supply Services, Works Contract Services, etc., to various clients. The appellant, KIADB did not obtain registration under service tax for the said services. KIADB is established by an enactment of the Legislature of Karnataka Act, i.e. Karnataka Industrial Areas Development Act, 1966. Appellant performs various statutory / sovereign functions assigned to it under provisions of KIAD Act. Revenue entertained the view that the appellants are liable to pay the service tax on various services rendered by them but they have not paid the service tax and not registered under the Finance Act, 1994.

Appellant’s Contention: The appellant contended before the CESTAT Bangalore as follows-

The appellant contended that they are a Government undertaking and being a ‘State’ as defined in Article 12 of the Constitution of India are not liable to pay service tax. Further they are not undertaking any activities for profit motive. It was also contended that the appellant did not provide any construction related service. On the contrary, they engaged various contractors who provided services to the appellant. It was also contended that the figures adopted by the Department to demand service tax were nothing but cumulative figures of each year appearing in financial statements. The appellant has also raised the issue of error in quantification and wrong adoption of figures to arrive at the amount of service tax payable.

No service tax can be imposed on the sovereign activities as also the statutory obligation of the Government. Various activities are being undertaken by the appellant as per the KIAD Act like promoting establishments and development of industrial areas, preparing scheme of development of industrial areas, acquisition of land by the state for development within the state of Karnataka on which Service tax shall not be imposed. Reliance has been placed upon the decision of the Bombay High Court in the case of CCE, Nashik Vs. Maharashtra Industrial Development Corporation [2018(9) GSTL 372 Bom.)] wherein the Bombay High Court has held that no service tax could be demanded on the charges collected by Maharashtra Industrial Development Corporation in terms of the Maharastra Industrial Development Act, 1961 towards maintenance of the industrial areas, as the same is in the nature of statutory functions performed in terms of the statute. They further submitted that when the maintenance of industrial area itself is held to be statutory function, the main function of acquisition of land, development of such land in to industrial area and allotment of such land would certainly be a statutory function and does not attract the levy of service tax.

It is submitted that appellant is a state Government undertaking and a creature of statute to exercise the power of eminent domain. Power of eminent domain is a sovereign function. Apart from being a sovereign authority, the appellant is a statutory authority under the provisions of law. It, inter alia, includes to promote orderly establishment of industries and to develop industrial areas.

Appellant is not carrying out commercial activities for a consideration and the amount of deposit collected by the appellant is based on principles of rationality and reasonableness. It cannot fix prices arbitrarily.

They also submitted that the entire demand is based on the information shown in the financial accounts and notes to accounts without considering the fact whether the said amounts are treated as income or assets in the books of account.

As far as renting of immovable property service is concerned, it is submitted that constitutional validity of levy of service tax on renting of immovable property has already been referred to Nine Judges Bench of Hon’ble Supreme Court in the case of UOI Vs. UTV News Ltd. [2018(13) GSTL 3 (SC)]. They also submitted that service tax has been erroneously demanded on deposits collected by KIADB for the purpose of allotment of land. The said deposits are collected towards allotment of land and the same is adjusted against the sale consideration of the land and is not rent or lease charges. They further submitted that the renting of immovable property does not apply to vacant land. It was also submitted that no service tax is leviable on onetime upfront amount.

As far as construction of complex service is concerned, appellant does not provide construction service rather the appellant engages independent contractors to carry out the construction for the appellant.

It has been contested that the demand of service tax under the head Business Support Service by saying that the appellants have not provided any support services to any person. Further the accounting heads considered for the purpose of computation of demands itself reflects that the said amounts are deposits towards various amenities including water supply etc. as far as demand of service tax under the head ‘management maintenance or repair service’, they submitted that the said amount is collected from the industrial units for maintenance work like infrastructure, roads, water lines, civil amenities buildings, power lines etc. and for this purpose, the appellant has engaged independent contractors for carrying out the activities and they did not carry out such activities personally.

For the demand of service tax under the head ‘manpower recruitment or supply services’, it is submitted that the appellant did not provide any manpower for carrying out acquisition of land. The said activity cannot be subjected to tax under the category of manpower recruitment or supply service.

The appellant questions the quantification and also raised the argument that the appellant being arm of the State Government, there cannot be any question of having intention to evade payment of taxes and hence extended period cannot be invoked and hence penalty cannot be imposed.

Reasoning of Judgement: The tribunal after considering the facts of the case, have considered the opinion that the appellant is a statutory body discharging the statutory function as per the statute KIAD Act, 1966 and hence are not liable to pay service tax. Since it has been held that appellant is not liable to pay service tax at all, it is not worth discussing on the demand of service tax on individual services allegedly rendered by the appellant on which the learned Commissioner has confirmed the demand. In the result, by following the ratios of the Hon’ble Apex Court in the case of Shri Ramtanu Housing Co-operative Society Ltd., Hon’ble Bombay High Court in the case of MIDC and the Tribunal’s decision in the case of Employee Provident Fund Organisation (upheld by Apex Court), the impugned order is being set aside and the appeal of the appellant is allowed.

Comment:- It can be concluded that the Companies carrying out the statutory and sovereign functions for the development of industrial areas and being setup by an Act shall not be leviable to Service Tax. And the same has also been confirmed by the decision of Bangalore CESTAT.

Prepared by- CA Akanksha Bohra

Comments

PJ/Case Law/2019-2020/3602

Post a Comment

Query