Taxability of Construction services and valuation

[ABHISHEK Kumar]

Dear Sir,

Our Client In FY 2016-17, had provided construction service to BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED. The agreement was For “Construction of Senior Secondary Schools on Panchayat Level in Bihar”. BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED is government company.

Total amount received is ₹ 21,18,643/-.

Department is giving 60% abetment and levies service tax on ₹ 8,47,457.

Our Query is:

1. Can we claim exemption under clause 12A (b) of Notification No. 25/2012-Service Tax. If no

2. Can we claim Small Service provider exemption, since taxable value of service portion is below ₹ 10 lacs.

[KASTURI SETHI]

"BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED is government company."

Sh.Abhishek K Ji,

Are you 100% sure that "BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED is government company." ? If so, what is the basis ?

[ABHISHEK Kumar]

Sh. KASTURI SETHI Sir,

1. On MCA portal Company Master Data inquiry, it is classified as Government Company.

2. Also Following message displays on its website which is https://www.bseidc.in/

"Bihar State Educational Infrastructure Development Corporation (BSEIDC) Limited was established by Bihar Government (100% shareholding) on 16th of July, 2010 within the meaning of Section 617 of the Companies Act, 1956.Bihar State Educational Infrastructure Development Corporation (BSEIDC) Limited Head Office is situated at Siksha Bhawan, Bihar Rashtrabhasha Parishad Campus, Acharya Shiv Pujan Sahai Path, Saidpur,Patna-800004. "

[KASTURI SETHI]

Dear Sh.Abhishek K Ji,

For claiming Small Scale Exemption, Value of taxable services for preceding year is to be considered. In this situation, what was value of taxable services in the financial year 2015-16 ? See Notification No.33/12-ST dated 20.6.12 as amended (para no.2(viii) refers.

"(viii) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year."

For claiming exemption under Notification No.25/12-ST (12 A) Whether BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED is Govt. in the eyes of Service Tax law ? It has to be examined.

[KASTURI SETHI]

The department's view is right. You can claim Small Scale Exemption only if eligible (as explained above in my reply.. I am not aware of your turnover/value of taxable services during the preceding year i.e. 2015-16

A corporation is not Govt. Corporation Ltd. is a body corporate. It is an autonomous body. Govt.company is neither Government. nor Govt. department.Govt. company has separate legal existence.

Relevant extract of Education Guide released by Board on 1.7.12

2.4.10 Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State Legislatures be ‘Government’ or “local authority”?

Ans. A statutory body, corporation or an authority created by the Parliament or a State Legislature is neither ‘Government’ nor a ‘local authority’ as would be evident from the meaning of these terms explained in point nos. 2.4.7 and 2.4.8 above respectively. Such statutory body, corporation or an authority are normally created by the Parliament or a State Legislature in exercise of the powers conferred under article 53(3)(b) and article 154(2)(b) of the Constitution respectively. It is a settled position of law Government (Agarwal v. Hindustan Steel - 1969 (12) TMI 109 - SUPREME COURT) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under article 53(1) of the Constitution and similarly to the Governor under article 154 (1). Such a statutory body, corporation or an authority as a juristic entity is separate from the state and cannot be regarded as Central or State Government and also do not fall in the definition of ‘local authority’.

Thus regulatory bodies and other autonomous entities which attain their entity under an act would not comprise either government or local authority.

These clarifications are applicable even now under GST regime.

[ABHISHEK Kumar]

As per clause :

12A. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; or

(c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause (44) of section 65 B of the said Act;

under a contract which had been entered into prior to the 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

provided that nothing contained in this entry shall apply on or after the 1st April, 2020;

The definition of Governmental authority is

(s) “governmental authority” means an authority or a board or any other body;

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution]

Query is : Can we claim BIHAR STATE EDUCATIONAL INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED which is a body corporate having 100% control of Government of Bihar as Govermental Authority.

[KASTURI SETHI]

Dear Sir,

The following a are the Board's guidelines released through Education Guide effective from 1.7.12. Pl go through these and take decision yourself whether you are eligible or not.

7.3 Services provided to or by a governmental authority

7.3.1 Are various corporations formed under Central Acts or State Acts or various government companies registered under the Companies Act, 1956 or autonomous institutions set up by special acts covered under the definition of ‘governmental authority’?

No. In terms of its definition in mega Notification 25/2012-S.T., following conditions should be satisfied for a board, body or an authority to be eligible for exemptions as a governmental authority :

● set up by an act of the Parliament or a State Legislature;

● established with 90% or more participation by way of equity or control by Government; and

● carries out any of the functions entrusted to a municipality under article 243W of the Constitution.

7.3.2 What are the functions entrusted to a municipality under article 243W of the Constitution?

Article 243W of the Constitution is as under :

‘Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow -

(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to -

(i) the preparation of plans for economic development and social justice;

(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;

(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.’

Matters listed in twelfth schedule are :

1. Urban planning including town planning.

2. Regulation of land-use and construction of buildings.

3. Planning for economic and social development.

4. Roads and bridges.

5. Water supply for domestic, industrial and commercial purposes.

6. Public health, sanitation conservancy and solid waste management.

7. Fire services.

8. Urban forestry, protection of the environment and promotion of ecological aspects.

9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.

10. Slum improvement and upgradation.

11. Urban poverty alleviation.

12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.

13. Promotion of cultural, educational and aesthetic aspects.

14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.

15. Cattle pounds; prevention of cruelty to animals.

16. Vital statistics including registration of births and deaths.

17. Public amenities including street lighting, parking lots, bus stops and public conveniences.

18. Regulation of slaughter houses and tanneries.

7.3.3 Are all services provided by a governmental authority exempt from service tax?

No. All services are not exempt. Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under Article 243 W of the Constitution are exempt. All other services are subjected to service tax if they are not otherwise exempt.

7.3.4 Are all services provided to a governmental authority exempt from service tax?

No. A governmental authority enjoys same benefits as the Government or a local authority in respect of receipt of services. The following services when provided to a governmental authority are exempt :

(a) Specified services as listed in Sr. No. 12 of Exhibit A3 relating to construction.

(b) Services in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation.

(c) Services received from a service provider located in a non- taxable territory by such authorities in relation to any purpose other than commerce, industry or any other business or profession

[KASTURI SETHI]

Sh.Abhishek K Ji,

Definition of Governmental Authority was amended vide Notification No. 2/14-ST dated 30.1.14.

Your client's company is covered under the definition of 'governmental authority' inasmuch as Bihar Govt.'s control is 100% as intimated by you.. Whether your client's company is eligible for exemption under Notification No.25/12-ST as amended or not ? So many aspects are to be examined.

(i) Contract executed between Service Provider and Service Receiver has to be examined.

(ii) Whether service provided conforms to the parameters laid down under Article 243 of the Constitution ?

(iii) Whether the purpose of constructed building is commercial or not ?

(iv) Exact nature of service etc.

In the absence of copy of contract/agreement, final opinion cannot be given. Moreover, I have observed that sometimes full facts are not disclosed by the Service Provider to the Govt. as well as Advocate/Consultant..

[ABHISHEK Kumar]

Sh. KASTURI SETHI Sir,

1. The agreement is for “Construction of Senior Secondary Schools on Panchayat Level in Bihar”.

2. As per clause 2 of twelfth schedule which is :

“Regulation of land-use and construction of buildings.”

Construction of building is covered in clause 2.

Is it not safe to say that service provided conforms to the parameters laid down under Article 243 of the Constitution.

Thanks for your valuable opinion.

[KASTURI SETHI]

Dear Abhishek K. Ji,

Whether safe or not ? It can be ascertained only from a perusal of the terms and conditions of the agreement executed between the Service Provider and Service Receiver. A documentary evidence matters a lot.

AI Summary

Governmental authority definition may determine exemption for construction services to a state-owned corporation under service tax rules. Eligibility for exemption under Notification No.25/2012 (clause 12A(b)) hinges on whether the recipient qualifies as a governmental authority-i.e., statutory creation or government establishment with ninety percent or more equity/control that performs functions under Article 243W-and whether the constructed facility serves non commercial purposes and meets temporal and stamp duty conditions. Separately, the small service provider exemption requires that the provider's aggregate taxable services in the preceding financial year fall below the notified threshold; both entitlements demand examination of the contract, the purpose of works, preceding year turnover, and documentary compliance.