The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has held that a municipal authority is liable to pay service tax on consideration received for providing space for advertisements and renting out immovable property for commercial purposes.
However, the bench of Dr. Rachna Gupta (Judicial Member), and P.V. Subba Rao (Technical Member) simultaneously granted substantial relief to the municipal body by holding that the extended period of limitation could not be invoked in the absence of evidence of deliberate suppression of facts.
The appellant municipal authority was engaged in providing space for the display of advertisements and was also renting out its immovable properties to various agencies and persons against consideration. According to the Revenue, the municipality had neither obtained service tax registration nor discharged service tax on the amounts received from these activities.
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During the course of departmental inquiry, information furnished by the municipality revealed that it had received ₹3,06,738 from hoarding rent during April 2009 to June 2012. The Department treated the amount as consideration for taxable services under the category of “Sale of Space or Time for Advertisement Services.”
The municipality had also received approximately ₹3.39 crore as rent from various immovable properties during April 2009 to July 2014. The Department sought to levy service tax on this amount under “Renting of Immovable Property Services” for the period up to June 30, 2012 and under the broader definition of “service” under Section 65B(44) of the Finance Act, 1994 for the subsequent period.
A total service tax demand of ₹39,22,945, along with interest and penalties under Sections 76, 77 and 78 of the Finance Act, 1994, was proposed through a show cause notice dated September 11, 2014. Late fee for delayed filing of ST-3 returns was also proposed. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) subsequently upheld the order. The municipality then approached CESTAT.
Before CESTAT, the municipal authority argued that the Department had incorrectly interpreted the provisions relating to “Renting of Immovable Property Service.”
It was contended that certain vacant land did not fall within the relevant definition of “immovable property” during the disputed period. The municipality also argued that service tax had to be determined with reference to the period to which the rental consideration related, rather than merely the year in which arrears of rent were actually received. According to the appellant, the Department had incorrectly applied the tax rate applicable to the year of receipt while computing the demand.
The municipality further relied upon the decision of the Madras High Court in Cuddalore Municipality, contending that the expression “any other person” in the pre-negative-list service tax provision meant a person other than the owner of the property. On that basis, it argued that renting of property by the owner itself should not attract service tax under the relevant provision.
The municipality separately challenged the levy concerning hoarding space.
It argued that it was not actually selling advertising space. Rather, under the Madhya Pradesh Municipalities Act, 1961, it had statutory authority to allot land and collect licence fees. Advertisers independently erected hoardings on the allotted sites.
According to the appellant, therefore, the amount collected was merely a licence fee for use of municipal land, and not consideration for “sale of space or time for advertisement.”
The municipality also argued that penalties were unjustified because there was no intention to evade service tax and relied upon several judicial decisions, including rulings concerning Cuddalore Municipality, Selvel Media Services, Pimpri Chinchwad Municipal Corporation and Nagpur Municipal Corporation.
The Revenue, on the other hand, defended the impugned order and relied upon the Supreme Court’s decision in Krishi Upaj Mandi Samiti, New Mandi Yard v. Commissioner of Central Excise & Service Tax, Alwar.
The Tribunal noted that the dispute covered both the period before and after July 1, 2012, when the negative-list regime under Section 66D of the Finance Act, 1994 came into force.
It consequently identified two principal questions: Whether providing space for display of advertisements was taxable; and Whether renting municipal immovable property to various agencies constituted a taxable activity.
On the first issue, concerning the period before July 1, 2012, CESTAT examined Section 65(105)(zzzm), which covered services provided in relation to the sale of space or time for advertisement.
The Tribunal noted that the statutory explanation specifically included providing space for display, advertising or showcasing products and services on billboards and public places, among other locations.
Against this statutory background, the Tribunal concluded that providing space for hoardings was apparently covered by the taxable service.
It therefore upheld the demand under the category of “Sale of Space or Time for Advertisement Services” for the period up to July 1, 2012.
The Tribunal next examined the provisions governing renting of immovable property before July 1, 2012.
The relevant statutory definition covered renting, letting, leasing, licensing and similar arrangements involving immovable property when used in the course of or in furtherance of business or commerce. The definition also contained specific exclusions.
In the present case, the municipality had provided vacant land for marketplaces and commercial use.
CESTAT rejected the appellant’s argument that such vacant land fell outside the taxable category. It observed that the land was being used for commercial purposes and therefore did not fall within the relevant exclusion.
Importantly, the Tribunal also disagreed with the municipality’s interpretation of the Madras High Court’s judgment in Cuddalore Municipality.
According to CESTAT, the expression “any other person” in the relevant statutory provision meant any person other than the recipient and did not necessarily require that the service provider be someone other than the owner of the property. The Tribunal consequently found no infirmity in the confirmation of the demand under the renting-of-immovable-property category.
The Tribunal separately considered the position after July 1, 2012, when the negative-list regime was introduced.
Section 65B(44) broadly defined “service” as an activity carried out by one person for another for consideration, subject to specified exclusions. Section 66D, meanwhile, contained the negative list of services.
One of the relevant provisions concerned services provided by the Government or a local authority. However, the Tribunal focused on the statutory distinction between statutory functions and commercial activities undertaken for consideration.
The Tribunal found that the municipality had rented immovable property, including vacant land, for organising flea markets and was receiving consideration for the activity.
A significant aspect of the ruling is CESTAT’s reliance on the Supreme Court’s decision in Krishi Upaj Mandi Samiti.
The Tribunal noted the Supreme Court’s principle that service tax is not payable on statutory functions performed by sovereign or public authorities. However, exemption does not automatically extend to other activities undertaken by such authorities for consideration where those activities are otherwise taxable.
The Supreme Court decision also distinguished between mandatory statutory functions and discretionary commercial activities such as renting, leasing or allotment of shops, land, platforms or spaces.
Applying that reasoning, CESTAT held that the municipality’s commercial renting activities could not be insulated from service tax merely because the service provider was a local authority.
The fact that the amounts were described as licence fees also did not alter their essential character where the municipality was commercially providing land or space to traders for consideration.
While CESTAT rejected the municipality’s principal challenge to taxability, it accepted its argument concerning the extended period of limitation.
The Tribunal specifically noted that the appellant was a government authority and held that there was no evidence on record demonstrating any mala fide intention on its part.
More importantly, the Tribunal emphasised that the burden was on the Department to establish a positive act amounting to suppression of relevant facts. No such evidence had been produced.
CESTAT relied upon the Supreme Court’s decision in Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, Meerut, which lays down that suppression requires more than a mere failure to disclose information.
The Tribunal observed that there must be a positive act on the part of the assessee demonstrating wilful suppression. Mere failure to declare, by itself, cannot automatically be equated with wilful suppression.
Applying this principle, CESTAT concluded that the Department had wrongly invoked the extended period while issuing the show cause notice.
Accordingly, the demand relating to the period beyond the normal limitation period was set aside.
In its final conclusion, CESTAT held that both activities undertaken by the municipality were taxable and that service tax was payable on the value received for providing those services.
However, the Tribunal drew a clear distinction between the existence of tax liability and the Department’s ability to invoke the extended limitation period.
It held that the extended-period demand was liable to be set aside, while the demand falling within the normal limitation period was confirmed. The penalty was also directed to be proportionately reduced. The appeal was consequently partly allowed.
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