2018 (9) TMI 2001 - HC - Service Tax

Liability of Service Tax - sum charged for providing security to various banks in the State of Punjab - Exemption of property and income of a State from Union taxation - HELD THAT - A perusal of the Article 289 of the Constitution of India shows that the property and income of a State is exempted from Union taxation. However, the Union is not debarred from imposing or authorising or imposition of any tax by law to be framed by the Parliament in respect of a trade or business of any kind carried on by or on behalf of the State or any property used for the purpose - In the case in hand, providing security cannot be said to be a business carried on by the State, as it is otherwise the duty of the State. Security service has not been provided to any private individual. Apparently for the reason of requirement of security more than the normal being provided by the State, certain amounts have been recovered from the public sector banks and All India Radio, on which Service Tax is sought to be charged by the department, which cannot be permitted, because of constitutional bar. The impugned orders directing recovery of Service Tax from the amount received by the State on account of service provided to the banks, etc. are set aside - Petition allowed - decided in favor of petitioner.

Summary

Issues:
Challenges to orders raising demand of service tax on security services provided to banks and General Post Office by the State of Punjab. Interpretation of Article 289 of the Constitution of India regarding exemption of State property and income from Union taxation.

Analysis:
The judgment addresses a series of petitions challenging orders raising demands for service tax on security services provided by the State of Punjab to various banks and the General Post Office. The core issue revolves around the interpretation of Article 289 of the Constitution of India, which exempts State property and income from Union taxation but allows for taxation on trade or business carried out by the State. The petitioners argued that providing security services is not a trade or business conducted by the State and falls under the ordinary functions of the government, thus exempt from taxation.

The respondents contended that the amounts charged for security services provided to public sector banks are subject to service tax under Section 65(105) of the Finance Act, 1994. They argued that the State cannot evade tax liability on such receipts. The court examined the provisions of Article 289, emphasizing that while the State's property and income are exempt from Union taxation, taxation may apply to trade or business activities conducted by the State or connected operations as authorized by Parliament.

The court concluded that providing security services does not constitute a business carried out by the State but rather a duty of the government. As the security services were not provided to private individuals and the amounts were charged due to increased security requirements, the imposition of service tax on such transactions was deemed impermissible due to constitutional restrictions. Consequently, the writ petitions were allowed, and the orders directing the recovery of service tax were set aside. Any amounts already paid were directed to be refunded to the State within three months from the date of the order.