Sovereign levy under municipal law kept Tahbazari outside service tax, with the demand, interest, and penalty set aside.

CESTAT New Delhi held that Tahbazari collected by a municipal corporation under municipal law was a sovereign levy arising from statutory functions, not consideration for renting of immovable property service. The collection was treated as a tax under the municipal framework and Article 285 of the Constitution, so the corporation was not providing a taxable service to traders. A later departmental clarification was treated as confirming that tax, cess, or duty collections are outside service tax, and it was applied retrospectively as a beneficial clarification. The service tax demand was therefore unsustainable, and the confirmation of tax, interest, and penalty was set aside.

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Issues: Whether the amount collected by the municipal corporation as Tahbazari fee was a sovereign levy under the municipal law and, therefore, not taxable as renting of immovable property service.

Analysis: The collection was treated as arising from the municipal corporation's statutory functions under the municipal legislation and Article 285 of the Constitution of India. The statutory scheme indicated that the amount received from traders for carrying on activity within municipal limits was collected as tax under the municipal law. On that basis, the activity was not a service rendered by the municipal corporation to the traders. The later departmental clarification was treated as confirming that tax, cess, or duty collections are not leviable to service tax, and it was applied retrospectively as a beneficial clarification.

Conclusion: The demand of service tax was unsustainable and the issue was decided in favour of the assessee.

Final Conclusion: The order confirming service tax, interest, and penalty was set aside and the appeal succeeded.

Ratio Decidendi: Amounts collected by a local authority in exercise of its statutory sovereign functions, and not as consideration for a taxable service, do not attract service tax.

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