CLEANING ACTIVITY – TAX LIABILITY IS WITH REFERENCE TO BUILDING/ PREMISES

[Mr. M. GOVINDARAJAN]

Section 65 (24b) of Finance Act, 1994 defines the expression ‘cleaning activity; as cleaning, including specialized cleaning services such as disinfecting, exterminating or sterilizing of objects or premises, of-

• Commercial or industrial buildings and premises thereof; or
• factory, plant or machinery , tank or reservoir of such commercial or industrial buildings and premises thereof, but does not include such services in relation to agriculture, horticulture, animal husbandry or dairying.

Section 65(105)(zzzd) defines the expression ‘taxable service’ as any service provided or to be provided to any person, by any other person, in relation to cleaning activity.

The term ‘commercial’ has not been defined in the Finance Act, 1994.  For the expression ‘industrial activity’ we may refer to the Industrial Disputes Act.  The issue to be discussed in this article is as to the tax liability for cleaning services with reference to decided case law.

In ‘Mukesh Kalway V. Commissioner of Central Excise, Bhopal’ – 2017 (3) TMI 615 - CESTAT NEW DELHI the appellants are engaged in providing mechanized cleaning service for railways, diesel locomotives, railway station premises, general manager’s office, Airport Authority of Indian and certain colleges and schools.   Proceedings were initiated against the appellant to demand service tax under the category of cleaning service rendered to various clients for the period from July 2015 to March 2010.  The Original Authority confirmed the service tax liability to the tune of ₹ 1.07 crores and imposed equal penalty.

The appellant filed an appeal before the Tribunal.  The appellant put forth the following arguments before the Tribunal-

• The Original Authority considered the entire case after examining the status of the service recipient and not the status of the building/premises;
• The word ‘Commercial’ has not been defined in the Finance Act, 1994; relying on the dictionary meaning as well as common understanding, railways is not to be considered as a commercial venture with intention to earn profit;
• Railway is a public utility organization and as such cleaning of railway station, railway shed or office premises of the general manager cannot be considered as cleaning of commercial premises;
• Cleaning of an ordinance factory is involved in non commercial activity of producing arms for the defence forces.The said activity is part of sovereign function of the State and as such not liable to service tax;
• Airports are for general public utility and not run for profit.Cleaning of airport cannot be considered as cleaning of commercial premises;
• The colleges and schools for which cleaning activity was undertaken are all educational institutions recognized by law and cannot be considered as commercial or industrial building and premises;
• The appellant already informed the Department about their cleaning activity on 23.09.2007 and the tax treatment for the same.No communication was received from the Department.Therefore there was no suppression of fact and as such the extended period could not be revoked in this case.On this reason the penalties imposed on the appellants are also liable to be set aside.

The Department put forth the following arguments before the Tribunal-

• Railways, though run by the Central Government, is a commercial organization;
• Railways are managing their finance independently and the operations including staff management are fully sourced by the Revenue receipts and the tariff for passengers and the freight are fixed after due consideration of commercial viability;
• Substantial revenue of the railways is generated in freight transport and there is no public utility involved in transport of goods;
• The railway is one of the provider of transport service in competition with other modes of transport;
• There is no exemption provided to therailway stations, wagon shed and railway offices
• The air port premises being used as a public utility by itself does not give any right to claim exemption;
• Ordinance factory are undoubtedly factories which are industrial premises and are covered for service tax liability;
• Regarding cleaning of college and school premises the appellants failed to produce evidence regarding the nature of organization/premises before the Original Authority.

The Tribunal heard both sides.  The Tribunal analyzed the provisions of Section 65(24b) of the Finance Act, 1994.  The Tribunal noted that the tax liability in respect of cleaning services is with reference to the building or premises.  To decide the nature of building, whether commercial or industrial, it is necessarily, the nature and the functions of the occupant is examined.  The arguments of the appellant that the railways and airport are public utilities and cannot be considered as commercial building or premises is having no legal support.  The Tribunal did not find any bar for a public utility organization to be run on commercially basis.    The Tribunal further held that the case is not with the service tax liability for the services provided by railways but only with the appellant, who is a private party rendering taxable services to railways.  

The Tribunal held that being a public utility by itself does not provide for immunity from service tax levy.  It is apparent that the railways or airport authority are being subjected to service tax under various categories like transport of passengers, freight , advertising etc.,    However exemptions are selectively provided for some of the organizations involved in providing such service.  The freight revenue of railways is more than double of the activity of the passenger revenue.  It only shows that substantial railways activity is in commercial freight transport.  The commercial nature of the railway stations and its premises is very apparent.  To illustrate the Tribunal noted that the railways had advertised to redevelop 400 stations where the entire cost of redevelopment is to be met by leveraging commercial development of land and airspace in and around the stations.  Having examined the scope of the activities of railways and the premises of railway stations the Tribunal was of the opinion that the activities carried out by the appellant relating to mechanical cleaning of station, rail wagon, railway office is covered by the taxable under cleaning activity.

In respect of ordinance factory the Tribunal noted that the definition covers industrial building and premises thereof.  Ordinance factory premises are covered by industrial building.  The factor in the present case is not in relation to agriculture, horticulture, animal husbandry or for dairying.  As such in the absence of any exclusion from the statutory definition the Tribunal found that the appellants are liable to service tax on this account.

In respect of the services rendered to educational institutions the Tribunal found no justification to confirm the tax liability on these activities.  The impugned order confirmed the tax liability for these premises only on the ground that the appellant failed to produce documentary evidence.  On the contrary the Tribunal noted that the Department also did not produce supporting evidence to show that cleaning activity of these premises will be covered by the tax entry.  As such examining scope of these buildings and submissions made by the appellant, the Tribunal found that the tax liability to this portion cannot be sustained.

Regarding to invoking of extended period of limitation the Tribunal noted that the appellants vide their letter dated 23.09.2007 itself gave details of their activities and also particulars of recipient of service.   No clarification or following up to that letter by the department is seen as per the records.  The present demand has been issued after three years after the intimation given by the appellant.  Therefore the allegation of suppression cannot be sustained.  The order did not give detailed discussion or justification in invoking the extended period of limitation.  The Tribunal held that the demand for extended period cannot be sustained for the present case.  The Tribunal held that the service tax liability should be restricted to the normal period of demand.  There is also no justification for imposing penalties on the appellant.  The Tribunal set aside the penalty.

Discussions to this article

[PRADEEP KUMAR]

Dear sir .. thanks for good explanation. One doubt : whether cleaning services provided to CRIS( Centre for Railway Information System) will attract service tax or it is to considered as Governmental Authority [25(A)of notifications 25/2012]. CRIS is registered under society registration act 1860 which is under full control of ministry of railways.

thanks

sarthak