From the title of the article, it is clear that entire discussion is relating to understanding of ‘Governmental Authority’ prior and post to the judgment of Honourable High Court of Patna in the case of Shapoorji Paloonji and Company Pvt Limited. Before going into the discussion, let us try to understand the significance of the phrase ‘governmental authority’.
We all know that negative list has been introduced from 01.07.2012 and post its introduction, majority of the exemptions are clubbed under single notification 25/2012-ST dated which is colloquially referred as ‘Mega Exemption Notification’. The subject notification grants exemption from service tax on various activities and has quite a long list. One such entry is Entry 12 which deals with exemption provided in respect of construction activities if the service receiver is ‘government, governmental authority or local authority’.
Without much going into the details of what activities are exempted vide Entry 12 of Mega Exemption notification, we shall try to understand who is ‘governmental authority’. Because if the service receiver can be called as ‘governmental authority’ and if the activities provided by service provider fits into the ambit of Entry 12, then the service provider need not charge service tax on such activity. Hence, it becomes necessary to understand the phrase ‘governmental authority’ without any further delay.
To understand the subject phrase, one place we need to see is whether the mega exemption notification defines such phrase or not. The phrase has been defined vide 2 (s) as
“governmental authority” means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution’’.
Consequently, the subject phrase has been amended by Notification No 02/2014-ST dated 30.01.2014 as under:
(s) “governmental authority” means an authority or a board or any other body;
- 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
Now let us get into facts to understand the impact of amendment and the judgment delivered by Honourable High Court of Patna. The facts of the case are Indian Institute of Technology (for brevity ‘IIT’) wants to get constructed an academic building at Bihar. IIT has appointed ‘National Building Construction Company’ (for brevity ‘NBCC’) as a consultant to get the building constructed. NBCC acts as a project managment consultant and oversees the construction of such building. In the process, NBCC has appointed Shapoorji Paloonji (for brevity ‘SP’) as a contractor to construct and deliver such building to IIT.
SP being a service provider has examined whether such works were exempted from the provisions of service tax law in light of Mega Exemption Notification, in specific Entry 12. As stated earlier, to claim exemption under Entry 12, the prerequisite is the service receiver shall either be ‘government’, ‘local authority’ or a ‘governmental authority’. It is clear that IIT is neither government nor a local authority and if it fits to be a ‘governmental authority’, SP can avail the exemption benefit.
On reading the definition of ‘governmental authority’, SP has interpreted that even though IIT is registered under Institutes of Technology Act, 1961 and constituted by an act of Parliament but since does not have 90% or more participation by way of equity/control and not a body constituted for carrying out activities mentioned vide 243W of constitution, IIT does not fit into the ambit of ‘governmental authority’ and accordingly started collection of tax and making payments to the credit of central government.
Subsequently, Indian Audit and Account department raised objection stating that construction services provided by SP relating to educational institutions does not attract service tax and accordingly either SP or IIT is not required to pay service tax on subject works. SP has approached the Honourable High Court of Patna for ordering of refund of service tax paid on such construction services provided to IIT.
The learned advocate representing the Commissioner of Customs, Central Excise and Service Tax has stated that the plea of SP is not right since the definition of ‘governmental authority’ states that IIT has to satisfy the condition of 90% or more equity/control and should be entrusted with the activities mentioned vide Article 243W of Constitution. Since IIT is not an entity not entrusted with activities mentioned vide Article 243W, it cannot be called as ‘governmental authority’ and accordingly SP has to pay service tax on the said transaction.
That is to say, the department/authorities have interpreted the definition as under:
- “governmental authority” means an authority or a board or any other body;
- set up by an Act of Parliament or a State Legislature 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; or
- 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
However, the Honourable High Court of Patna has stated that the condition of 90% or more equity/control shall be applicable only to sub-clause (ii) of the definition and not to sub-clause (i) of the definition. That is to say, the High Court has interpreted the definition as under:
- “governmental authority” means an authority or a board or any other body;
- set up by an Act of Parliament or a State Legislature; or
- 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
Hence, in view of the Honourable High Court, it is clear that the condition of 90% or more equity/control has to be satisfied for a body/authority/any other body which is established by Government and does not apply to body/authority/any other body which is set up by an act of Parliament or a State Legislature.
Accordingly, since IIT is a body constituted by an act of Parliament, it satisfies the definition of ‘governmental authority’ and consequently the services provided by SP shall fit into the exemption entry 12 and no service tax is required to be paid. The Court has ordered for a refund of service tax which is already paid by SP.
Hence, from the above judgment it is clear that the condition is linked to the sub-clause (ii) and not sub-clause (i). Accordingly, all services which are falling under the Entry 12 and being provided to body/authority constituted by an act of Parliament/State Legislature does not attract service tax and if already paid can be applied for refund by placing reliance of the subject judgment.
