The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, has held that a Municipal Corporation cannot be treated as a “person” for the purpose of levy of service tax under the category of “Selling of Space for Advertisement Service” prior to July 1, 2012. Consequently, the Tribunal set aside service tax demands aggregating over ₹31.78 lakh, along with interest and penalties, raised against the Municipal Corporation, Mohali.
The bench of Justice S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) has observed that prior to July 1, 2012, the Finance Act did not define the term “person” and reliance had to be placed on the General Clauses Act. Following earlier judicial precedents, including the decisions involving the Deputy Commissioner of Police, Jodhpur and the Indian Red Cross Society, the Tribunal held that sovereign governmental bodies and local authorities were not covered within the expression “person” for the purposes of the levy.
The dispute arose after the Service Tax Department alleged that the Municipal Corporation had earned revenue by allowing display of advertisements at parks, green belts, bus shelters and other public utilities and had failed to pay service tax under the taxable category of “Selling of Space for Advertisement Service” under Section 65(105)(zzzm) of the Finance Act, 1994.
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Two separate demands were raised covering the following periods: April 2005 to March 2010: Service tax demand of ₹11.92 lakh and October 2010 to March 2012: Service tax demand of ₹19.86 lakh
The Commissioner (Appeals) had earlier upheld the demands after granting the benefit of cum-tax valuation and also sustained interest and penalties. Aggrieved by this order, the Municipal Corporation approached the Tribunal.
Before the Tribunal, the Municipal Corporation argued that it was performing statutory functions entrusted to it under the Punjab Municipal Corporation Act and the Constitution.
It submitted that the parks, bus shelters and green belts were owned by GMADA and had merely been entrusted to the Municipal Corporation for maintenance. Private agencies were permitted to maintain these public assets and were allowed to display advertisements as part of the maintenance arrangement. The amount collected was advertisement tax, a statutory levy imposed under Sections 90 and 122 of the Punjab Municipal Corporation Act, rather than consideration for providing any taxable service. Prior to July 1, 2012, the Finance Act did not define the expression “person”, and therefore a Municipal Corporation, being a sovereign local authority, could not be regarded as a taxable person. The activity itself was excluded from service tax from July 1, 2012 onwards, indicating legislative intent that such statutory collections should not be taxed.
Accepting the submissions, the Tribunal observed that during the relevant period, service tax on selling advertisement space was attracted only when a person provided taxable service to another person.
Accordingly, the Tribunal concluded that the Municipal Corporation itself could not be subjected to service tax under the charging provision applicable during the relevant period.
The Tribunal further rejected the Department’s finding that the amounts collected as licence fee constituted consideration for rendering advertisement services.
It observed that the Corporation was authorised under Article 243X of the Constitution and the Punjab Municipal Corporation Act to levy advertisement tax. The amount collected represented a statutory levy meant for maintaining public infrastructure and not payment for any commercial service.
The Bench also relied upon the earlier decision in Karad Nagar Parishad, which held that advertisement tax collected under statutory authority cannot be subjected to service tax merely because advertisements are displayed.
Apart from deciding the issue on merits, the Tribunal also ruled that the extended period of limitation invoked by the Department was unavailable.
The Bench observed that the principal demand related to the financial years 2005-06 to 2009-10, whereas the show cause notice was issued only on May 30, 2011, beyond the normal limitation period.
Since the dispute involved interpretation of law and the assessee was a public local body, the Tribunal held that allegations of suppression or intention to evade tax were unsustainable. It relied upon the Rajasthan High Court’s ruling in Commissioner of CGST v. Rajasthan Tourism Development Corporation Ltd., which held that extended limitation cannot ordinarily be invoked against government undertakings in such circumstances.
Having concluded that the service tax demand itself was unsustainable, the Tribunal held that there could be no liability towards interest or penalties under the Finance Act, 1994. Consequently, both were also quashed.
Allowing both appeals, the CESTAT set aside the impugned orders in their entirety and granted consequential relief to the Municipal Corporation in accordance with law.
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