Leasing weekly market collection rights to contractors exempt from GST under constitutional functions

The AAR-TN ruled that leasing weekly market collection rights to tender contractors is not a taxable supply under GST. The activity involves collecting entry fees from vendors/farmers selling vegetables, fruits, and animals in open spaces on designated market days. The authority determined this falls under functions entrusted to Panchayats under Article 243G of the Constitution as a local authority acting as public authority. Since the contractor operates under back-to-back arrangements providing the same constitutional functions, the activity is covered under Central Tax Notification 14/2017-Rate and State Tax GO 75/2017, exempting it from GST as neither supply of goods nor services.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

• Whether the activity of leasing the right to collect entry fees for weekly markets to tender contractors by a Panchayat falls under the functions entrusted to Panchayats under the Eleventh Schedule to Article 243G of the Constitution, thereby qualifying as an activity undertaken by a local authority engaged as a public authority.
• Whether such activity constitutes a supply of service or is excluded from the ambit of supply under Section 7(2)(b) of the CGST Act, 2017, and hence eligible for exemption under Notification No. 14/2017-CT (Rate) dated 28-06-2017 and its amendments.
• Whether the contractor collecting entry fees on behalf of the Panchayat is also covered by the exemption as a back-to-back service provider.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether leasing the right to collect entry fees for weekly markets is a function entrusted to Panchayats under Article 243G and the Eleventh Schedule

Relevant legal framework and precedents: Article 243G of the Constitution prescribes the powers, authority, and responsibilities of Panchayats and lists 29 functions in the Eleventh Schedule, including "Markets and Fairs" (function No. 22). The CGST Act, 2017, defines "local authority" under Section 2(69) and recognizes activities undertaken by local authorities as public authorities under Section 7(2)(b). The applicant relied on prior rulings of the Tamil Nadu Appellate Authority for Advance Ruling (TNAAR) on similar issues.

Court's interpretation and reasoning: The AAR examined the nature of the activity, which involved the Panchayat granting a tender contractor the right to collect entry fees from vendors, farmers, and the public for selling goods in weekly markets. The contract stipulated that fees collected must be as prescribed by the Panchayat and receipts issued in the Panchayat's name. The Authority emphasized the close nexus between the activity and the function entrusted under Article 243G, noting that the activity is inseparable from the Panchayat's constitutional function of managing markets and fairs.

Key evidence and findings: The applicant's submissions, tender contract terms, and constitutional provisions were scrutinized. The Authority found that the activity of leasing the right to collect entry fees is clearly linked to the Panchayat's function of managing markets and fairs.

Application of law to facts: Since the activity is directly related to a function entrusted to Panchayats under the Eleventh Schedule, it qualifies as an activity undertaken by a local authority engaged as a public authority.

Treatment of competing arguments: The Authority considered whether the activity might be a taxable service, such as renting of immovable property or mandap keeper service, but concluded that the constitutional function's nature and the statutory framework supersede such classification.

Conclusions: The activity of leasing the right to collect entry fees for weekly markets to tender contractors falls within the functions entrusted to Panchayats under Article 243G and the Eleventh Schedule.

Issue 2: Whether the activity constitutes a supply of service or is excluded from the scope of supply under Section 7(2)(b) of the CGST Act, 2017, and eligible for exemption under Notification No. 14/2017-CT (Rate)

Relevant legal framework and precedents: Section 7(2)(b) of the CGST Act excludes from supply "such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities." Notification No. 14/2017-CT (Rate) dated 28-06-2017 explicitly states that services by way of any activity in relation to a function entrusted to a Panchayat under Article 243G shall neither be treated as supply of goods nor supply of services. The applicant also cited amendments and related notifications and prior rulings supporting this interpretation.

Court's interpretation and reasoning: The Authority noted that despite the activity involving the collection of fees, it is not a commercial supply but an activity undertaken in the discharge of a constitutional function by a local authority as a public authority. The Authority emphasized the legislative intent to exclude such activities from the GST net to avoid taxation on government functions entrusted under the Constitution.

Key evidence and findings: The contract conditions, prescribed fee structure, and issuance of receipts in the Panchayat's name demonstrated the activity's public authority character. The Authority also noted that the contractor acts as an agent or service provider on behalf of the Panchayat.

Application of law to facts: The activity is excluded from the definition of supply under Section 7(2)(b) and Notification No. 14/2017-CT (Rate) applies, making the activity neither a supply of goods nor services for GST purposes.

Treatment of competing arguments: The Authority considered the possibility that the activity could be construed as "renting of immovable property" or other taxable services but held that the constitutional function and statutory exclusion prevail over such classification.

Conclusions: The activity is not a taxable supply and is exempt under Notification No. 14/2017-CT (Rate) dated 28-06-2017 as amended.

Issue 3: Whether the contractor collecting entry fees on behalf of the Panchayat is covered by the exemption as a back-to-back service provider

Relevant legal framework and precedents: The concept of "back to back contract" is recognized where a main contractor passes obligations to sub-contractors bound by the same terms. The Authority referred to this principle to assess whether the contractor's activity is also exempt.

Court's interpretation and reasoning: The Authority held that since the contractor performs the activity as per the terms prescribed by the Panchayat and issues receipts in the Panchayat's name, the contractor acts as an agent or service provider rendering services back to the Panchayat. The exemption under Notification No. 14/2017-CT (Rate) extends to such back-to-back services.

Key evidence and findings: The tender contract's terms and conditions, receipts issued, and the nature of the activity support the contractor's role as a back-to-back service provider.

Application of law to facts: The contractor's activity is not independently taxable but covered by the exemption applicable to the Panchayat's entrusted functions.

Treatment of competing arguments: No contrary arguments were found persuasive given the legislative intent and contractual arrangements.

Conclusions: The contractor's activity is also exempt from GST as a back-to-back service provider to the Panchayat.

3. SIGNIFICANT HOLDINGS

The Authority's crucial legal reasoning is encapsulated in the following verbatim excerpts:

"The transaction between Panchayat and Contractor is clearly an activity/transaction undertaken by the local authority, engaged as public authority. Hence, the requirement stated in Section 7 (2) (b) of the Act are clearly met. Hence, the activity undertaken by the corporation is an activity covered under the Notification No. 14/2017-CT (Rate) dated 28-06-2017, as amended as 'neither a supply of goods nor a supply of services' and out of purview of GST and the notification is available for the Contractor also provided the same are rendered as back to back services to the applicant."

"The purpose of providing certain functions entrusted to the Panchayat will not change the essential characteristics envisaged under the Article irrespective of the person providing the services entrusted. It is important to determine whether the activities provided by the contractor is the same function entrusted to a panchayat in the Constitution and to ensure that the intention of the provisions contained in the Constitution is fulfilled. Thus, there is close link or association between the activity and the functions."

Core principles established include:

• Activities undertaken by Panchayats in relation to functions entrusted under Article 243G of the Constitution are not treated as supply of goods or services under GST law.
• The exemption under Notification No. 14/2017-CT (Rate) applies to such activities, including those performed through contractors under back-to-back contracts.
• The constitutional function's nature and legislative intent override classification of such activities as taxable services.

Final determinations on each issue are:

• The activity of leasing the right to collect entry fees for weekly markets to tender contractors is a function entrusted to Panchayats under Article 243G and the Eleventh Schedule.
• Such activity is excluded from the scope of supply under Section 7(2)(b) of the CGST Act and Notification No. 14/2017-CT (Rate) dated 28-06-2017 applies, rendering it neither a supply of goods nor services liable to GST.
• The contractor collecting entry fees acts as a back-to-back service provider to the Panchayat and is also covered by the exemption.

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