Whether security services rendered by police to banks are leviable to service tax?

PJ/Case Study/2013-14/64

CASE STUDY

Prepared by: CA Neetu Sukhwani &
Aashish Bohra

Introduction:- The office of the deputy commissioner of police, herein referred to as service provider is engaged in providing security services to various banks for commercial consideration. They have been raised a demand of service tax amounting to Rs. 1, 18, 06, 856/- under the category of ‘Security Agency’s Service’ for the period from 01.05.2006 to 31.03.2011 by invoking the extended period of limitation on the ground that security services for a consideration are liable to service tax. The show cause notice was adjudicated vide order confirming the allegations levelled therein and consequently confirming the service tax demand along with interest. However, penalty was being waived on the premise that the assessee being a sovereign public authority, could not be said to have malafide intention to evade payment of service tax. The main contention of the assessee was that they are a body constituted for the maintenance of law and order in the country and banks being the root cause of money, security services provided to banks was their statutory liability and was hence, not leviable to service tax. The above contention of the assessee was not accepted by the adjudicating authority and the order was passed against the assessee. Hence, the assessee is in appeal to Tribunal along with stay application. This case study covers the stay application decided by the Tribunal while the final decision of the appeal is yet pending before the Tribunal.

THE DEPUTY COMMISSIONER OF POLICE, DISTRICT, JODHPUR V/S COMMISSIONER OF CENTRAL EXCISE COMMMISSIONERATE, JAIPUR-II

[ORDER IN ORIGINAL –26-28/2012/ST/JPR-II DT. 24.08.2012]

Relevant Legal Provisions:-

Definition of Security Agency Services:-

Section 65(94) of the Finance Act, 1994, defining the ‘security agency services’ which reads as follows:

“Security agency means any person engaged in the business of rendering the services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity, whether of a personal nature or otherwise, including the services of providing security personnel.”

Sec 67 Valuation of taxable services for charging Service tax -

Sec 68 Payment of service tax

Sec 69 Registration

Sec 70 Furnishing of Returns

Issue Involved:

The following issue was involved for the purpose of stay application in this case:-
Whether security services rendered by police to banks are leviable to service tax?

Brief Facts:-

The Deputy Commissioner of Police, District-Jodhpur (hereinafter referred to as the appellant) are the sovereign/ public authority working for maintaining the law, social security and order in the city. As an extension to their work, on being requested, they are also providing the security personnel to various banks against a consideration which is nothing but simply a reimbursement of expenses. On these charges, objection is being raised that these fall under the definition of security services and are liable to service tax.
Show Cause Notice No. V (ST) Adj./JPR-II/367/2011/900 dated 21.10.2011 was issued to the appellant wherein it was alleged that the appellant have not paid service tax amounting to Rs. 1,18,06,856/- on the security services provided during the period from 01.05.2006 to 31.03.2011 and hence are liable to pay service tax along with interest under section 75 and penalty under section 76, 77 & 78 of the Finance Act, 1994.
Thereafter, reply to the above mentioned SCN was filed by the appellant vide their letter No. G.5() Jodh-Finance/AA0/2008/2276-78 dated 03.11.2011 in which following submissions were made by the appellant:

                      i.        The objective of the Police Department is not to function as Security Agency.
                     ii.        Their motive is not to earn profit and hence Police Department is not a commercial concern.
                    iii.        That, in providing security to those Institutions/Departments, the basic objective of the police is to maintain law and order and prevention of crime.
                    iv.        That, only re-imbursement of the expenses incurred on security guard/police personnel is claimed and no profit is earned.
                     v.        That the service tax so demanded is not applicable to the police department.

The submissions made by the appellant were not considered and the impugned order having OIO No. 26-28/2012/S.T./JPR-II-Commissioner dated 24.08.2012 was passed confirming the allegations levelled in the SCN and thereby confirming demand of Rs. 1,18,06,856/-along with interest under section 75 of the Finance Act, 1994. The penalty proposed in the SCN was not imposed on account of belief of the appellant that they being sovereign/public authorities were not liable to any levy of tax.

Appellant’s Contention:- The appellant made following submissions before the Tribunal for allowing their stay application:-

1. Functions, Duties and Responsibilities of Police Officers:-

“Section 29 Functions, Duties and Responsibilities of Police Officers.-
(1) The following shall be the functions, duties and responsibilities of a police officer;
(a)   to enforce the law, and to protect life, liberty,property rights, dignity and human rights of the people;
(b) to prevent crime and public nuisance;
(c)   to maintain public order;
(d) to preserve internal security, prevent and control terrorist activities, and to prevent breach of public peace;
(e)   to protect public property;
(f)    to detect offences and bring the offenders to justice;
(g)   to apprehend persons whom he is legally authorised to apprehend and for whose apprehension sufficient grounds exist;
(h) to help people in situations arising out of natural or manmade disasters, and to assist other agencies in relief measures;
(i)    to facilitate orderly movement of people and vehicles, and to control and regulate traffic;
(j)    to gather intelligence relating to matters affecting public peace and crime;
(k)   to provide security to public authorities in discharging their functions and duties;
(l) to perform such duties and discharge such responsibilities as may be enjoined upon him by law or by an authority empowered to issue such directions under any law;
The State Government, or an authority specially empowered in this behalf by the State Government, may assign such other duties and responsibilities to police officers as may be prescribed by the State Government.
The applicant submits that it is clear from the above section that it is duty and responsibility of police department to protect public property and maintain law and order in the country. Since the banks are holding the significant amount of cash invested by the common man, its security is the prime concern of the Police department. Any mishap in the banks may lead to social instability deteriorating the law and order of the city. Hence, providing security personnel to banks is nothing but extension of their duties and responsibilities enshrined in the Rajasthan Police Act, 2007 and so are very well covered within their statutory and sovereign functions on which service tax should not be levied.
Elaborating on the above submission, we also submit that yet another function of the police department is “to prevent crimes, and reduce the opportunities for the commission of crimes through their own preventive action and measures as well as by aiding and cooperating with other relevant agencies in implementing due measures for prevention of crimes.” Thus, amongst the prime function of the police department, the foremost is to prevent crimes and to reduce the opportunities for the commission of the crimes. World famous and most relevant proverb reads as “Money is the root of all the crimes”. This is squarely applicable for the banks where this root cause is accumulated in large amount. As such, the chances of committing crimes are higher in such places. Therefore, the providing of security personnel to these banks is nothing but a step taken to reduce the opportunities for the commission of the crimes. Thus, this is nothing but a step taken for performing statutory duties entrusted to them. This fact further gets clarified by the consideration received against such services, they are getting only reimbursement of expenses, no profit motive is involved. Therefore, it is ample clear that the supply of security personnel to the banks is in course of performing their statutory functions. Therefore, the impugned order levying service tax on such security services provided by the applicant is not justifiable and should be set aside.

2.         Provide security services is statutory obligation of the police department:-

The applicant further submit that they are not liable to pay any service tax as providing security services is their statutory and sovereign function and the same cannot be leviable to service tax. They submit that the Preamble of The Rajasthan Police Act, 2007 states the basic theme of the constituting this Act, the relevant extracts from the same is being highlighted for the purposes of reference as follows:-
“WHEREAS, respect for and promotion of the human rights of the people, and protection for their civil, political, social, economic, and cultural rights is the primary concern of the Rule of law;”
It has also been explained by the applicant in their grounds of appeal that the supply of security personnel to banks is simply an extension of their duties to maintain the social security. It is worthwhile to mention here that the security personnel are being supplied to the banks which are the key factors of economic growth in the country. The hard-earned savings of a common man are being collected in the banks. Thus, the security of banks is the key factor determining the stability of law and order in any city. Thus, providing security personnel to the banks is nothing but an extension of their sovereign duties. This fact is further clarified by the consideration collected against the security personnel. The applicant is simply collecting the reimbursement of expenses incurred on the security personnel, no profit element is involved. As such, it cannot be said that the applicant is engaged in the “Business” of providing the security services as the term business directly relates to profit motive. This discussion makes it clear that the criteria laid down in the definition of security services is not satisfied. Therefore, the applicant cannot be held to be covered under the definition of Security Agency and the demand raised under this category is not legally sustainable and is liable to be quashed.
Aligning with the above, the applicant also wish to reproduce section 46 regarding Payment for Police Service, as contained in Chapter VI Special Provision for Policing for reference as follows:
“The State Government may levy from any person, who carries on any such occupation, gathering, exhibition, sale, entertainment etc., for monetary gain, as may, for the purpose of public security or for the maintenance of public peace or order, require deployment of additional police force, such user charges as may be prescribed.”
The analysis of above section makes the following things clear:-
1.    The police department levies such charges.
2.    This security is to be provided to a person for the purpose of public security or for the maintenance of public peace or order. Thus, this is not for the purpose of gain but is only done for the purpose of sovereign function.
3.    These charges are also prescribed by the state government only.
Hence from above, it is clear that these security services are provided as per directions of state Government and the purpose of the same is public security and maintenance of public peace and order. Hence, it is clear a sovereign function and cannot fall under security services. Also, the charges are collected as prescribed by the state government and hence it is statutory levy only. Furthermore, these charges are deposited with the state government only. These are not kept by the police department with them. A specimen copy of the challan evidencing deposition of such charges collected by the police department in the state government’s account along with Letter of Financial Advisor of Police Headquarters regarding deposition of charges collected in lieu of providing security services in the specified accounting head code was also enclosed.

3.         Case Laws in applicant’s favour:-

·         Security Guards Board vs Commissioner of Central Excise, Thane-II [2011 (24) S.T.R. 391 (Bom)].
·         Electrical Inspectorate, Government of Karnataka v/s CST Bangalore [2008 (9) STR 494 (Tri.-Bang)]
·         Mysore City Corporation [2010 (18) S.T.R. 127 (Commr Appeal)]:

·         Dy Director of Mines & Geological Department vs CCE and C, Belgaum [2007 (7) STR 285 (Tri.-Bang)

·         Commissioner of Cus & CEx., Hyderabad-II vs CMC Ltd [2007 (7) STR 702 (Tri.-Bang)]

·         M/s Greater Noida Industrial Development Authority vs Commissioner of Central Excise, Noida [2013-TIOL-44-CESTAT-DEL]

·         M/s Pressure Vessels and Equipments Testing Enterprises vs CCE, Salem [2013-TIOL-142-CESTAT-MAD]

4.         Not covered in definition of Security Services:-

The applicant submits that in the impugned order the demand has been raised on the consideration received against providing the security personnel to the banks under the category of “Security Agency” services. It is submitted that section 65(94) of the Finance Act, 1994, defines the ‘security agency services’ which reads as follows:

“Security agency means any person engaged in the business of rendering the services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity, whether of a personal nature or otherwise, including the services of providing security personnel.”

Therefore, on analyzing the above definition of security services, the following essential ingredients must be present:

Ø The person liable under this category should be engaged in the business of rendering the services relating to security of any property whether movable or immovable or person.
Ø It includes services of investigation, detection or verification of any facts or activity whether of a personal nature or otherwise.
Ø It also includes services of providing security personnel.

The above definition clearly states the person is liable under security services only if he is engaged in the “business” of providing the security services. The word ‘business’ has been defined in Black’s Law Dictionary as:-

·         Employment, occupation, profession or commercial activity engaged in for gain or livelihood;
·         Activity or enterprise for gain, benefit, advantage or livelihood;
·         Enterprisein which person engaged shows willingness to invest time and capital on future outcome;
·         That which habitually busies or occupies or engages time, attention, labour and efforts of a person as a principal serious concern or interest or for livelihood or profit.

Thus, the sole purpose of carrying out business is for gain or earning livelihood. It is not to do charity for any person. Hence, it can be said that the profit motive must be present, irrespective of whether the activity eventually yields profit or not. Thus, reading ‘engaged in’ and ‘business’ together, it can be said that the person should, on a continuous basis, provide advice, consultancy or technical assistance for the purpose of gain or for earning livelihood.

With reference to above, it is submitted that it is sovereign/ public authority for maintenance of law and order and is not engaged in the business as such with a profit motive. In this regard, it is submitted that the supply of security personnel to banks is simply an extension of their duties to maintain the social security. It is worthwhile to mention here that the security personnel are being supplied to the banks which are the key factors of economic growth in the country. The hard-earned savings of a common man are being collected in the banks. Thus, the security of banks is the key factor determining the stability of law and order in any city. Thus, providing security personnel to the banks is nothing but an extension of their sovereign duties. This fact is further clarified by the consideration collected against the security personnel. The appellant is simply collecting the reimbursement of expenses incurred on the security personnel, no profit element is involved. As such, it cannot be said that the appellant is engaged in the “Business” of providing the security services as the term business directly relates to profit motive. This discussion makes it clear that the criteria laid down in the definition of security services is not satisfied. Therefore, the appellant cannot be held to be covered under the definition of Security Agency and the demand raised under this category is not legally sustainable and is liable to be quashed.

5.        Demand against the intention of legislature:-

The applicant further submits that that the impugned order has been passed against the intention of law makers which do not intend to levy the service tax on the other statutory bodies. This is because demanding the service tax from one government department by another government department is nothing but like putting out money from one pocket and keeping it in another pocket. The levy of the service tax from police department will not give any surplus to government, indeed it will increase the expenses of police department in form of paper work and unproductive working hours resulting into nothing. Thus, the government does not intend to tax the government bodies. This intention gets clarified by the fact that by implementation of new scheme of service tax by way of negative list, except specified services like speed post, transport of goods and passengers, life insurance, et., all the services provided by government bodies are exempted. Also, for the taxable services in nature of support services provided by the government, the liability to pay the service tax has been casted on the recipient of the service by virtue of exemption notification no. 30/2012-ST dated 20.6.2012 effective from 1.7.2012. This simply clarifies the intention of the government that the service tax should not be imposed on the government bodies. While interpreting any provision, the intention of law makers is to be kept in mind. This has been held in the following cases:-
·         BALWANT SINGH Versus JAGDISH SINGH [2010 (262) E.L.T. 50 (S.C.)]
·         COMMISSIONER OF CENTRAL EXCISE, LUDHIANA Versus RALSON INDIA LTD. [2006 (202) E.L.T. 759 (P & H)]
The analysis of above decisions of hon’ble Supreme Court and High Court makes it clear that the intention of the law makers is to be kept in mind while interpreting any provision.If any interpretation defeats the intention of the law makers, it should be avoided. In their case also, the interpretation taken by the impugned order is defeating the intention of law makers of not taxing the government bodies, hence it should be avoided. Therefore, the impugned order is not viable in the eyes of law and it should be quashed.
6.         Demand barred by limitation:-

The applicant submit that on one hand, the impugned order has set aside penalty under section 76, 77 and 78 of the Finance Act, 1994, on grounds that the appellant was under the bonafide belief that being sovereign/public authorities they were not liable to any levy of tax in performing their duties while on the other hand, demand has been confirmed by invoking extended period of limitation. While holding this view and setting aside the penalties, it is specifically held in para no. 14.6 of the impugned order by hon’ble Commissioner as follows:-

            “……..No intention to evade service tax can be attributable to the noticees.”

Thus, the learned commissioner has himself accepted the fact that intention to evade payment of service tax is absent in this case. When there was no intention to evade service tax, the entire proceedings itself is barred by the clause of limitation. On the other hand, the impugned order has confirmed demand under proviso to section 73(1) of the Finance Act, 1994 wherein it is clearly stated that:

“Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of-
a)    fraud; or
b)    collusion; or
c)     wilful mis-statement; or
d)    suppression of facts; or
e)    contravention of any of the provisions of this Chapter or of the rules made there-under with intent to evade payment of service tax
by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words eighteen months the words “five years had been substituted.

Therefore, when the order itself states that there was no intention to evade service tax, then the extended period of five years is not invokable under proviso to section 73(1) which specifically says that this period is invokable only if there was intention to evade payment of service tax. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Wilful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This is also held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC- CX) - [1989 (40) E.L.T. 276 (S.C.)] that extended period of limitation can only be invoked in case of fraud, collusion, suppression or willful misstatement. In absence of these essential ingredients, extended period cannot be invoked. Verdicts of hon’ble Supreme Court held as under:-

“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”

Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Similar decision is given in the following cases:-

Ø Pushpam Pharmaceuticals Company Vs. CCE, Mumbai reported in ( 2002-TIOL-235-SC- CX )

“Central Excise – Demand – Suppression of facts – Words and phrases – Where facts are known to both the parties the omission by one to do what he might have done and not he must have done, does not render it suppression – Suppression of facts must be deliberate to escape from payment of duty.”

Ø M/s Idea Cellular Ltd Vs CCE, Rohtak [2009-TIOL-387-CESTAT-DEL]-Binding nature of Board Circulars -As per Supreme Court's judgment in case of CCE , Bolpur Vs. Ratan Melting & Wire Industries reported ( 2008-TIOL-194-SC- CX -CB ) , the Board's instructions are binding on the Departmental officers unless contrary view has been expressed by Supreme Court or any High Court. In this case neither any such judgment of Hon'ble Supreme Court or High Court has been produced, nor the Department has shown as to how the Board's instructions, which are its own instructions, are contrary to statutory provisions.

Something positive, rather than mere inaction or failure on the part of an assessee has to be proved before invoking extended limitation period :The Supreme Court in cases of CCE Vs. Chemphar Drug & Limits reported in ( 2002-TIOL-266-SC- CX ) and Pushpam Pharmaceuticals Company Vs. CCE , Mumbai reported in ( 2002-TIOL-235-SC- CX ) has held that something positive, rather than mere inaction or failure on the part of an assessee has to be proved before invoking extended limitation period under proviso to Section 11A (1) of the Central Excise Act, 1944 and that since the expression - 'Suppression of facts' has been used in the company of strong words such as fraud, collusion in wilful default, it cannot be interpreted as mere omission - the act constituting 'suppression' must be deliberate. In this case neither the circumstances indicate 'suppression of facts', misstatement, fraud etc. nor any evidence in this regard has been produced. Therefore neither the demand beyond the normal limitation period of one year is sustainable nor penalty under Rule 15 (4) of Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 is attracted.:DELHI CESTAT;

In the above cases, it was held that mere inaction would not be a valid ground for invoking the extended period of limitation. Further in the case of PADMINI PRODUCTS vs. CCEreported at 1989 (43) ELT 195 (Supreme Court) it was held that mere negligence or failure to pay duty on part of manufacturer is not sufficient to invoke the extended The extended period was held to be wrongly invoked in this case.

Thus, in the light of all the above decisions, where the intention to evade payment of tax is not proved, extended period cannot be invoked. In the instant case, the impugned order has accepted the fact that the intention to evade payment of service tax is not applicable as the appellant is a government department. Thus, when this fact as accepted in the order is seen with the language of proviso to section 73(1), it is ample clear that the extended period of limitation cannot be invoked here. Therefore, the impugned order confirming a time barred demand is not sustainable and is liable to be quashed.

Therefore, it is ample clear from the submissions made here above that the applicant has a strong case in favour so the appeal should therefore be allowed to be heard on merits itself. Moreover, the applicant being a department governed by State Government, it is not feasible to order a pre-deposit of such a huge demand running in crores of rupees as it is futile exercise to transfer amount from one pocket to the another; both the taxpaying and tax collecting departments are government departments. Hence, full waiver from pre-deposit should be granted to the applicant.

Respondents Contention: The department contended that the service relates to the security agent’s service that has been provided for a consideration and thus service tax will be levied.

Reasoning of Judgment by the Tribunal: It was concluded by the Tribunal that prima facie reading of section 65 (94) of the Finance Act, 1994, which defines the term ‘security agency’ shows that an agency engaged in the commercial activity of providing security service is brought to tax under the provisions of Finance Act, 1994. The police department of the State of Rajasthan does not appear to have carried out any business of providing such service. This is the prima facie view subject to the testing of the matter further if Police Act of Rajasthan provides otherwise. Accordingly, the stay application is allowed and there shall be waiver of pre-deposit of service tax demand during the pendency of the appeal.

Decision:The stay application was allowed.

Conclusion: The essence of this case is that primarily the security services that are being provided by the department of police cannot be brought within the ambit of service tax net, as it is the statutory obligation and duty of the police department to provide security services to maintain the law and order in the country. Moreover, even if such security services have been provided by them in lieu of consideration, the same is deposited in the account of State Government as prescribed under the Police Act and accordingly, such receipts cannot be levied to service tax.

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