2025 (9) TMI 1272 - AT - Service Tax

Remand for fresh decision on service tax applicability to municipal receipts, allowing written submissions and personal hearing

M/s. Mohanur Town Panchayat Versus Commissioner of GST & Central Excise, Salem

CESTAT CHENNAI - AT allowed the appeal by way of remand, holding that levy of service tax on various municipal receipts (renting of immovable property, ... Levy of service tax under various services including ‘Renting of Immovable Property Services’ - charges collected by a municipal local authority for activities including renting of immovable property, parking, market fees, bus-stand/bay fees, slaughterhouse fees, public toilet charges, rents from shopping complexes/rest houses and similar receipts - HELD THAT:- The Tribunal in the appellant’s own case had occasion to consider a similar issue. After taking note of the judgement passed by the Hon’ble High Court in the case of Cuddalore Municipality Vs. Joint Commissioner of GST and Central Excise, Tiruchirappalli [2021 (4) TMI 500 - MADRAS HIGH COURT] and St. Thomas Mount Cum Pallavaram Cantonment Board Vs. Additional Commissioner of GST and Central Excise, Chennai [2023 (4) TMI 1024 - MADRAS HIGH COURT] the Tribunal remanded the matter to the adjudicating authority to reconsider the issue afresh. The matter requires to be remanded to the Original Authority who is directed to consider the issue afresh after giving an opportunity to the appellant to file their written submissions and for personal hearing. The appellant should also cooperate with the Ld. Original Authority in ensuring that the matter is decided expeditiously. All issues are left open including the issue on limitation. The appeal is allowed by way of remand to the adjudicating authority. ISSUES PRESENTED AND CONSIDERED 1. Whether charges collected by a municipal local authority for activities including renting of immovable property, parking, market fees, bus-stand/bay fees, slaughterhouse fees, public toilet charges, rents from shopping complexes/rest houses and similar receipts are exigible to service tax. 2. Whether services rendered by a municipal local authority in relation to functions enshrined in Article 243W/read with Article 243X and the Twelfth Schedule of the Constitution constitute sovereign functions (or activities 'by a governmental authority') and therefore fall within statutory/notification exemptions from service tax. 3. Whether any portion of the demand is payable under the Reverse Charge Mechanism (RCM) or otherwise chargeable to the appellant as service provider. 4. Whether demands raised invoking extended period of limitation are sustainable against a local authority alleged to have suppressed facts with intent to evade tax, i.e., whether there is sufficient basis for invoking extended limitation. 5. Whether, in view of conflicting High Court decisions and pending appellate proceedings, the proper course is to remit the matters to the adjudicating authority for fresh consideration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of municipal receipts (including Renting of Immovable Property Services) Legal framework: Taxability derives from the charging provisions for taxable services (e.g., renting of immovable property) under the Service Tax statutory scheme and related definitions; exemptions include statutory exemptions for services by Government/local authority under specified sections/notifications (including Mega Exemption Notification entries for public conveniences and activities entrusted to a municipality under Article 243W). Precedent Treatment: Conflicting High Court decisions exist. One line of authority holds municipal renting and related services taxable (relying on statutory definition of 'renting of immovable property' and prior High Court decisions upholding provisions). Another line (notably a Single Judge decision) holds that services by municipalities in discharge of functions under Article 243W are sovereign/governmental and therefore fall within exemptions (and quashes demands). Interpretation and reasoning: The Tribunal identifies that the majority of the demand arises from renting of immovable property and related municipal charges. Given the divergent High Court authorities - some sustaining taxability and others exempting municipal activities treated as sovereign or governmental authority activities - the issues require fact-sensitive and law-sensitive reexamination (including whether specific receipts arise from functions entrusted by statute/Constitution and whether they are ancillary/commercial in nature). The Tribunal notes that where activities are in discharge of sovereign right/function or are services by a governmental authority as envisaged by the exemption, levy cannot be attracted. Ratio vs. Obiter: The Tribunal's direction to remit for fresh adjudication on taxability is ratio. Observations about the need to examine whether particular receipts fall within the Twelfth Schedule/Article 243W and the scope of the Mega Exemption Notification and Sectional exemptions are binding in the context of the remand (operative part). Statements recounting conflicting precedents are explanatory (obiter) to the extent they do not decide the taxability of the particular receipts on the record. Conclusions: The Tribunal sets aside the impugned order and remands the question of taxability (including renting of immovable property and other municipal receipts) to the adjudicating authority for fresh consideration with opportunity to the appellant to file written submissions and be heard. All issues on taxability are left open for adjudication. Issue 2 - Whether municipal activities are sovereign/governmental (Article 243W / Twelfth Schedule) and applicability of exemptions Legal framework: Constitutional provisions (Article 243W/243X and Twelfth Schedule) that allocate municipal functions; statutory exemption provisions and notification entries which exempt services 'by a governmental authority' and services in relation to functions entrusted to a municipality. Precedent Treatment: The Tribunal identifies and relies on a High Court decision holding that services rendered by municipalities under Article 243W are exempt (including renting by a government/local authority under Section/notification); other High Court authorities have reached opposite conclusions, emphasising statutory definitions and previous upholding of charge provisions. Interpretation and reasoning: Whether a particular municipal receipt is taxable depends on whether the activity is an exercise of sovereign function/entrusted function under the Twelfth Schedule or merely a commercial/ancillary activity. The Tribunal reasons that several contested receipts may relate to statutory functions conferred by State enactment and Article 243W, and these factual and legal aspects were not sufficiently examined by the adjudicating authority. Given the conflicting judicial views, the Tribunal considers remand appropriate to enable a granular determination of whether services qualify as governmental/sovereign and hence exempt. Ratio vs. Obiter: The direction to examine sovereign/governmental character and applicability of exemptions on remand is ratio. Comparative discussion of differing High Court outcomes is obiter insofar as it contextualises the need for fresh consideration. Conclusions: The adjudicating authority must determine, after hearing and on evidence, whether the specific activities are functions entrusted to the municipality under the Twelfth Schedule/State enactment and whether statutory/notification exemptions apply; the Tribunal leaves the merits open for fresh decision. Issue 3 - Reverse Charge Mechanism (RCM) liability Legal framework: Statutory provisions and rules governing RCM which specify when service recipient or provider is liable to discharge service tax. Precedent Treatment: Not decisively adjudicated on the record; parties raised conflicting contentions (appellant contested RCM liability; department relied on conventional application). Interpretation and reasoning: The Tribunal records the appellant's submission that it is not liable under RCM where the recipient is the person liable by statute, and that this point requires consideration in the factual matrix. Because the overall matter is remanded for fresh adjudication, RCM applicability must be examined afresh in light of which party is statutorily chargeable and whether any exemption applies to the service provider/recipient. Ratio vs. Obiter: The Tribunal does not decide RCM liability; the instruction to decide RCM on remand is part of the operative ratio to remit the entire matter for complete adjudication. Conclusions: RCM contentions are left open and to be decided by the adjudicating authority on remand after considering submissions and evidence. Issue 4 - Limitation and invocation of extended period for demands against a local authority Legal framework: Limitation rules for issuing demands and principles for invoking extended period where suppression or wilful misstatement is alleged; special considerations when assessee is a local authority (wing of government / elected body). Precedent Treatment: The Tribunal refers to prior remand practice and High Court directions to examine limitation in the context of municipal bodies; no conclusive precedent uniformly resolves whether extended period applies in absence of positive act of suppression by local authority. Interpretation and reasoning: The Tribunal notes appellant's contention that a local authority cannot be presumed to have suppressed facts with intent to evade tax and that the show cause notices do not allege positive acts of suppression. Given that limitation is a mixed fact/law issue and connected to the substantive classification of receipts, the Tribunal instructs the adjudicating authority to consider limitation (including invocation of extended period) in light of the appellant's status and the record. Ratio vs. Obiter: Direction to consider limitation on remand is ratio; generalized observations about policy considerations relating to local authorities are explanatory. Conclusions: The adjudicating authority must examine limitation and whether extended period is justified, giving reasons; issue is left open for determination on remand. Issue 5 - Appropriate remedy in view of conflicting jurisprudence and pending appeals Legal framework: Principles of justice and administrative fairness where binding precedent is unclear or conflicting and where higher court decisions on the point are pending. Precedent Treatment: The Tribunal refers to recent remands ordered by courts and tribunals in similar matters where conflicting High Court decisions exist and further appeals are pending. Interpretation and reasoning: Given the divergence of High Court decisions on municipal taxability and pending appeals against those decisions, the Tribunal finds remand to the adjudicating authority the appropriate course to permit fresh consideration in light of relevant authorities, statutory provisions and factual matrix. Remand enables the authority to quantify demand (if sustainable), assess RCM and limitation issues, and give the appellant opportunity to present evidence and submissions. Ratio vs. Obiter: The decision to remit for fresh consideration is the operative ratio of the Tribunal's order. Observations referencing the conflicting precedents and pending appeals are contextual and explanatory. Conclusions: The impugned order is set aside and the matter is remitted to the adjudicating authority for fresh adjudication on all open issues (taxability, exemptions, RCM, limitation, quantification), after giving the appellant opportunity to file written submissions and for personal hearing; all issues are left open for decision on merits.