Semi Conductor Laboratory Not a Business Entity, Not Liable to Pay Service Tax on CISF Security Services: CESTAT [Read Order]

The Chandigarh Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that Semi Conductor Laboratory (SCL) is not a business entity and is not liable to pay service tax on security services provided by the Central Industrial Security Force (CISF).

Semi Conductor Laboratory, located in Mohali, Punjab, is an autonomous body of the Government of India. It was earlier under the Department of Space and is now under the Ministry of Electronics and Information Technology.

The organization is fully funded through government grants and engaged in research and development in semiconductors and microelectronics for strategic and confidential projects of the Department of Space.

The department issued a show cause notice demanding service tax of Rs. 83,81,616 along with interest and penalties. It alleged that SCL, being a business entity, was required to pay service tax under the category of "Security Agency Service" for availing security from CISF.

The Commissioner confirmed the demand and imposed equal penalty under Section 78 of the Finance Act, 1994, and an additional penalty of Rs. 10,000 under Section 77. Aggrieved by the order, SCL approached the CESTAT.

The appellant’s counsel argued that SCL is a government organization engaged purely in research and development without any commercial motive. They cannot be treated as a business entity as defined under Section 65B(17) of the Finance Act. They further argued that CISF is a statutory body of the Union Government and its duty to protect government installations is a sovereign function, not a taxable service.

The counsel also submitted that service tax was earlier paid for a short period but was discontinued after clarification that other units under the Department of Space were not paying tax for similar services.

The revenue counsel argued that SCL received security services for consideration and was covered under the definition of a business entity. The department supported the order of the Commissioner confirming the demand.

The two-member bench comprising S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that SCL is an autonomous government organization wholly owned and controlled by the Union Government. It pointed out that the laboratory carries out research and development activities without any profit motive and is not involved in industry, commerce, or any business.

The tribunal explained that services provided by one department of the government to another cannot be considered taxable under the Finance Act. It also observed that the protection of strategic government installations by CISF is a sovereign duty.

The tribunal held that the Commissioner’s finding that SCL was a business entity engaged in commercial activity was unsustainable. The order confirming the demand was set aside, and the appeal of Semi Conductor Laboratory was allowed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates