2024 (11) TMI 403 - AT - Service Tax

Service tax demand on municipality on the income received from the renting of immovable property - assessee argued service tax demand on the plea that the Srivilliputhur Municipality is a creature of an Act of the Tamil Nadu Legislature and is the statutory body being governed by the Tamil Nadu District Municipalities Act, 1920 and it is an autonomous self-government in terms of the Article 243Q of the Constitution of India. HELD THAT - We find that the issue involved has been squarely covered by the decisions rendered by this Tribunal in the case of The Commissioner, Krishnagiri and OtheRs 2024 (6) TMI 767 - CESTAT CHENNAI as set aside only to the extent of demand of Service Tax on Renting of Immovable Property service by allowing the appeal by way of remand to the Adjudicating Authority who is directed to pass fresh order in strict observance to the principles of natural justice.

Issues Involved:

1. Liability of the municipality to pay service tax on renting of immovable property.
2. Constitutional validity of imposing service tax on a statutory body.
3. Applicability of exemptions under the Finance Act, 1994, and related notifications.
4. Interpretation of "person" and "any other person" in the context of service tax liability.
5. Consideration of sovereign functions and their exemption from service tax.

Issue-wise Detailed Analysis:

1. Liability of Municipality to Pay Service Tax:

The primary issue was whether the municipality, as a statutory body, was liable to pay service tax on renting out immovable properties for commercial purposes. The tribunal examined precedents from various High Courts, including the Punjab and Haryana High Court, Bombay High Court, and Gujarat High Court, which upheld the constitutional validity of service tax on renting of immovable property with retrospective effect from June 1, 2007. The tribunal also referred to the decision of the Madras High Court in the case of Cuddalore Municipality, which analyzed the issue for periods before and after July 1, 2012. The court held that prior to July 1, 2012, the term "person" did not include municipalities, thus exempting them from service tax. However, post-July 1, 2012, the service tax was applicable, but exemptions under the Finance Act and related notifications needed consideration.

2. Constitutional Validity of Imposing Service Tax:

The appellant argued that imposing service tax on a municipality, a statutory body under the Tamil Nadu District Municipalities Act, 1920, violated Article 289 of the Constitution, which exempts state property and income from union taxation. The tribunal noted that various High Courts had upheld the constitutional validity of service tax on renting of immovable property, emphasizing that it was a tax on the service aspect rather than the property itself.

3. Applicability of Exemptions:

The appellant contended that they were exempt from service tax under the Mega Exemption Notification No. 25/2012-ST and its amendments, which exclude governmental authorities from service tax for functions entrusted to a municipality under Article 243W of the Constitution. The tribunal acknowledged these exemptions and directed the adjudicating authority to reassess the applicability of these exemptions to the appellant's case, particularly for services related to sovereign functions.

4. Interpretation of "Person" and "Any Other Person":

The tribunal highlighted the interpretation issues concerning the terms "person" and "any other person" in the context of service tax liability. It referred to the Cuddalore Municipality case, where the court held that service tax was payable only if services were provided by "any other person," meaning someone other than the owner. This interpretation exempted municipalities from service tax liability for the period before July 1, 2012.

5. Consideration of Sovereign Functions:

The tribunal recognized that some services provided by the municipality might fall under sovereign functions, which are exempt from service tax. It instructed the adjudicating authority to examine if the services in question were part of the sovereign functions listed in the 12th Schedule of the Constitution, thus qualifying for exemption.

Conclusion:

The tribunal set aside the impugned order to the extent of the service tax demand on renting of immovable property and remanded the case to the adjudicating authority for fresh consideration, emphasizing adherence to the principles of natural justice. The tribunal affirmed the setting aside of the penalty imposed on the appellant, recognizing its status as a municipality. The adjudicating authority was directed to reassess the case, considering the exemptions and limitations discussed, and to address the issue of limitation as argued by the appellant.

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