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2025 (4) TMI 419 - AAR - GSTExemption from GST - activity of leasing of 19 onion mandis (Shops/Godowns) to the tender contractor for the purpose of collection of fee on daily basis from the merchants/farmers/public for usage of shops for selling of onion on daily basis - activity covered under the function entrusted to Municipality under Article 243W of the Constitution/ Panchayat under Eleventh Schedule of Article 243G as a local authority in which they are engaged as a public authority or not - HELD THAT - By the notifications and subsequent amendment if the activities of transactions by the Central Government or State Government or Union Territory or any local authority if engaged as a public authority does the functions entrusted to municipality or panchayat under article 243W or 243G of the Constitution all such activity are out of the purview of the taxable net and shall be treated neither as supply of goods nor as supply of services. The Onion mandis for effecting sale of onions is a convenient facility provided to the public/farmers/merchants which will fall under Sl. No. 17 of the functions entrusted to a municipality. The activity of collection of entry fee for using Onion mandis by the vendors/farmers/public would fall within the ambit of functions entrusted under Article 243W of the Constitution. It cannot be said that the contractor is doing any other service or deviating from doing the contracted service not concerned with the functions indicated. The relationship between the Municipality and the contractor is very specific and has a direct correlation with the functions entrusted in the Article. The purpose of providing certain functions entrusted to the municipality will not change the essential characteristics envisaged under the Article irrespective of the person providing the services entrusted. Only for administrative and operational convenience the functions entrusted to a municipality under the Article are being provided. It is important to determine whether the activities provided by the contractor is the same function entrusted to a municipality in the Constitution and to ensure that the intention of the provisions contained in the Constitution is fulfilled. It is not the proportionality of the activity relating to the function entrusted but the implications of the legislative assessment of the terms in relation to is more tilted towards nexus inseparability and identity of the activities involved with the functions and not merely on other parameters. Hence the transaction between Corporation and Contractor is clearly an activity/transaction undertaken by the local authority engaged as public authority. Hence the requirement stated in Section 7 (2) (b) of the Act are clearly met. Hence the activity undertaken by the corporation is an activity covered under the Notification No. 14/2017-CT (Rate) dated 28-06-2017 as amended as neither a supply of goods nor a supply of services and out of purview of GST and the notification is available for the Contractor also provided the same are rendered as back to back services to the applicant. Conclusion - i) The activity of leasing to the tender contractor the right to collect entry fees on a daily basis from merchants/farmers/public for 19 constructed onion mandis (shops/Godowns) would be covered under the function entrusted to Municipality under Article 243W of the Constitution as a local authority engaged as a public authority. ii) N/N. 14/2017-CT(Rate) dated 28-06-2017 as amended by N/N. 16/2018-CT(Rate) dated 26th July 2018 issued in terms of Section 7 (2) (b) of CGST/TNGST Act 2017 is very much available to claim as the activity is neither supply of goods nor supply of services .
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Authority for Advance Ruling (AAR) were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the leasing of onion mandis for collection of entry fees is a function entrusted to a Municipality under Article 243W of the Constitution Relevant Legal Framework and Precedents: Article 243W of the Constitution prescribes the powers, authority, and responsibilities of Municipalities and lists 18 functions entrusted to them under the Twelfth Schedule. Among these functions, "Public amenities including street lighting, parking lots, bus stops and public conveniences" is listed. The Tamil Nadu District Municipalities Act, 1920 also contains provisions relating to markets and municipal functions. Earlier rulings by the Appellate Authority for Advance Ruling (AAAR) had held that collection of daily market fees for open markets by contractors on behalf of the Municipality falls within the functions entrusted to a Municipality under Article 243W. Court's Interpretation and Reasoning: The AAR examined the nature of the activity: the Municipality leases the right to collect entry fees for 19 constructed onion mandis to a tender contractor, who collects fees from vendors/farmers/public. The contract conditions specify that the entry fee is fixed by the Municipality and receipts are issued in the Municipality's name. The AAR found a direct nexus between the activity and the functions entrusted to the Municipality under Article 243W, specifically under the function relating to public amenities. Key Evidence and Findings: The applicant provided details of the contract, fee structure, and the nature of the mandis as daily market facilities constructed for the public's use. The fees collected are uniform, prescribed by the Municipality, and no separate rental or storage charges are levied. The contractor acts under strict conditions laid down by the Municipality. Application of Law to Facts: The AAR applied the constitutional provisions and relevant statutes to conclude that the activity of leasing the right to collect entry fees for the onion mandis is integrally connected to the functions entrusted to the Municipality. The activity is thus an exercise of a municipal function and not a commercial supply in the ordinary course. Treatment of Competing Arguments: The Assistant Commissioner had argued that the contractor, being a non-government entity, is liable to pay GST on the service received, relying on Notification No. 12/2017-CT (Rate) which exempts only services provided to government bodies. The AAR, however, relied on the AAAR ruling which overruled the AAR's earlier view and held that the contractor's activity is a 'back to back' service rendered to the Municipality and hence eligible for exemption. Conclusion: The activity of leasing the right to collect entry fees for the onion mandis is a function entrusted to the Municipality under Article 243W and hence falls within the ambit of municipal functions. Issue 2: Whether the activity is a taxable service or excluded from supply under Notification No. 14/2017-CT(Rate) dated 28-06-2017 (as amended) Relevant Legal Framework and Precedents: Section 7(2)(b) of the CGST Act, 2017 states that activities or transactions undertaken by local authorities engaged as public authorities in functions entrusted under the Constitution shall be treated neither as supply of goods nor supply of services. Notification No. 14/2017-CT(Rate) excludes services by way of any activity in relation to functions entrusted to Panchayats under Article 243G and Municipalities under Article 243W from GST. Notification No. 16/2018-CT(Rate) amended the earlier notification to explicitly include Municipalities. Court's Interpretation and Reasoning: The AAR noted that the activity of leasing the right to collect entry fees is "in relation to" a function entrusted to the Municipality. The phrase "in relation to" was interpreted broadly to mean a close nexus or inseparability between the activity and the municipal function. The AAR emphasized that the activity is not a commercial supply but an exercise of a constitutional function. The prior AAAR ruling on a similar issue of market fee collection was held to be directly applicable. Key Evidence and Findings: The contract terms, fee collection method, and the nature of the facility (constructed mandis for daily market use) supported the conclusion that the activity is part of municipal function. The uniform fee fixed by the Municipality and issuance of receipts in its name were significant factors. Application of Law to Facts: Applying the provisions of Section 7(2)(b) and the Notifications, the AAR concluded that the activity is excluded from the definition of supply and hence not liable to GST. Treatment of Competing Arguments: The Assistant Commissioner's contention that the activity is a taxable service was rejected on the basis that the activity is undertaken by the Municipality as a public authority and covered by the Notification. The AAR also distinguished between supply to government and supply by government, emphasizing the constitutional function aspect. Conclusion: The activity of leasing the right to collect entry fees for onion mandis is neither supply of goods nor supply of services under GST law and is exempted from tax under the relevant Notifications. Issue 3: Whether the contractor collecting entry fees is liable to pay GST or is covered by the exemption as a 'back to back' service provider Relevant Legal Framework and Precedents: Notification No. 12/2017-CT (Rate) exempts certain services provided by government bodies to other government bodies but not to non-government entities. The concept of 'back to back' contracts is recognized wherein a contractor passes on obligations and liabilities to subcontractors under the same terms. Court's Interpretation and Reasoning: The AAR referred to the earlier AAAR ruling which held that the benefit of exemption under Notification No. 14/2017-CT(Rate) extends to contractors engaged by the Municipality to perform municipal functions on a 'back to back' basis. The contractor acts under strict conditions and collects fees as prescribed by the Municipality, effectively rendering services that are inseparable from the municipal function. Key Evidence and Findings: The contract conditions, uniform fee structure, and issuance of receipts in the Municipality's name demonstrated that the contractor's activities are integrally linked to the municipal function and not independent commercial supplies. Application of Law to Facts: The contractor's service is a 'back to back' service to the Municipality and hence the exemption available to the Municipality extends to the contractor. The contractor is not liable to pay GST on the fees collected under the contract. Treatment of Competing Arguments: The Assistant Commissioner's argument that the contractor is a non-government entity liable to pay GST was rejected based on the principle that the contractor's activity is a continuation of the municipal function and thus exempted. Conclusion: The contractor collecting entry fees on behalf of the Municipality is eligible for exemption under Notification No. 14/2017-CT(Rate) as amended, provided the services are rendered on a 'back to back' basis. 3. SIGNIFICANT HOLDINGS "The transaction between the Corporation and Contractor is clearly an activity/transaction undertaken by the local authority, engaged as public authority. Hence, the requirement stated in Section 7 (2) (b) of the Act are clearly met. Hence, the activity undertaken by the corporation is an activity covered under the Notification No. 14/2017-CT (Rate) dated 28-06-2017, as amended as 'neither a supply of goods nor a supply of services' and out of purview of GST and the notification is available for the Contractor also provided the same are rendered as back to back services to the applicant." Core principles established include:
Final determinations on each issue:
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