CESTAT Kolkata: Sovereign Functions Exempt from Service Tax [Read Order]

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Kolkata has ruled that Asansol Durgapur Development Authority (ADDA) is a statutory body performing sovereign functions and is therefore not liable to pay service tax on such activities. The tribunal dismissed the appeal filed by the Revenue Department and allowed the appeal of ADDA on both merits and grounds of time bar, setting aside the confirmed service tax demand of Rs.2.95 crore.

ADDA, the appellant, a government agency constituted under the West Bengal Town and Country (Planning and Development) Act, 1979, was issued a show cause notice dated October 12, 2012, demanding service tax of Rs.28.39 crore for the period 2007-08 to 2011-12. The Commissioner of CGST & Central Excise, Bolpur, after adjudication, dropped Rs.25.43 crore of the demand but confirmed a service tax liability of Rs.2.95 crore. Both ADDA and the Revenue Department challenged the order before CESTAT Kolkata—ADDA disputing the confirmed demand and the Revenue contesting the dropped portion.

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The tribunal examined whether ADDA’s activities were taxable under the Finance Act, 1994. It found that ADDA was created under a specific statute and functioned entirely under the control of the State Government of West Bengal. The tribunal referred to Section 66D of the Finance Act, which provides a negative list of services exempt from service tax, including services provided by the government or local authorities.

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Since ADDA collected development charges, licensing fees, and land-related fees as part of its statutory obligations, the tribunal held that these activities were in the nature of sovereign functions and thus not liable to service tax.

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The tribunal also reviewed Circular No. 89/7/2006 dated December 18, 2006, issued by the Central Board of Excise and Customs (CBEC), which clarified that fees collected by a statutory body for performing mandatory functions are not taxable. Applying this principle, the tribunal ruled that ADDA’s collection of charges for development and land use was a statutory function and not a commercial service. However, the tribunal noted that certain other services, such as renting of immovable property and leasing of advertisement space, were commercial in nature and not automatically exempt.

On the issue of time limitation, the tribunal found that the show cause notice for the period 2007-08 to 2011-12 was partly time-barred. It observed that ADDA’s financial records were audited and regulated by the State Government, and the Revenue could not establish any intent to evade tax. Since all transactions were disclosed in financial statements, the tribunal ruled that the extended period for issuing a demand was not applicable, making the confirmed demand legally unsustainable.

In its final order, CESTAT Kolkata Coram comprised of R Muralidhar(Judicial Member) and Rajeev Tandon(Technical Member) dismissed the Revenue’s appeal and allowed ADDA’s appeal in full, setting aside the service tax liability.

To Read the full text of the Order CLICK HERE

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