Governmental authority exemption upheld for market infrastructure works; incidental renting did not convert the activity into business.

Construction, erection and related works executed for a Krishi Utpadan Mandi Samiti were treated as exempt from service tax under the governmental authority notification. The Mandi Samiti, constituted under State law to regulate agricultural produce markets and perform public regulatory functions, was regarded as a governmental authority. The exemption remained available because the works were for market infrastructure and allied facilities used predominantly for regulatory purposes, not commerce or business. Incidental leasing or renting of shops and sheds in the market area did not alter the character of the activity or disqualify the exemption. The service tax demand was therefore unsustainable.

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Issues: (i) Whether the Krishi Utpadan Mandi Samiti fell within the expression "governmental authority" for the purpose of the service tax exemption notification; (ii) Whether construction and related works carried out for the Mandi Samiti were exempt from service tax notwithstanding rental activity in the market area.

Issue (i): Whether the Krishi Utpadan Mandi Samiti fell within the expression "governmental authority" for the purpose of the service tax exemption notification.

Analysis: The Mandi Samiti was constituted under the State enactment as a body corporate to regulate sale and purchase of agricultural produce and to supervise and control markets. Its functions were aligned with public regulatory duties and with the concept of a body established by statute to perform functions entrusted to a municipality. On that basis, it answered the description of a governmental authority under the exemption notification.

Conclusion: The Krishi Utpadan Mandi Samiti was a governmental authority for the purposes of the notification.

Issue (ii): Whether construction and related works carried out for the Mandi Samiti were exempt from service tax notwithstanding rental activity in the market area.

Analysis: The exemption for services provided to a governmental authority covered construction, erection, completion and similar services where the works were meant predominantly for use other than commerce, industry or business. The Court held that construction of market infrastructure, shops, sheds and allied facilities for regulatory functioning of the Mandi Samiti did not become a commercial activity merely because the Samiti leased or rented such facilities. The renting of shops and sheds was treated as a method of regulating the market area, not as a business enterprise disqualifying the exemption.

Conclusion: The work contract services were exempt from service tax and the rental activity did not take the case outside Clause 12 of the notification.

Final Conclusion: The exemption notification applied to the works executed for the Mandi Samiti, and the service tax demand was unsustainable.

Ratio Decidendi: Services provided to a statutory governmental authority for construction of market infrastructure remain exempt where the works are predominantly for regulatory/public functions, and incidental leasing or rental of facilities does not by itself convert the authority's activities into commerce or business.

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