2019 (12) TMI 1486 - AT - Service Tax

Levy of service tax - Management or Business Consultant Service - Business Auxiliary Service - project was in relation to provision of Smart Card to the beneficiaries of National Rural Employment Guarantee Scheme (NREGS in short) of Patna District - Board s Circular No. 96/7/2007-S.T. dated 23.08.2007 - HELD THAT - From various clauses and terms and conditions of the agreement dated 10.09.2008 it transpires that the Government of Bihar through its agency BSEDC allotted the entire work of generation of digital job cards (E-shakti cards) for the workers of MNREGS to the appellant on turn-key basis. For the aforesaid purpose the appellant had to set-up the entire infrastructure by supplying all kinds of plant machinery/equipments/software/hardware. As per the Agreement the appellant had to collect process and store data of the beneficiaries of MNREGS like photographs biometric fingers prints along with names address etc. in the database server installed for the purpose. They had to integrate electronic payment mechanism of various banks and to make proper arrangements for payments of wages to the beneficiaries. Board s Circular No. 96/7/2007-S.T. dated 23.08.2007 issued by CBEC has clarified that the activities assigned to and performed by the sovereign/public authorities under the provisions of any law are undertaken as mandatory and statutory functions and cannot be treated as services provided for a consideration. The Appellant was acting as an implementing agency and implementing the government welfare scheme sponsored by the Government of Bihar accordingly the entire demand against the Appellant is contrary to the Board s Circular No.125/7/2010-ST dated 0.07.2010 which clarifies that levy and collection of service tax on State Government agencies/departments implementing the CSS under a central grant is not legally tenable and therefore in such cases service tax should not be demanded. Since the Appellant has executed the project to facilitate the Government in discharging of its sovereign duty the Appellant cannot be made liable for service tax. The appellant s case is squarely covered by the Judgment of COMMISSIONER OF CUS. C. EX. HYDERABAD-II VERSUS CMC LIMITED 2007 (7) TMI 17 - CESTAT BANGALORE M/S INSTRUMENTATION LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE S. TAX LUCKNOW 2016 (7) TMI 502 - CESTAT ALLAHABAD and SUKHMANI SOCIETY FOR CITIZEN SERVICES VERSUS C.C.E S.T. CHANDIGARH 2016 (9) TMI 588 - CESTAT CHANDIGARH . The activity of the appellant is a sovereign activity and therefore out of the ambit of the Service Tax and no service tax can be demanded on such services. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of services provided by the appellant.
2. Taxability of services under the Finance Act, 1994.
3. Applicability of sovereign function exemption.
4. Validity of penalties imposed.

Issue-wise Detailed Analysis:

1. Classification of Services Provided by the Appellant:
The appellant, M/s Smaarftech Technologies Private Limited, was accused of providing 'Management or Business Consultant Service', 'Business Auxiliary Service', and 'Support Service to Business and Commerce' to BSEDC and CBI. The Show Cause Notice (SCN) alleged that the services provided by the appellant, including the implementation of e-Muster (e-Shakti project), were covered under these categories. The SCN referenced Section 65A of the Finance Act, 1994, which prioritizes the most specific description of services. The adjudicating authority confirmed the classification under 'Management Consultant Service' and 'Support Service to Business and Commerce', citing the nature of the work and the deductions under Section 194J of the Income Tax Act, 1961.

2. Taxability of Services under the Finance Act, 1994:
The appellant contended that the generation of digital job cards (E-shakti cards) for MNREGS beneficiaries was a sovereign function under the Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MNREGA) and hence not taxable. The adjudicating authority, however, confirmed the demand of Service Tax along with interest and penalties, rejecting the appellant's arguments. The appellant argued that the activities were part of a government scheme and funded by the government, thus falling under the sovereign function exemption as per various judicial precedents and CBEC Circulars.

3. Applicability of Sovereign Function Exemption:
The appellant argued that the activities carried out were sovereign functions, citing CBEC Circular No. 89/7/2006-ST and Board Circular No. 125/7/2010-ST, which clarify that activities performed by sovereign/public authorities under the provisions of any law are not taxable. The Tribunal agreed with the appellant, noting that the activities were part of the government welfare scheme and funded by the government. The Tribunal referenced several judicial precedents, including UTI Technology Services Limited and CMC Limited, supporting the view that services related to sovereign functions are not taxable.

4. Validity of Penalties Imposed:
The SCN proposed penalties under Sections 77 and 78 of the Finance Act, 1994, for intentional evasion of Service Tax. The adjudicating authority confirmed these penalties. However, the Tribunal, in light of its findings that the services were part of a sovereign function and not taxable, set aside the penalties as well.

Conclusion:
The Tribunal concluded that the appellant was acting as an implementing agency for a government welfare scheme, and the activities were sovereign functions exempt from Service Tax. The Tribunal set aside the impugned order, allowing the appeal with consequential relief to the appellants. The Tribunal emphasized that the activities were purely in public interest and not in the nature of services provided for consideration, thus falling outside the ambit of Service Tax.