2025 (5) TMI 1027 - HC - Service Tax

Bihar Rajya Pul Nirman Nigam Limited centage payments constitute taxable service under Finance Act 1994

The Patna HC held that Bihar Rajya Pul Nirman Nigam Limited (BRPNNL), a public limited company, does not qualify as 'Government,' 'Local Authority,' or ... Maintainability of petition - availability of alternative remedy - Levy of service tax at the rate of 14-15% on the amount of ‘centage’, the penalty and other charges collected from the contractors - to fall within the definition of 'Government,' 'Local Authority,' or 'Governmental Authority' under the Finance Act, 1994 or not - petitioner's receipt of 'centage' (a percentage of construction cost and toll collection) constitutes taxable service under the Finance Act, 1994 or is exempt as reimbursement of expenses or otherwise outside the ambit of service tax - Invocation of extended period of limitation. Whether the petitioner/BRPNNL is a government or governmental authority? - HELD THAT:- The word “Governmental Authority” is defined under Mega Exemption Notification dated 20th June, 2012. In the case of Shapoorji Pallonji, this Court had occasion to consider the relevant clause 2 (s) of the Exemption Notification defining “Governmental Authority.” Clause 2 (s) defines the word “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 Parliament or a State Legislature to carry out any function entrusted to a municipality under Article 243-W of the Constitution. The Hon’ble Division Bench of this Court in the case of Shapoorji Pallonji [2023 (10) TMI 748 - SUPREME COURT] has considered the amended definition of the word “governmental authority” and held that as per definition of “governmental authority” as amended on 30.01.2014, an authority or board or any other body set up by an Act of Parliament or State Legislature is a “governmental authority.” - This Court held that since the IIT is falling within the definition of governmental authority, the notification dated 20th June, 2012 (Mega Exemption Notification) would exempt the activity of construction undertaken by the petitioner from payment of service tax. In the case of Shapoorji Paloonji, it has been noticed by the Hon’ble Division Bench that vide Notification No.6/2015 Service Tax, dated 1st March, 2015, amending the Notification dated 20th June, 2012, item nos. (a), (c) and (f) of Entry 12 as reproduced above, stands omitted. While in the case of Shapoorji Paloonji, the contract for construction was granted to the petitioner on 20th December, 2012 and prior to that the Notification dated 20th June, 2012 had been issued and the same had taken effect from 1st July, 2012, in the case of present petitioner, apart from the fact that the petitioner does not come within the meaning of governmental authority, the petitioner has not been awarded any contract by the government during the relevant period which is financial year 2015-16, 2016-17 and 2017-18 (upto June, 2017). The ‘Modus Operandi’ of the petitioner which this Court has taken note of from the written submissions of the petitioner clearly shows that the petitioner invites tenders from the eligible bidders for undertaking construction of roads and bridges. Upon selection, an agreement is entered into with them to undertake the construction work. It is found from the Circular No. 192/02/2016-Service Tax dated 13.04.2016 which clarifies the issue of liability of service tax on the services provided in lieu of fee charged by government or a local authority that any activity undertaken by government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to service tax - unless the petitioner is able to demonstrate by cogent evidence that it is engaged in providing services by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a road or bridge for use by the general public, it would not be possible to hold that its activity would be exempted under clause 13(a) of the Mega Exemption Notification. Invocation of extended period of limitation - HELD THAT:- If this is the declaration of the petitioner in Form ST-3, the allegation of the revenue that the petitioner had willfully suppressed the facts of their taxable value from the department with an intention to evade payment of service tax gains support. If the petitioner was claiming exemption from payment of service tax under the Mega Exemption Notification, it was obligatory upon the petitioner to make a correct declaration in Form ST-3 which has not been done in the present case. Therefore, the petitioner cannot succeed on this ground. The Court found that law about excisability of exempted goods was settled by this Court in Wallace Flour Mills Co. Ltd. v. CCE [1989 (9) TMI 106 - SUPREME COURT]. Till then conflicting decisions were rendered by different High Courts and Tribunals and it was not settled whether the turnover of assessable and exempted goods were liable to be clubbed for determining liability. Therefore, two questions arose, whether the appellant was bound in the state of uncertainty in law to include the turnover of the two items and if it failed to do so then it amounted to suppression of fact and second whether it was the duty of appellant to keep the Department informed about the turnover of the goods which were not liable to any duty. No rule could be pointed out requiring a manufacturer to disclose the turnover of exempted goods. It was held that even assuming it was, the appellant could not be held guilty of suppression when the law itself was not certain. The facts of Pushpam Pharmaceuticals Company [1995 (3) TMI 100 - SUPREME COURT] are completely different from the facts of the present case. Here, we have noticed that petitioner is not engaged as a contractor for construction of roads and bridges and in ST Form-3 while answering question no.11.1 the petitioner answered in negative. The petitioner, therefore, did not declare that it is seeking benefit of exemption notification. The present case is clearly distinguishable. Maintainability of petition - availability of alternative remedy - HELD THAT:- The petitioner has an alternative remedy of statutory appeal under Section 86 of the Finance Act, 1994. If so advised, the petitioner may apply for the statutory remedy of appeal on any other ground or grounds within a period of eight weeks from today. If any such appeal is preferred and in case a question of limitation arises for consideration, the same will be considered by the appellate authority keeping in view the period spent by the petitioner in pursuing this writ application under bona fide belief. Conclusion - i) Bihar Rajya Pul Nirman Nigam Limited (BRPNNL) is a Public Limited Company incorporated under the provisions of the Companies Act, 1956 does not fall within the meaning of word 'Government', 'Local Authority' and 'Governmental Authority'. ii) The petitioner does not satisfy the conditions laid down in Section 65B(26A), Section 65B(31) of the Finance Act, 1994 and clause 2(s) of the Mega Exemption N/N. 25/2012-ST dated 20.06.2012, as amended, for claiming exemption from service tax. iii) The 'centage' received by the petitioner for technical assistance and administrative support in construction and toll collection is consideration for taxable services under Section 65B(44) and Section 65B(51) of the Finance Act, 1994 and is not exempt under the Mega Exemption Notification or negative list under Section 66D. iv) Penalty or liquidated damages deducted from contractors for delay or breach of contract are compensatory payments and do not constitute consideration for taxable services under Section 66E(e) of the Finance Act, 1994 and hence are not liable to service tax. v) The extended period of limitation under proviso to Section 73(1) of the Finance Act, 1994 is rightly invoked in the present case due to willful suppression of facts and intent to evade payment of service tax. Application disposed off. 1. ISSUES PRESENTED and CONSIDERED(a) Whether the petitioner, a government company engaged in construction of bridges and roads and authorized to collect tolls, falls within the definition of 'Government,' 'Local Authority,' or 'Governmental Authority' under the Finance Act, 1994 and Mega Exemption Notification No. 25/2012-ST dated 20.06.2012, thereby entitling it to exemption from service tax.(b) Whether the petitioner's receipt of 'centage' (a percentage of construction cost and toll collection) constitutes taxable service under the Finance Act, 1994 or is exempt as reimbursement of expenses or otherwise outside the ambit of service tax.(c) Whether the penalty or liquidated damages deducted from contractors for delay or breach of contract constitute taxable services under Section 66E(e) of the Finance Act, 1994.(d) Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 is rightly invoked in the present case for recovery of service tax, interest, and penalty.(e) Whether there is any willful suppression or misstatement by the petitioner with intent to evade service tax, justifying imposition of penalty under Section 78 of the Finance Act, 1994.(f) Whether the writ jurisdiction is appropriate in the present matter, or the petitioner ought to have availed statutory remedies.2. ISSUE-WISE DETAILED ANALYSIS(a) Definition of Government, Local Authority, and Governmental Authority and entitlement to exemptionThe legal framework involves the definitions under Section 65B of the Finance Act, 1994 and the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012. The petitioner claimed exemption relying on clauses 12, 12A, and 13 of the Notification, which exempt services provided to the government, local authority, or governmental authority by way of construction of roads, bridges, and related works.The respondent rejected the petitioner's claim, holding that:The petitioner is a public limited company incorporated under the Companies Act, 1956, not created by statute or required to maintain accounts as per Article 150 of the Constitution.The petitioner does not fall within the statutory definitions of 'Government' (Section 65B(26A)), 'Local Authority' (Section 65B(31)), or 'Governmental Authority' as defined in the Mega Exemption Notification.The petitioner's main activities and income sources (centage from construction and toll collection) do not fall under functions entrusted to a municipality under Article 243W of the Constitution.The Court examined the relevant constitutional provisions, statutory definitions, and authoritative guidelines, including the 'Taxation of Services: An Education Guide' issued by the Ministry of Finance, which clarify that statutory corporations or companies incorporated under the Companies Act, even if wholly owned by the government, do not qualify as government or local authorities unless they satisfy specific criteria.The Court referred extensively to the judgment in the Shapoorji Pallonji case, upheld by the Supreme Court, which interpreted the amended definition of 'governmental authority' to require either establishment by statute or government control and performance of municipal functions under Article 243W. The petitioner failed to satisfy these conditions.Hence, the Court concluded that the petitioner does not qualify as a 'Government,' 'Local Authority,' or 'Governmental Authority' for exemption purposes.(b) Taxability of 'centage' received by the petitionerThe petitioner contended that the centage received is reimbursement of establishment or administrative expenses and not consideration for taxable services. They relied on the definitions of 'service' under Sections 65B(44) and 65B(105) of the Finance Act, arguing that reimbursement of expenditure is not a service.The respondent found that the petitioner acts as an executing agency awarding contracts to third-party contractors for construction and toll collection, providing technical assistance and administrative support. The centage is a fixed percentage of contract costs or toll collections paid to the petitioner for these services.The respondent relied on Circular No. 152/3/2012-ST dated 22.02.2012 and Circular No. 192/02/2016-Service Tax dated 13.04.2016, clarifying that services provided in lieu of fees charged by government or local authorities are taxable if consideration is received for such services, irrespective of statutory or mandatory nature.The Court applied the principle from Section 66F(1) that a 'main service' does not include services used for providing the main service, but the petitioner's centage is consideration for distinct taxable services rendered (technical assistance, administration, toll collection support).The petitioner's own accounting and profit and loss statements showed centage as revenue, and the petitioner admitted not declaring exemption in statutory returns (ST-3). The Court found no merit in the petitioner's claim that centage is merely reimbursement.Therefore, the Court held that the centage received by the petitioner constitutes consideration for taxable services under the Finance Act and is not exempt.(c) Taxability of penalty/liquidated damages deducted from contractorsThe petitioner argued that penalties or liquidated damages deducted from contractors are merely compensatory payments and not consideration for taxable services, relying on Circular No. 178/10/2022-GST dated 03.08.2022 and relevant CESTAT orders.The respondent initially contended that such penalties fall under declared services under Section 66E(e) of the Finance Act, which includes agreeing to tolerate an act or refrain from an act.The Court examined the circular and judicial precedents, including CESTAT decisions, which clarified that liquidated damages or penalties are payments for breach of contract and do not constitute consideration for tolerating breach or for any service. They are compensatory in nature and not taxable.The Court accepted the petitioner's submission on this point and held that the demand of service tax on penalty deducted from contractors is unsustainable.(d) Invocation of extended period of limitation under proviso to Section 73(1)The respondent invoked the extended period of limitation on the ground of willful suppression of facts and intention to evade service tax, based on third-party data from the Income Tax Department and non-filing of statutory returns (ST-3) by the petitioner.The Court noted the detailed findings in the impugned order, including:Non-assessment and non-payment of service tax during the relevant period.Failure to respond to departmental requests and non-filing of statutory returns.Concealment of taxable value and malafide intent to evade tax.The Court referred to the Supreme Court's ruling in Union of India vs. Rajasthan Spinning and Weaving Mills, which holds that 'wilful' suppression or misstatement with intent to evade tax justifies extended limitation.Given the evidence and the petitioner's conduct, the Court found no error in the invocation of the extended period of limitation.(e) Allegation of willful suppression and imposition of penalty under Section 78The petitioner denied any willful attempt to evade tax, arguing that the imputation of evasion is unjustified.The respondent pointed to the petitioner's failure to declare exemption in ST-3 returns, non-filing of returns, and concealment of taxable value, indicating willful suppression.The Court analyzed the Supreme Court's observations in various judgments, including Northern Operating Systems Pvt. Ltd. and Pushpam Pharmaceuticals Company, which require deliberate and intentional suppression for penalty imposition.On facts, the Court found that the petitioner's failure to disclose exemption claims and non-filing of returns supports the inference of willful suppression.However, since the penalty on penalty/liquidated damages was held unsustainable, only the penalty related to suppression of centage income remains.(f) Appropriateness of writ jurisdictionThe petitioner invoked writ jurisdiction alleging jurisdictional error in the impugned order.The respondent submitted that the petitioner had an alternative statutory remedy of appeal under Section 86 of the Finance Act, 1994, which was not availed.The Court referred to the Supreme Court's consistent view that writ jurisdiction should not be exercised where an efficacious alternative remedy exists, citing State of Maharashtra vs. Greatship (India) Ltd. and other precedents.The Court noted that the petitioner's failure to avail statutory appeal weighs against entertaining the writ petition.3. SIGNIFICANT HOLDINGS'Bihar Rajya Pul Nirman Nigam Limited (BRPNNL) - A Public Limited Company incorporated under the provisions of the Companies Act, 1956 does not fall within the meaning of word 'Government', 'Local Authority' and 'Governmental Authority'.''The petitioner does not satisfy the conditions laid down in Section 65B(26A), Section 65B(31) of the Finance Act, 1994 and clause 2(s) of the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012, as amended, for claiming exemption from service tax.''The 'centage' received by the petitioner for technical assistance and administrative support in construction and toll collection is consideration for taxable services under Section 65B(44) and Section 65B(51) of the Finance Act, 1994 and is not exempt under the Mega Exemption Notification or negative list under Section 66D.''Penalty or liquidated damages deducted from contractors for delay or breach of contract are compensatory payments and do not constitute consideration for taxable services under Section 66E(e) of the Finance Act, 1994 and hence are not liable to service tax.''The extended period of limitation under proviso to Section 73(1) of the Finance Act, 1994 is rightly invoked in the present case due to willful suppression of facts and intent to evade payment of service tax.''The petitioner's failure to declare exemption in statutory returns and non-filing of returns supports the finding of willful suppression, justifying imposition of penalty under Section 78 of the Finance Act, 1994.''Writ jurisdiction is not appropriate in the present case where an efficacious alternative statutory remedy of appeal is available and not availed by the petitioner.''The petitioner is liable to pay service tax amounting to Rs. 38,79,23,782/- on centage received for the period April 2015 to June 2017.''The demand of service tax amounting to Rs. 2,48,40,450/- on penalty deducted from contractors is not sustainable.'