Article 243W Does not Grant Tax Immunity to Private Contractors: CESTAT confirms Service Tax on Park & Garden Maintenance [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), Chennai held that Article 243W of the Constitution does not grant tax immunity to private contractors executing outsourced municipal functions.

Therefore, the appellate tribunal ruled that the service tax is payable on park and garden maintenance services provided to a municipal corporation for consideration.

In the appeal filed by M/s Trishaa Rose Garden Pvt. Ltd, the appellant submitted that maintenance of parks and gardens is a function entrusted to municipalities under Article 243W read with the Twelfth Schedule.

The service provider argued that by performing such activities for Coimbatore City Municipal Corporation (CCMC), the appellant has effectively stepped into the shoes of the municipal authority and is discharging a sovereign/municipal function, which is not taxable.

However, according to the department, it said that while the function may be municipal in nature, the appellant is a private contractor rendering services for consideration.

Service tax law distinguishes between services rendered by a local authority and services rendered to a local authority, said the department further stating that outsourcing does not confer Public Authority/ sovereign character on the contractor.

The Tribunal noted that Article 243W lists municipal functions such as urban forestry and urban amenities including parks and gardens, but it does not create any blanket tax exemption for private parties who execute such work under commercial contracts.

‘We find that Core functions of the State such as taxation, legislation, policing, defence, or statutory administration are Sovereign function and Execution of municipal works by private entities for consideration under contract by a private contractor: does not become a sovereign authority, and the Appellant does not step into the shoes of the State or municipality merely because the work relates to a municipal function’ observed the bench of Vasa Seshagiri Rao (Technical member) and P. Dinesha (Judicial member).

It was specifically held by the tribunal that the Article only identifies municipal responsibilities and it does not grant tax immunity to private entities executing outsourced work.

The appellate tribunal also quoted the CEBC circular ST dated 18.12.2006 which clarified that the Sovereign functions performed by Government authorities are not taxable and Private contractors performing such functions are not covered by this exclusion.

Accordingly, services provided by the appellant to the Coimbatore Municipal Corporation cannot be treated as sovereign functions and cannot escape from levy of service tax.

Therefore, service tax is leviable.

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