Letting college hostels to government department not 'in relation to' statutory functions; no exemption under Entry 3 of N/N.12/2017

AAAR held the appellant's letting of buildings to a government department for use as social welfare college hostels did not qualify as supply "in relation to" statutory functions of panchayats and similar bodies, and therefore was not entitled to exemption under entry 3 of N/N.12/2017. Applying the legal meaning of "in relation to," the authority found the supply was not sufficiently connected to the statutory functions and dismissed the appeal.

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ISSUES PRESENTED AND CONSIDERED

1. Whether rent received for letting out immovable property to a State Government department, used to run hostels for scheduled castes/weaker sections, qualifies as "pure services ... by way of any activity in relation to any function entrusted to a Municipality/Panchayat" under serial no. 3 of Notification No.12/2017 and is therefore exempt from GST.

2. Whether the supply by the lessor is directly "in relation to" the statutory functions listed in Article 243W read with the Twelfth Schedule of the Constitution of India, such that the exemption at serial no. 3 of Notification No.12/2017 applies.

3. Whether prior AAR/AAAR decisions from other States submitted by the appellant bind the Appellate Authority where those orders did not apply the Supreme Court's interpretation of the phrase "in relation to."

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of exemption under serial no. 3 of Notification No.12/2017 to rent received from State Government department used for social-welfare hostels

Legal framework: Serial no. 3 of Notification No.12/2017 exempts "Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G ... or in relation to any function entrusted to a Municipality under article 243W ...".

Precedent treatment: The Court refers to the Supreme Court's guidance in Doypack Systems Pvt. Ltd. on the correct legal import of "in relation to". AAR/AAAR orders from other States relied on by the appellant were examined and not followed because they did not consider Doypack.

Interpretation and reasoning: The Tribunal interprets "in relation to" in its legal sense-meaning "concerning with", "pertaining to" or having a direct association/connection with the statutory functions enumerated in the Twelfth Schedule pursuant to Article 243W. The Twelfth Schedule entries (including "Safeguarding the interests of weaker sections" and "Promotion of cultural, educational and aesthetic aspects") are listed; the authority requires a direct nexus between the service supplied and the statutory municipal/panchayat function.

Ratio vs. Obiter: Ratio - exemption requires that the service be directly "in relation to" a function entrusted to Municipality/Panchayat as legally construed; services merely used by a government entity for welfare purposes but not directly connected to a municipal/panchayat statutory function do not qualify. Obiter - reference to the list of Twelfth Schedule functions and examples are explanatory but secondary to the nexus requirement.

Conclusions: The letting of buildings by a private lessor to a State Government department that, in turn, uses the premises to run social welfare college hostels does not constitute a service directly "in relation to" the statutory functions entrusted to Municipalities/Panchayats. Therefore the exemption under serial no. 3 of Notification No.12/2017 is not attracted and the rent is taxable.

Issue 2 - Directness of nexus between the lessor's supply and municipal/panchayat functions under Article 243W/243G

Legal framework: Article 243W and the Twelfth Schedule identify municipal functions; the exemption hinges on services being "by way of any activity in relation to any function entrusted" to those bodies.

Precedent treatment: The Supreme Court's elucidation of "in relation to" in Doypack is treated as binding guidance for determining the requisite connection/nexus.

Interpretation and reasoning: The Appellate Authority examines the factual sequence: lessor ? lease to State department ? department uses premises to run hostels. The Court finds the lessor's activity (renting the building) lacks the requisite directness or immediacy to be considered an activity "in relation to" a function entrusted to a Municipality/Panchayat. The channeling of supply through a government department that applies the premises for welfare does not transform the lessor's supply into one connected with municipal/panchayat statutory functions.

Ratio vs. Obiter: Ratio - a direct and proximate connection between the service provided and the municipal/panchayat function is necessary; indirect or downstream use by a government entity does not suffice. Obiter - discussion of factual permutations where such nexus might exist (not decided here).

Conclusions: There is no direct nexus between the appellant's renting service and the functions in the Twelfth Schedule; hence the exemption claim fails on the ground of insufficient legal connection.

Issue 3 - Weight of other AAR/AAAR decisions and compliance with Supreme Court interpretation of "in relation to"

Legal framework: Administrative rulings (AAR/AAAR) are persuasive but must conform to higher court precedent and correct legal interpretation.

Precedent treatment: The Appellate Authority explicitly declines to follow the other State AAR/AAAR rulings tendered by the appellant because those orders proceeded without applying the Supreme Court's Doypack interpretation of "in relation to".

Interpretation and reasoning: The authority reasons that AAR/AAAR orders that do not apply binding Supreme Court authority on statutory interpretation cannot stand as persuasive precedent for the present matter. The correct legal import of "in relation to" must be applied uniformly; departures are not followed.

Ratio vs. Obiter: Ratio - administrative rulings inconsistent with Supreme Court interpretation are not followed. Obiter - citation of specific out-of-State orders is explanatory of why they were not persuasive.

Conclusions: The prior AAR/AAAR decisions submitted by the appellant are not followed because they failed to apply binding Supreme Court guidance; they do not alter the outcome.

OVERALL CONCLUSION

The Appellate Authority affirms that rent received for letting buildings to a State Government department, which subsequently uses the premises to run social welfare college hostels, is taxable. The exemption under serial no. 3 of Notification No.12/2017 is not attracted because the lessor's service is not directly "in relation to" any function entrusted to a Municipality/Panchayat as legally construed; out-of-State AAR/AAAR orders inconsistent with Supreme Court authority are not followed. The appeal is dismissed and the impugned AAR ruling is upheld.

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