AAR rules K-DISC training services taxable, not exempt under Entry 72 or 3B; full ITC available on subcontractors

AAR held that services provided by the applicant to K-DISC are not exempt under Entry 72 of Notification 12/2017-CT (Rate) as K-DISC, being a society under the Travancore-Cochin Literary, Scientific and Charitable Societies Act, 1955, is a distinct legal entity and cannot be treated as Central/State Government or a Government Department. K-DISC may, at best, be a Governmental Authority/Entity, but the applicant's services (skill development, capacity building, employability training) also do not fall within the limited exempt categories under Entry 3B of Notification 13/2023-CT (Rate). Consequently, the supplies are taxable, and the applicant is entitled to full ITC on GST paid to subcontractors, subject to statutory conditions and documentation.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether services supplied to the Kerala Development and Innovation Strategic Council under various training and skill development programmes are exempt from GST under Entry 72 of Notification No. 12/2017-Central Tax (Rate).

1.2 Whether such services can alternatively be exempt under Entries 3, 3A or 3B of Notification No. 12/2017-Central Tax (Rate), having regard to the legal status and character of the recipient and the nature of services.

1.3 Whether input tax credit is admissible on GST charged by subcontractors on goods and services used for providing the above services.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Eligibility of GST exemption on services supplied to Kerala Development and Innovation Strategic Council

Legal framework

2.1 The Court examined Entry 72 of Notification No. 12/2017-Central Tax (Rate), as amended, which exempts "services provided to the Central Government, State Government, Union territory administration under any training programme for which 75% or more of the total expenditure is borne by the Central Government, State Government, Union territory administration".

2.2 The Court also considered Entries 3, 3A and 3B of the same notification, along with the amendments brought by Notification No. 16/2021-Central Tax (Rate) and Notification No. 13/2023-Central Tax (Rate), and the definitions in Sections 2(53) and 2(69) of the CGST Act, 2017 and Sections 3(8) and 3(60) of the General Clauses Act, 1897.

Interpretation and reasoning - Entry 72 (services to Government)

2.3 The conditions for exemption under Entry 72 were identified as: (i) services must be provided to the "Government"; and (ii) 75% or more of the total expenditure of the training programme must be borne by the Government.

2.4 It was accepted that K-DISC is fully funded from the State budget through the Consolidated Fund of the State, satisfying the second condition relating to expenditure.

2.5 The Court examined whether K-DISC could be treated as "Government" or a "Government Department" for purposes of Entry 72. Section 2(53) of the CGST Act defines "Government" as the Central Government and the State Government. Read with Sections 3(8) and 3(60) of the General Clauses Act, this was held to refer exclusively to the sovereign executive authority represented by the President (Union) or the Governor (State).

2.6 On the documents produced, including the Government Order authorising registration and the letter of the Member Secretary, it was found that K-DISC stands registered as a society under the Travancore-Cochin Literary, Scientific and Charitable Societies Act, 1955. The Court held that such a society, though fully funded and controlled by the State and integrated with departmental functioning, is a separate legal entity distinct from the State Government.

2.7 It was further held that even if K-DISC could be treated as a Governmental Authority or Government Entity, this would not make it "Government" or a "Government Department" within the meaning of Section 2(53) of the CGST Act and Entry 72. A society, even when wholly controlled and financed by Government, cannot be regarded as "Government" for purposes of the exemption.

2.8 On this basis, the Court concluded that services provided by the applicant to K-DISC cannot be regarded as services provided "to the Central Government or State Government", and hence are not eligible for exemption under Entry 72.

Interpretation and reasoning - Entries 3 and 3A (pure/composite services to Government and local authority)

2.9 The Court traced the legislative evolution of Entries 3 and 3A of Notification No. 12/2017-Central Tax (Rate). Initially, these entries extended exemption for specified services not only to the Central Government, State Government, Union territory and local authority, but also to a Governmental Authority and a Government Entity, where the services related to functions listed under Articles 243G/243W of the Constitution.

2.10 By Notification No. 16/2021-Central Tax (Rate), effective 1 January 2022, the words "or a Governmental Authority or a Government Entity" were omitted from Entries 3 and 3A. The Court held that, post-amendment, exemption under these entries is confined strictly to services provided to the Central Government, State Government, Union territory or local authority.

2.11 Section 2(69) of the CGST Act defining "local authority" was examined. The Court held that this term covers only constitutionally or statutorily created self-governing bodies (such as Panchayats and Municipalities) with elected representatives, territorial jurisdiction, and statutory responsibility for a local or municipal fund.

2.12 The Court found that K-DISC, as a society under the Travancore-Cochin Literary, Scientific and Charitable Societies Act, 1955, has no elected body, no territorial jurisdiction, and no local or municipal fund, but functions as a State-level coordinating and advisory body. It therefore does not qualify as a "local authority".

2.13 On these findings, the Court held:

(a) K-DISC is, at best, a Governmental Authority or Government Entity, not "Government" or a "local authority".

(b) For periods on or after 1 January 2022, Governmental Authorities and Government Entities are not covered by Entries 3 and 3A due to the express legislative deletion. Applying the principle expressio unius est exclusio alterius, such entities cannot be read back into those entries by interpretation.

(c) Accordingly, for the relevant period, services supplied to K-DISC cannot claim exemption under Entries 3 or 3A.

2.14 The Court noted that for periods prior to 1 January 2022, services of the kind rendered could arguably have fallen under Entries 3 or 3A if all conditions were met; however, in light of the current statutory framework and the questions posed, the operative position is that no exemption is now available under these entries for services to K-DISC.

Interpretation and reasoning - Entry 3B (specified civic services to Governmental Authority)

2.15 The Court considered the newly inserted Entry 3B (Notification No. 13/2023-Central Tax (Rate)), which grants exemption for specific services-water supply, public health, sanitation conservancy, solid-waste management, and slum improvement/upgradation-when provided to a Governmental Authority.

2.16 The services supplied by the applicant to K-DISC were identified as skill development, capacity building, employability enhancement training and related programs. The Court held that these services do not fall within any of the five specified utility services enumerated in Entry 3B.

2.17 Even assuming K-DISC to be a Governmental Authority, the Court held that the nature of the services supplied by the applicant lies outside Entry 3B, and therefore no exemption is available under that entry.

Conclusions on Issues 1 & 2

2.18 K-DISC, being a society registered under the Travancore-Cochin Literary, Scientific and Charitable Societies Act, 1955, is a distinct legal entity and not "Government" or a "Government Department" under Section 2(53) of the CGST Act; it also does not qualify as a "local authority" under Section 2(69).

2.19 The services supplied by the applicant to K-DISC do not satisfy the recipient-condition under Entry 72 (services must be to Central/State Government) and therefore are not exempt under that entry.

2.20 After 1 January 2022, Governmental Authorities and Government Entities are expressly excluded from the scope of Entries 3 and 3A, and K-DISC cannot be brought within those entries by interpretation.

2.21 The applicant's services to K-DISC do not fall within the narrow set of civic utility services listed in Entry 3B and therefore cannot claim exemption under that entry.

2.22 Consequently, under the current framework of Notification No. 12/2017-Central Tax (Rate), the services rendered by the applicant to K-DISC are taxable and not eligible for GST exemption.

Issue 3 - Admissibility of input tax credit on GST charged by subcontractors

Legal framework

2.23 The Court considered Sections 16 and 17 of the CGST Act, 2017 and Rule 42 of the CGST Rules, 2017. Section 16(1) entitles a registered person to input tax credit on goods or services used in the course or furtherance of business. Section 17(2) mandates proportionate restriction and reversal of ITC where inputs are used for both taxable and exempt supplies.

Interpretation and reasoning

2.24 The applicant procures goods and services from subcontractors for executing training and skill-development projects for K-DISC, and such subcontractors charge GST on their invoices. These inward supplies are directly linked to the applicant's business and meet the basic "used in the course or furtherance of business" requirement.

2.25 Since, on the Court's findings, the services supplied by the applicant to K-DISC are taxable and not exempt, Section 17(2) does not require proportionate restriction of ITC in respect of those outputs. Inputs and input services used exclusively for taxable supplies are eligible for full credit, subject to the specific conditions in Sections 16(2) and 17(5).

Conclusions on Issue 3

2.26 The GST charged by subcontractors on goods and services used for providing taxable training and skill development services to K-DISC is eligible for full input tax credit in the hands of the applicant.

2.27 Such ITC entitlement is subject to verification of proper tax invoices, actual receipt of goods and/or services, payment of tax by the supplier, and compliance with all other conditions and restrictions prescribed under the CGST Act and Rules.

---