2025 (11) TMI 1924 - HC - GST

Society recognized as Government Entity under Clause (zfa), entitled to GST exemption under Entry 9B; revenue denial quashed

M/s. Bagalkot Nirmithi Kendra Versus The Union of India, The GST Council New Delhi, The Commissioner of Central Tax (Audit) New Delhi, The Commissioner of Central Tax (Audit) Hubballi, The Assistant Commissioner (Audit) Central Excise, Audit Circle Hubballi, The Under Secretary To The Government of India Ministry of Finance New Delhi, State of Karnataka, The Deputy Commissioner Bagalkot.

HC held that the petitioner, a society formed under a government order, qualifies as a 'Government Entity' under Clause (zfa) of the notification dated ... Seeking a direction to declare the petitioner to be a ‘Government Entity’ as defined under Clause (zfa) of the notification dated 13.10.2017 issued by the Government of Karnataka - The petitioner is a Society registered under the Karnataka Societies Registration Act, 1960, which comes into existence in terms of a government order - HELD THAT:- A ‘Government Entity’ means an authority or a board or any other body including a society, trust, corporation, set up by an Act of Parliament or State Legislature or established by any government with 90% or more participation by way of equity or control, to carry out the functions entrusted to it by the Governments, Union Territory or a local authority. It is again a matter of record that the Society is controlled by the State Government and funded inter alia by the State Government. Therefore, undoubtedly the petitioner fits into the definition of Clause (zfa) - a ‘Government Entity’. Entry No.9B in the aforequoted notification also describes a ‘Government Entity’. On a coalesce of the definitions noted hereinabove, what would unmistakably emerge is, the petitioner is a ‘Government Entity’. On a plain consideration of the notifications and the definition and description of the ‘Government Entity’, the exemption that is granted of tax liability indicated in the notification is undoubtedly applicable to the petitioner, as the Apex Court considers the effect of exemption to a ‘Government Entity’. The case therein was whether the exemption notification to educational institution would become applicable to the respondents. It held that it did applicable. The petitioner’s entitlement to exemption emerges not as a matter of judicial indulgence but as a clear command of law. This is brought to the notice of the fourth respondent, who declines to accept that the petitioner is a Government Entity, which in the considered view of this Court is an error. Merely because other Nirmithi Kendras are paying tax, it would not mean that the petitioner would also become liable to pay tax. Thus, the petitioner’s status as a ‘Government Entity’ stands firmly and incontrovertibly established. The petition thus, deserves a full and complete success. The impugned communication dated 07.07.2021, stands quashed - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the petitioner qualifies as a 'Government Entity' under clause (zfa) of notification dated 13.10.2017 issued under the Karnataka Goods and Services Tax Act, 2017. 1.2 Whether, upon being so classified, the petitioner is entitled to exemption from GST under Entry No. 9B of notification No. 32/2017, and whether the impugned communications demanding tax liability are legally sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of the petitioner as a 'Government Entity' under clause (zfa) of notification dated 13.10.2017 (a) Legal framework 2.1 The Court considered notification No. 32/2017 dated 13.10.2017 issued by the State Finance Department under section 11(1) of the Karnataka Goods and Services Tax Act, 2017, amending notification No. 12/2017. 2.2 Clause (zfa) inserted by the notification defines 'Government Entity' as: 'an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.' 2.3 Entry No. 9B of the same notification exempts from GST the 'supply of service by a Government Entity to Central Government, State Government, Union territory, local authority or any person specified by' them, 'against consideration received ... in the form of grants.' 2.4 The Court referred to judicial interpretation of similar exemption/definition clauses in: (i) A Division Bench decision of the Patna High Court holding that entities set up by an Act of Parliament fall within 'Governmental Authority' and are entitled to exemption, and that the '90 per cent or more participation' condition attaches only to the limb concerning entities 'established by' Government. (ii) The Supreme Court decision affirming the Patna High Court, explaining that punctuation (semicolon, comma) and the disjunctive 'or' in such definition clauses create independent categories, and the long line beginning with 'with 90% or more participation...' qualifies only sub-clause (ii). 2.5 The Court also considered decisions holding that Nirmithi Kendras: (i) Are 'public authorities' under section 2(h) of the Right to Information Act, 2005, being fully controlled and substantially funded by Government, with government officers managing their affairs. (ii) Have employees who are 'public servants' under the Prevention of Corruption Act, 1988, despite being registered under the Karnataka Societies Registration Act, 1960. (b) Interpretation and reasoning 2.6 The petitioner is a society registered in 1990 under the Karnataka Societies Registration Act, 1960, pursuant to a Government Order of Karnataka dated 05.03.1990, and established under the National Network Programme of Building Centres Scheme through HUDCO, a Government entity. 2.7 The Memorandum of Association and rules show that the objectives of the petitioner are public in nature, broadly in the fields of housing, construction, training, and related public works, including undertaking construction work and allied activities generating employment, particularly for weaker sections. 2.8 The governance structure demonstrates pervasive governmental control: (i) The Governing Body consists of 14 members, including as Chairman the Deputy Commissioner of the District; as Executive Chairman the Chief Executive Officer of the Zilla Panchayat; and as Member Secretary the Deputy Secretary (Development), Zilla Panchayat, along with the Executive Engineer, District Welfare Officer, Chief Planning Officer and other officials or institutional representatives. (ii) The Executive Committee consists of five members, including the Deputy Commissioner (Chairman of the Governing Body), Executive Chairman, Project Manager, Executive Engineer (Zilla Panchayat) and Deputy Secretary (Development), Zilla Panchayat. (iii) The Chairman is always the Deputy Commissioner, and all activities and financial transactions are controlled through this structure, with no independent private control. 2.9 The respondents themselves, in the impugned audit communications, acknowledged that: (i) The entire establishment amount has been provided by Government. (ii) The petitioner is '100% controlled by Government'. (iii) 'No work is carried out without the consent and approval of the Government'. 2.10 The objection raised by the revenue authorities was that the petitioner: (i) Was not set up by an Act of Parliament or State Legislature but by Government Order and registered as a society; and (ii) Did not satisfy the '90 per cent or more participation by way of equity or control' condition because, as per the bye-laws, ex officio members were only 60% of the maximum number of members, and there was no capital/equity participation. 2.11 The Court held that these objections misconstrued the definition in clause (zfa): (i) A 'Government Entity' expressly 'includes' a society and may be 'set up by an Act of Parliament or State Legislature; or established by any Government.' The petitioner clearly falls under the second limb, being established by Government through a specific Government Order, and subsequently registered. (ii) The lack of formal equity capital does not negate 'participation by way of ... control'. The admitted factual position is that the petitioner is wholly controlled by Government officers, headed by the Deputy Commissioner, with all significant decisions subject to governmental approval and oversight. (iii) '90 per cent or more participation by way of ... control' is satisfied by the complete and effective governmental control of the institution's governance, administration and functioning, as recognised both in the bye-laws and in prior judicial decisions treating Nirmithi Kendras as public authorities and their officers as public servants. 2.12 The Court relied on the Apex Court's approach to interpretation of similar exemption definitions, emphasising: (i) That such definitions must be read with attention to their grammatical and structural components (disjunctive 'or', semicolons, commas), which can create independent categories; and (ii) That the purpose of redefining categories like 'Governmental Authority' or 'Government Entity' was to make the exemption workable for entities performing public functions under governmental control. 2.13 The Court considered earlier High Court decisions on Nirmithi Kendras under the RTI Act and Prevention of Corruption Act as reinforcing material showing: (i) Governmental origin (on recommendation of Government departments); (ii) Government composition and supervision through committees of senior Government officers; (iii) Funding by HUDCO and other Government organisations; and (iv) Performance of public works treated as Government works. 2.14 On these facts and legal principles, the Court found that the petitioner answers the description in clause (zfa) as: (i) A society 'established by' Government; and (ii) Subject to 90% or more participation 'by way of ... control', since its governing and executive bodies are composed predominantly of Government officers and institutions, and its activities are fully controlled and supervised by Government. (c) Conclusions on Issue 1 2.15 The petitioner is a 'Government Entity' within the meaning of clause (zfa) of notification No. 32/2017 dated 13.10.2017. 2.16 The contrary view taken by the auditing authority, based on a narrow and erroneous understanding of 'equity or control' and of the composition of the governing body, is legally unsustainable. Issue 2: Entitlement to GST exemption under Entry No. 9B and validity of the impugned communications (a) Legal framework 2.17 Under Entry No. 9B of notification No. 32/2017, 'supply of service by a Government Entity to Central Government, State Government, Union territory, local authority or any person specified by' them, 'against consideration received ... in the form of grants' is exempt from GST. 2.18 The Court relied on the exposition of law by the Supreme Court and High Courts extending similar exemptions to entities held to fall within the relevant definitions of 'Governmental Authority' or 'Government Entity', where they perform public functions under government control. (b) Interpretation and reasoning 2.19 The petitioner is engaged exclusively in civil construction and allied works for the State and Central Governments, with funding and grants from Government and Government entities, directly in line with the description in Entry No. 9B. 2.20 Once the petitioner is classified as a 'Government Entity' under clause (zfa), the text of Entry No. 9B applies straightforwardly: services supplied by such an entity to Government bodies against grants are exempt from GST. 2.21 The revenue authorities' attempt to deny the exemption was premised solely on the view that the petitioner is not a 'Government Entity'. No independent ground was shown to disentitle the petitioner if it falls within the definition. 2.22 The contention that other Nirmithi Kendras have been paying GST was held to be irrelevant; the liability must be determined on the basis of the statutory notification and factual satisfaction of its conditions, not on the practice of other entities. 2.23 The Court, reading the statutory notification 'in conjunction with the elucidation of the Apex Court as to what would constitute the government entity', held that the petitioner's entitlement to exemption arises as a 'clear command of law', not a matter of discretion. (c) Conclusions on Issue 2 2.24 Having been found to be a 'Government Entity' under clause (zfa), and supplying services to Government against grants, the petitioner is entitled to exemption under Entry No. 9B of notification No. 32/2017. 2.25 The impugned communication dated 07.07.2021, and the subsequent communication dated 17.08.2021 premised on the petitioner not being a Government Entity and therefore liable to pay GST, are contrary to the statutory notification and the settled legal position and hence unsustainable. 2.26 All consequential actions taken or proposed to be taken on the basis of the impugned communication are void in law. Final Disposition 2.27 The Court allowed the writ petition, quashed the communication dated 07.07.2021, and declared that all consequential actions taken or to be taken pursuant to it are null and unsustainable in law.