TaxTMI 
TaxTMI 
2026 (5) TMI 419
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.....2025passed by the Authority for Advance Ruling (AAR), Andhra Pradesh. 3. Brief Facts of the Case: 3.1M/s. Laila Nutra Private Limited, (GSTN: 37AAGCL2515G1ZO) is a company engaged in research and development of herbal and nutraceutical formulations. 3.2 The Appellant was appointed as a Sub-Nodal Agency by the Central Council for Research in Ayurvedic Sciences (CCRAS), an autonomous body under the Ministry of AYUSH, Government of India, for carrying out research projects under the Ayurgyan Scheme. 3.3 The project is fully funded through a grant-in-aid released by CCRAS, out of the Public Health Budget, and disbursed through the Public Financial Management System (PFMS) in compliance with the General Financial Rules (GFR) of the Government of India. 3.4 The objective of the project is to develop scientifically validated herbal products and list them on a national digital platform for the benefit of Ayurveda medicine manufacturers and public health research. 3.5 The Appellant sought an Advance Ruling to determine: • Whether the R&D activity against the government grant constitutes "supply" under Section 7 of the CGST Act; and • If yes, whet....
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....are not received by CCRAS but are received by the beneficiaries i.e., general public and medicine manufacturers, the amount paid by CCRAS to the applicant is still covered under the definition of 'consideration' paid for the said supply of goods or services by the applicant and is coveted in the definition of supply given under Section 7(1) of the Act. The profit motive is not important, if we make combined reading of all above definitions, including that of the "business". The applicant's narrow interpretation of "supply" ignores the comprehensive scope of the term under the GST regime. Section 7(1)(a) of the CGST Act, 2017 clearly states that "supply" includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration in the course or furtherance of business. The list is inclusive, not exhaustive - meaning that any form of supply, even if not specifically mentioned, may still fall within the ambit of "supply" if the other conditions (consideration and business nexus) are satisfied. The applicant has acknowledged receiving financial assistance from CCRAS for ....
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....section (1) of Section 35 of the Income Tax Act, 196, provided that the institution is notified under those clauses at the time of supply. The same is extracted hereunder: "(B) after serial number 44 and the entries relating thereto, the following serial number and entries relating thereto in columns (2), (3), (4) and (5) shall be inserted, namely:- (1) (2) (3) (4) (5) "44A Heading 9981 Research and development services against consideration received in the form of grants supplied by - (a) a Government Entity; or (b) a research association, university, college or other institution, notified under clauses (ii) or (iii) of sub-section (1) of section 35 of the Income Tax Act, 1961. Nil Provided that the research association, university, college or other institution, notified under clauses (ii) or (iii) of sub-section (1) of section 35 of the Income Tax Act, 1961 is so notified at the time of supply of the research and development service." But, in the present case, the applicant has not provided any information whether it is notified under clauses (ii) or (iii) of sub-section (1) of section 35 of the Income Tax Act, 1961. ....
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....irectly in relation to any function entrusted to a Panchayat under Article 243G or Municipality under Article 243W of the Constitution. Even though the applicant contends that the supply of goods is below 10% of the contract value, which could satisfy the quantitative threshold, the qualifying condition regarding the functional nexus with Articles 243G/243W is not met. The key test here remains the same, whether the service is in relation to a function entrusted to and being carried out by a Panchayat or Municipality. In this case, the R&D services are not rendered to such authorities, and the activity is undertaken by a Central body (CCRAS), not under any decentralised governance framework. As held in numerous judicial pronouncements (e.g., Dilip Kumar & Co. v. Commissioner of Customs, [2018] 9 SCC 1), exemption notifications are subject to strict interpretation. If there is any ambiguity, the benefit of doubt must go to the Revenue. In the present case, the exemption conditions are not clearly or unambiguously satisfied. Further, the applicant's argument that CCRAS would have been required to deduct GST if the services were taxable is factually and legally irrelevant to the....
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....nment-funded activity on behalf of CCRAS, following government protocols (PFMS, GFR). 3. Thus, there is no "supply" between two distinct persons as required under Section 7(1)(a) of the CGST Act. Ground No. 3 - Misapplication of Notification No. 12/2017; Entry 3 & 3A Apply 1. The AAR wrongly concluded that the exemption under Entry 3 and 3A applies only when the services are directly rendered to municipalities or panchayats. This interpretation is contrary to the broad phrase "in relation to any function entrusted" used in the entry. 2. The expression "in relation to" has been judicially interpreted to cover activities having a direct or proximate nexus with the listed function, even if not performed by the local body itself. 3. Public health and sanitation are functions enumerated under Entry 23 of the Twelfth Schedule to Article 243W. The Appellant's research under the Ayurgyan Scheme, being part of the Public Health Budget, falls squarely within this constitutional framework. 4. The AAR's restrictive interpretation undermines the spirit of Entry 3 and 3A, which are designed to exempt government-funded welfare functions, no....
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....ice or other composite supplies involving supply of any goods) provided to the Central Government, State Government, Union Territory or Local Authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution. The exemption has been denied by the Advance Ruling Authority mainly on the following grounds: a) services were not provided to a Panchayat or Municipality; b) there was no delegation to PRIs / ULBs; and c) medical/clinical research is not related to "Public Health". The Appellant submits that the above conclusions are contrary to the express language of the notification, constitutional scheme, and settled interpretation. 6.2. ELIGIBILITY UNDER ENTRY 3 - LEGAL ANALYSIS 6.2.1 Service Provider The notification does not prescribe any restriction on the nature or constitution of the service provider. The Appellant, being a private limited company, is not disqualified from availing the exemption. 6.2.2 Service Recipient The notification expressly recognizes Central Government as an eligible recipient. In the present case: • ser....
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..../s Manish Manpower Agency - Karnataka AAR • M/s Crystal Infosystems - Karnataka AAR • M/s Core Project Engineers & Consultants - Maharashtra AAR • M/s Aarav Consultancy Services - Chhattisgarh AAR • Tamil Nadu Water Supply and Drainage Board - Tamil Nadu AAR The Appellant's services, being directly linked to public health, stand on a stronger footing than the above cases. 6.5 CONTEMPORANEOUS EXPOSITIO - NON-DEDUCTION OF GST-TDS Despite Section 51 of the CGST Act mandating GST-TDS on taxable supplies, CCRAS has consistently not deducted TDS on payments made to the Appellant over several years. Considering that CCRAS is subject to CAG audit, such consistent non-deduction reflects the prevailing administrative understanding that the services are exempt. 6.6. TELEOLOGICAL INTERPRETATION - AVOIDANCE OF TAX COST TO GOVERNMENT Public health services supplied by Government are themselves exempt, with no availability of input tax credit. Levying GST on input support services would convert tax into a dead cost, eroding public grants and defeating the object of Entry 3. The exemption exists to prevent such fiscal inefficien....
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....2.2025 after due notice to the appellant. The authorized representative appeared and reiterated the grounds of appeal. It was submitted that the amounts received from CCRAS were grants released for public welfare research and not consideration for any supply, that the appellant was functioning as a sub-nodal agency of CCRAS and therefore there was no supply between distinct persons, that the activities were undertaken in relation to public health and were eligible for exemption under Entry 3 or Entry 3A of Notification No. 12/2017-Central Tax (Rate), and that Notification No. 8/2024-Central Tax (Rate) read with Section 35 of the Income Tax Act, 1961 supported the claim for exemption. The submissions made during the personal hearing were examined with reference to the statutory provisions and records placed on file. 7.4 Grounds 1. 7.4.1 Section 2(31) of the CGST Act expressly excludes "subsidies given by the Central Government or a State Government" from the definition of "consideration." The legislature, despite being conscious of various forms of governmental financial assistance (including grants-in-aid), has deliberately chosen to exclude only subsidies. Applying settled p....
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....ent case, the Appellant undertakes specified research activities for CCRAS in return for grant-in-aid, thereby satisfying all elements of a taxable supply. 7.4.7 The Authority has correctly interpreted Section 2(31) by adhering to its explicit wording and legislative intent. The exclusion of subsidies cannot be extended to grants-in-aid by analogy or equitable considerations. Therefore, the finding that the grant received from CCRAS constitutes consideration is legally sound and calls for no interference. 7.5 Grounds 2. 7.5.1 The contention that the relationship between CCRAS and the Appellant is "intra-departmental" is factually and legally incorrect. CCRAS is an autonomous body/authority under the Ministry of AYUSH, while the Appellant is a separate legal entity with its own registration, accounts, and statutory existence. Merely designating the Appellant as a Sub-Nodal Agency does not efface its independent legal personality. Under GST law, distinct legal entities are treated as separate "persons" within the meaning of Section 2(84) of the CGST Act. 7.5.2 Execution of activities in accordance with government guidelines such as PFMS and GFR is a standard compliance me....
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.... to a function entrusted to a Panchayat or Municipality. The requirement of both (i) the nature of recipient and (ii) the nature of function being satisfied is cumulative. The AAR has correctly held that the exemption cannot be extended merely because the activity is loosely connected with a welfare objective. 7.6.2 While the phrase "in relation to" is undoubtedly wide, it does not dilute or dispense with the express requirement that the services must be rendered to the specified recipients in the notification. The Appellant's interpretation selectively amplifies the scope of the phrase "in relation to" while ignoring the mandatory condition relating to the nature of the recipient. Statutory exemptions must be strictly construed, and no word in the notification can be rendered otiose. 7.6.3 Entry 23 of the Twelfth Schedule relates to public health and sanitation as functions entrusted to municipalities under Article 243W. CCRAS, and a fortiori the Appellant, is neither a Municipality nor discharging functions as a local authority under the constitutional scheme. Merely aligning an activity with a subject appearing in the Twelfth Schedule does not automatically attract the exe....
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....ctions. 7.6.7 Further, the transactions under Project 1 and Project 2 do not qualify as a composite supply under Section 2(30) of the CGST Act, as they involve distinct supplies of goods and services not naturally bundled in conjunction with each other in the ordinary course of business. 7.6.8 Project 1 constitutes a supply of goods, involving the manufacture and delivery of 100 kg each of five different raw material extracts to other selected institutes for their independent testing. 7.6.9 Project 2 represents a separate supply of services, encompassing testing, safety analysis, and reporting on one product from Project 1, intended for publication by CCRAS. These activities lack the natural bundling required for composite supply, as they are sequential and not interdependent in ordinary business practice, consistent with GST definitions requiring a principal supply with ancillary elements supplied together. 7.6.10 The two projects, though linked thematically under Ayurgyan, form independent contracts with separate grants (Rs. 10 Cr each), distinct deliverables, and recipients (other institutes for extracts; CCRAS for reports), failing the "naturally bundled and supplie....
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.... An exemption does not automatically displace a taxable classification unless its conditions are fully met. 7.7.5 The Appellant's attempt to label Entry 44 as applicable only to "commercial R&D" is unsupported by the text of the notification. Entry 44 covers R&D services without any distinction based on profit motive, commercial exploitation, or public funding. GST is a transaction-based tax, and the charitable or welfare nature of an activity does not change its classification. 7.7.6 The correct approach is harmonious construction: first determine the correct classification of the service (Entry 44), and thereafter examine whether any exemption applies. Since Entries 3 and 3A do not cover the Appellant's services, the taxable entry necessarily governs the transaction. 7.7.7 The AAR has correctly followed the settled legal sequence-classification of service followed by examination of exemption. There is no error in referring to Entry 44 once the Appellant was found ineligible for exemption under Entries 3 and 3A. 7.8 Grounds 5. 7.8.1 While Article 47 of the Constitution enjoins the State to improve public health, Directive Principles of State Policy are non-justiciab....
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.... defined circumstances. The exclusion of only "subsidies" from consideration, and not all grants, further underscores this conscious policy choice. Courts and quasi-judicial authorities cannot enlarge exemptions based on perceived hardship or policy desirability. 7.8.7 The AAR has correctly confined itself to statutory interpretation within the four corners of the CGST Act and the relevant notifications. Considerations of constitutional policy, fiscal sourcing, or welfare objectives-howsoever laudable-cannot override the clear charging provisions of a tax statute. 8.1 In view of the foregoing discussion and findings, it is conclusively held that the amounts received by the appellant from the Central Council for Research in Ayurvedic Sciences under the AYURGYAN Scheme are consideration within the meaning of Section 2(31) of the CGST Act, 2017, being payments made in respect of identifiable supplies of goods and services undertaken by the appellant pursuant to defined project obligations. The appellant and CCRAS are distinct taxable persons, and the activities carried out by the appellant constitute supplies made in the course or furtherance of business under Section 7 of the C....