2025 (10) TMI 885 - AT - Service Tax

Autonomous government unit under Dept. of Space not a 'business entity' under Section 65B(17); government security services non-taxable

CESTAT allowed the appeal and set aside the service-tax demand. The tribunal found the appellant to be an autonomous, wholly government-owned unit under ... Taxability - Security Agency Service - service provided by one department of the Government to another department of the Government - demand of service tax on the allegation that CISF, a fully government owned/controlled body, was providing security service to the appellant SCL who appeared to be duly covered by the term ‘business entity’ as defined u/s 66D(a)(iv) read with Section 65B(17) of the Finance Act - HELD THAT:- The appellant is an autonomous body of the Union Government and is wholly owned and controlled by Dept of Space, Govt of India and is funded through grant in aid from the budget of Government; all its members are the government employees by designation and they are engaged in the research and development in the area of semi-conductors and micro-electronics exclusively for certain strategic strictly confidential projects of Dept of Space, Govt of India. Further, the appellant being a sensitive organization of Govt of India, its security was handed over to the CISF which is also a body of Union Government and comes under the Ministry of Home Affairs. The appellant being a unit of Dept of Space, cannot be considered as a ‘business entity’ because they are barred from doing any commercial activity as clarified by ISRO vide its letter dated 06.09.2012. It is also found that as defined in Section 65B(17) of the Finance Act, a person to be called ‘business entity’ who is ordinarily carrying out any activity relating to industry, commerce or any other business or profession, whereas the very purpose of establishing the SCL was to establish a centre of excellence in micro-electronics in the country to meet the strategic requirement of country without any commercial considerations. It is also found that it is the sovereign duty of the CISF, a statutory body of the Union Government, to protect certain installations as specified by the Government to be vital. It is further observed that the appellant SCL is not running any industry and as such is not registered under the Factories Act, 1948 and therefore, the Security Service by the CISF, a body of Union Government, is being provided to the SCL, a wholly owned and controlled by Union of India, is not taxable. Thus, it is not inclined to accept that fact that the appellant is a ‘business entity’ and is working for profit. The finding of the learned Commissioner, that the appellant is engaged in commercial activity and thus is business entity, is not sustainable in law and accordingly, set aside on merits. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether security services provided by one department/body of the Union Government to another department/body of the Union Government are taxable under the Service Tax provisions (notably Security Agency Service) of the Finance Act, 1994. 2. Whether the appellant (an autonomous government laboratory wholly owned, funded and controlled by a Union Government department and engaged in non-commercial, strategic R&D) qualifies as a 'business entity' within the meaning of Section 65B(17) read with Section 66D(a)(iv) of the Finance Act, 1994. 3. Whether the supply of CISF security to the appellant amounts to a taxable service received by a service recipient who is a business entity, and whether any allegation of suppression/extended period invocation is sustainable when the issue is one of statutory interpretation and government-to-government supply. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of services provided by one Government department/body to another Government department/body Legal framework: Service Tax regime under the Finance Act, 1994 applies to taxable services as defined in the Act. Definitions of 'person', 'business entity' (Section 65B(17)), and specific categories like 'Security Agency Service' form the statutory matrix. Rule 2(1)(d)(i)E (as referenced) excludes certain government-to-government transactions where there is no service receiver outside the Government. Provisions concerning assessment, demand, interest and penalties (Sections 68-78, Rules 4-7) govern liability and adjudication. Precedent treatment: The Tribunal's earlier decision that State police providing security/chargeable services to organizations on cost-recovery is not leviable to service tax (Dy. Commissioner of Police Jodhpur) was affirmed by the Supreme Court. That line of authority treats sovereign/state security services differently from commercial security agency services. Interpretation and reasoning: The Court examined the character of both provider (CISF - a statutory central armed police force under Ministry of Home Affairs) and receiver (an autonomous laboratory wholly owned and controlled by a Union department). It found the CISF's function in this context to be sovereign/protective in nature and the supply to be activity between Government bodies. The Tribunal emphasised that where service is provided by one part of Government to another - particularly for protection of sensitive strategic installations - the nature of the transaction lacks commercial attributes required for taxability under Security Agency Service. The Tribunal relied on the sovereign duty of CISF and the established view that analogous State police activities were non-taxable and that such view is supported by the apex court's upholding of the Tribunal's decision. Ratio vs. Obiter: Ratio - Government-to-Government security services provided by statutory armed forces (CISF) to another Government unit for protection of sovereign/strategic installations do not attract service tax under the Security Agency Service classification. Obiter - general observations about cost-recovery arrangements by police forces and analogy to State police decisions insofar as not directly litigated facts may be treated as persuasive only. Conclusion: The service provided by CISF to the government laboratory is not taxable as Security Agency Service; the demand based on such classification cannot be sustained. Issue 2: Whether the government laboratory is a 'business entity' under Section 65B(17) Legal framework: Section 65B(17) defines 'business' or 'business entity' by reference to carrying on activities relating to industry, commerce or any other business or profession; taxation under service categories requires the recipient to be a business entity in certain contexts. Article 12 constitutional tests for 'State' (referred to for analogous treatment) identify six tests/factors to determine whether an entity is the State. Precedent treatment: Authorities were cited where courts applied multiple indicia to determine whether an entity is 'State' (Article 12) or a commercial/ business entity. Tribunal and High Court precedents distinguish entities set up for strategic, non-commercial public purpose from commercial enterprises. Interpretation and reasoning: The Tribunal assessed statutory and factual indicators: (a) the appellant is wholly owned, funded by grant-in-aid from a Union department; (b) members are government employees by designation; (c) established to meet strategic national requirements (R&D in micro-electronics) without commercial considerations; (d) administratively under the Department of Space/Ministry; (e) barred from commercial activity as per internal/ISRO clarification. Applying the statutory definition, the Tribunal concluded that the appellant does not 'ordinarily' carry on activities relating to industry, commerce or business/profession and hence is not a 'business entity.' The Tribunal also relied on the principle that public-purpose R&D entities performing sovereign functions do not assume the character of a business for tax purposes. Ratio vs. Obiter: Ratio - An autonomous government laboratory wholly owned, funded and controlled by the Government and engaged exclusively in non-commercial strategic R&D is not a 'business entity' under Section 65B(17). Obiter - reliance on Article 12 tests from judicial precedents is used illustratively to support government character but is not dispositive beyond the statutory definition applied. Conclusion: The appellant is not a 'business entity' within the meaning of Section 65B(17) and therefore cannot be treated as a taxable recipient under Security Agency Service provisions aimed at business entities. Issue 3: Applicability of penalties/extended period/suppression where issue is one of interpretation and the service recipient is a Government department/body Legal framework: Sections 68-70 and corresponding Rules (4, 6, 7) prescribe assessment, show cause notice, and consequences for suppression or failure to disclose. Extended period or penalties require factual demonstration of suppression or evasion as opposed to bona fide interpretative disputes; case law recognises that interpretation issues are distinct from deliberate concealment. Precedent treatment: Decisions cited indicate that Government departments/entities, especially those operating in non-commercial spheres, cannot easily be faulted with suppression where the matter pertains to reasonable interpretation of statutory provisions and where payments/refunds/returns show history of compliance or bona fide reliance on departmental practice. Interpretation and reasoning: The Tribunal noted the appellant had earlier paid service tax on CISF security for certain months and later discontinued payments following internal communication and contemporaneous practice in similar divisions. The primary dispute was interpretative - whether the entity is a business entity and whether the CISF service to a Government unit is taxable. Given the nature of the entity and the interpretation issues, the Tribunal found extended period and suppression allegations untenable; imposition of penalties for suppression could not be sustained absent clear intentional concealment. The Tribunal also referenced authorities where extended period was held inapplicable in interpretation disputes between Government entities. Ratio vs. Obiter: Ratio - Penalties and extended period provisions are not appropriately invoked where the core dispute is one of legal interpretation concerning taxability of Government-to-Government services and where conduct reflects bona fide treatment (including prior payments and internal communications). Obiter - observations on administrative practices across different departments are persuasive but fact-specific. Conclusion: Allegations of suppression and the consequent penalties/extended period invocation are not sustainable in the present interpretative and government-to-government context. Interconnected Findings and Final Conclusion Cross-references: Issues 1 and 2 are interdependent - the non-taxability conclusion under Issue 1 is reinforced by the finding under Issue 2 that the receiver is not a business entity; Issue 3 follows from the interpretative nature of Issues 1-2. Final disposition: The Tribunal set aside the demand of service tax, interest and penalties as not sustainable on merits, holding the service to be a non-taxable government-to-government security service and the appellant not to be a 'business entity' within the statutory meaning; consequent penalties and demand were quashed.