2025 (4) TMI 1397 - HC - Service Tax

Exemption from payment of Service Tax on public services rendered by the petitioners pursuant to the circular issued by KMC and the Mega exemption N/N. 25/2012-ST dated 20th June 2012 - jurisdiction and authority of service Tax authorities to impose Service Tax on the petitioners in respect of contracts with KMC - HELD THAT - Admittedly in this case it would transpire that initially the petitioners had individually applied before this Court challenging inter alia the circular issued by the KMC claiming that the KMC is exempted from paying service tax in respect of the service rendered by the petitioners and the authority of the Service Tax Authority to impose Service Tax. Although by separate orders all dated 25th April 2017 such petitions were dismissed on the ground noted above on writ appeals being preferred the Hon ble Division Bench of this Court was of the view that having regard to the claim made by the KMC that services rendered by them and services given to them in rendering public service is exempted from payment of service tax in the light of the Mega exemption notification no. 25/2012-ST dated 20th June 2012 issued by the Government of India since according to KMC the functioning of duties of KMC is concomitant to public interest such issue was required to be decided upon notice to the KMC at the first instance. It may be noted here that the respective petitioners have no connection or nexus with each other. The cause of action of the individual petitioners against the KMC are individual and distinct. Though there is a common question of law involved facts are however separate. At no point of time the petitioners questioned the jurisdiction of the respective adjudicating authority to decide the case. In fact three separate adjudicating orders were passed by the respective adjudicating authorities dated 5th December 2022 7th December 2022 and 8th December 2022. When the writ petitions were filed in the first round in the year 2022 this question was not raised either before the writ Court or before the appeal Court. The issue as to whether the matter should be remanded back to a common adjudicating authority was also not raised. Although the ground on which the commissioner had rejected the application cannot be said to be proper however having regard to the peculiar facts of the case it is not inclined to interfere with the same as the prayer for a common adjudicator appears to be an afterthought and is likely to further delay the proceedings. Conclusion - i) The KMC s exemption claim is subject to adjudication and not accepted outright. ii) The original adjudication orders were set aside for violation of natural justice and remanded for fresh adjudication. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Kolkata Municipal Corporation (KMC) is exempt from payment of Service Tax on services rendered by the petitioners pursuant to the circular issued by KMC and the Mega exemption notification no. 25/2012-ST dated 20th June 2012.

- Whether the Service Tax authorities have the jurisdiction and authority to impose Service Tax on the petitioners in respect of contracts with KMC.

- Whether the adjudicating authorities correctly adjudicated the show cause notices issued to the petitioners and KMC, including compliance with principles of natural justice.

- Whether the petitioners are entitled to have their cases adjudicated by a common adjudicating authority given the commonality of legal issues involved.

- Whether the rejection of the petitioners' request for appointment of a common adjudicating authority by the Chief Commissioner was proper and sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Exemption of KMC from Service Tax and Authority of Service Tax Authorities

Relevant Legal Framework and Precedents: The Mega exemption notification no. 25/2012-ST dated 20th June 2012 exempts certain public services from Service Tax. The KMC claimed exemption on the basis that its services are rendered in public interest, as enshrined in the Constitution of India. The Finance Act, 1994 governs the levy and collection of Service Tax. Earlier writ petitions challenged the circular issued by KMC claiming exemption and questioned the authority of Service Tax authorities to impose tax.

Court's Interpretation and Reasoning: The Court noted that the correctness of KMC's interpretation of exemption required adjudication. The appellate Court directed the Service Tax Commissionerate to issue fresh notices and adjudicate the matter on merit after hearing the parties, treating the fresh notices as continuation of earlier show cause notices. The Court emphasized that the issue of exemption is a legal question requiring adjudication based on facts and law.

Key Evidence and Findings: The circular issued by KMC dated 4th January 2014 and the Mega exemption notification were central to the dispute. The adjudicating authorities passed separate orders on the show cause notices, but these were later set aside due to procedural lapses.

Application of Law to Facts: The Court held that the Service Tax authorities have jurisdiction to adjudicate the liability of petitioners despite KMC's claim of exemption, but the adjudication must be done in accordance with law and after affording opportunity to the parties.

Treatment of Competing Arguments: The petitioners argued for exemption based on KMC's circular and public interest nature of services. The authorities maintained their right to adjudicate tax liability. The Court balanced these by directing fresh adjudication with due process.

Conclusions: The exemption claim is not accepted outright but requires adjudication. The Service Tax authorities have jurisdiction to decide the issue.

Issue 2: Adjudication Process and Compliance with Natural Justice

Relevant Legal Framework and Precedents: Principles of natural justice require that parties be given effective opportunity to respond to all materials relied upon by the adjudicating authority. The writ petitions challenged the original adjudication orders on grounds including non-supply of KMC's circulars and submissions relied upon by the authority.

Court's Interpretation and Reasoning: The Division Bench found that the adjudicating authorities failed to provide copies of KMC's circulars and submissions to the petitioners, violating natural justice. Accordingly, the original orders were set aside and the matter remanded for fresh adjudication after furnishing all relevant documents to the petitioners.

Key Evidence and Findings: The absence of sharing KMC's circular and written submissions with petitioners was critical. The Court emphasized the need for transparency and fairness in adjudication.

Application of Law to Facts: The Court applied the principle that adjudication without effective notice of documents relied upon is invalid and ordered fresh proceedings.

Treatment of Competing Arguments: The authorities may have relied on the circulars to justify tax demand, but failure to share these with petitioners undermined the fairness of the process.

Conclusions: Adjudication orders were quashed and remanded for fresh decision after ensuring compliance with natural justice.

Issue 3: Appointment of a Common Adjudicating Authority

Relevant Legal Framework and Precedents: The petitioners sought appointment of a common adjudicator citing common legal questions and principles of fairness, equality, and propriety. Reference was made to circulars dated 7th December 2015 and 10th March 2017 issued by the Ministry of Finance, Department of Revenue, regarding appointment of adjudicators.

Court's Interpretation and Reasoning: The Court observed that the petitioners have distinct and separate causes of action with no nexus among them. Although common legal questions exist, facts are separate. The petitioners never raised the issue of a common adjudicator during earlier proceedings or appeals. The rejection of their application by the Chief Commissioner was not based on proper grounds but given the circumstances, the Court declined to interfere, noting the plea appeared as an afterthought and likely to cause delay.

Key Evidence and Findings: Separate adjudicating authorities had passed distinct orders on separate show cause notices. The petitioners' applications for a common adjudicator were made only after remand and fresh hearings commenced.

Application of Law to Facts: The Court applied principles of judicial propriety and efficiency, emphasizing that appointment of a common adjudicator is not mandatory merely because of common legal issues, especially where facts differ and no prior objection was raised.

Treatment of Competing Arguments: Petitioners argued for consolidation to ensure uniformity and avoid multiplicity of proceedings. Authorities argued that separate adjudicators had jurisdiction over separate causes of action and that the petitioners accepted prior adjudications without objection.

Conclusions: The Court upheld the rejection of a common adjudicator appointment and directed continuation of separate adjudications to avoid unnecessary delay.

3. SIGNIFICANT HOLDINGS

"The correctness of the interpretation made by the KMC in their circular dated 4th January 2014 was required to be tested out at the first instance as the adjudicating authority was yet to decide the same by putting KMC on notice in the above proceeding."

"The observations made by the adjudicating authority in the respective orders is not in proper appreciation of what is meant to be an effective opportunity to be given to a noticee by the adjudicating authority."

"The adjudicating authority was directed to adjudicate the matter and pass fresh orders on merit in accordance with law being uninfluenced by any of the observations made in the aforesaid order."

"Though there is a common question of law involved, facts are, however, separate. At no point of time the petitioners questioned the jurisdiction of the respective adjudicating authority to decide the case."

"Although, the ground on which the commissioner had rejected the application cannot be said to be proper, however, having regard to the peculiar facts of the case, I am not inclined to interfere with the same as the prayer for a common adjudicator appears to be an afterthought and is likely to further delay the proceedings."

Core principles established include that exemption claims under Service Tax must be adjudicated on merit with due process; principles of natural justice require effective notice of all materials relied upon; appointment of a common adjudicating authority is discretionary and not obligatory even if common legal questions exist, particularly where facts differ and no prior objection was raised; and procedural fairness and avoidance of delay are paramount considerations.

Final determinations:

- The KMC's exemption claim is subject to adjudication and not accepted outright.

- The original adjudication orders were set aside for violation of natural justice and remanded for fresh adjudication.

- The petitioners' request for a common adjudicating authority was rejected as an afterthought and not warranted under the facts.