Governmental Authorities Not ‘Business Entities’: CESTAT Rules HIMUDA Not Liable under RCM for Legal Services [Read Order]

The Chandigarh Bench of Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that the Himachal Pradesh Housing and Urban Development Authority (HIMUDA), being a statutory governmental authority, is not liable to pay service tax under the Reverse Charge Mechanism (RCM) for legal services, as it does not qualify as a “business entity” under the Finance Act, 1994.

The Tribunal also ruled that most of the services rendered and charges collected by HIMUDA are in relation to municipal and public welfare functions and hence exempt under Notification No. 25/2012-ST dated 20.06.2012.

The case was based on multiple show cause notices issued to HIMUDA for the period 2007-08 to 2014-15, alleging non-payment of service tax under various categories, including renting of immovable property, business auxiliary services, and consulting engineer services. The department also sought to impose liability under RCM for legal services received by HIMUDA, contending that it functioned as a “business entity.”

HIMUDA, represented by counsel Pawan K. Pahwa, argued that it is a governmental authority constituted under the Himachal Pradesh Housing and Urban Development Authority Act, 2004, functioning under full control of the State Government, and performing statutory duties such as urban planning, land regulation, water supply, sanitation, and development of housing for the general public all functions listed under Article 243W read with the 12th Schedule to the Constitution. Therefore, it was contended that its activities are sovereign and non-commercial in nature, not undertaken with any profit motive, and thus outside the purview of service tax.

The Tribunal, comprising Justice S.S. Garg (Judicial Member) and Mr. P. Anjani Kumar (Technical Member), accepted HIMUDA’s contention that RCM applies only when the recipient qualifies as a “business entity”, and a statutory authority discharging government-assigned functions cannot be categorized as such.

The bench, referring to precedents including The Housing Board Haryana v. CCE Panchkula and State of Andhra Pradesh v. H. Abdul Bakhi & Bros., said that business activity necessarily involves commercial intent and profit motive, which are absent in the case of HIMUDA.

The Tribunal further noted that the services provided by HIMUDA such as maintenance of housing colonies, collection of conversion and compounding charges, processing of applications, and provision of civic amenities are all in furtherance of municipal functions, thereby covered under Entry 39 of Mega Exemption Notification No. 25/2012-ST. Consequently, no service tax can be levied on these activities.

On the issue of construction works, the Tribunal held that non-commercial construction for government departments such as Education, Health, and Transport is exempt, while commercial works alone attract service tax. HIMUDA had already agreed to pay the applicable tax and interest on the latter. The Bench remanded the matter to the Adjudicating Authority for limited verification and quantification of liability relating to such commercial works.

Addressing the extended period of limitation invoked by the department, CESTAT observed that no suppression or intent to evade tax could be attributed to HIMUDA, as it is a state-controlled entity whose accounts are regularly audited by the Accountant General and filed with the Government. It stated that governmental bodies lack any motive to evade taxes, and hence the extended limitation under Section 73(1) of the Finance Act, 1994, could not apply.

Accordingly, the Tribunal set aside the service tax demands on legal services under RCM and quashed other demands relating to statutory receipts and non-commercial works. It only permitted computation of tax on commercial construction activities, as agreed by the appellant.

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