The Madras High Court held that no Service Tax applicable on Services provided by local authorities in terms of sovereign right.
The petitions municipalities, Cuddalore Municipality and Virdhachalam Municipality have challenged the Show Cause Notices and the impugned Orders-in-Originals passed by the respondent authority proposing and levying service tax on the services provided by the petitioners under the provisions of the Finance Act, 1994.
The impugned Show Cause Notice issued and the Orders-in- Originals passed by the respondent are challenged primarily on the ground that they are without jurisdiction. It is submitted that there is no question of proposing or demanding service tax on the activities undertaken by the respective municipalities under the provisions of the Finance Act, 1994.
The petitioners contended that municipalities were not a “person” within the meaning of Finance Act, 1994 as it stood prior to June 1, 2012 and thereafter. It is therefore submitted that the question of levying tax on services provided by the respective municipalities cannot be taxed under the provisions of the Finance Act, 1994.
The counsel for the petitioners submitted that the services rendered by the petitioners are either not taxable or otherwise exempted. He submitted that for instance, fees on pay and use toilets are exempted from tax under Sl.No.38 to the said Notification. He further submitted that for the period prior to 2012, i.e., the period between April 2012 and March 2013 covered by the challenge wherein Order-in-Original has been challenged, no tax can be demanded as the petitioner was not a person providing any taxable service.
The single judge bench of Justice C.S. Saravanan set aside the service tax demands issued to the Virdhachalam Municipality and Cuddalore Municipality and stated that if such services are provided by a Government or Local Authority, they are exempted under Section 65D(1)(a) of the Finance Act,1994 as amended and as in force from 01.07.2012. Only ancillary service provided by a third party towards renting of immovable property of a non-governmental or local body will be liable to pay service tax like any other service provider. Therefore, service tax is payable by the service provider himself.
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