1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals are:
- Whether the licence fees received by the Appellant from contractors for running bars, selling eatables, and collecting empty liquor bottles within or adjoining TASMAC shops constitute a taxable "service" under Section 65B(44) of the Finance Act, 1994.
- Whether the activity carried out by the Appellant, a 100% Government undertaking vested with exclusive privilege for wholesale and retail distribution of liquor under the Tamil Nadu Prohibition Act, 1937, amounts to a sovereign function exempt from service tax.
- Whether the Negative List regime introduced w.e.f. 1.7.2012 exempts the impugned activities from service tax liability from 29.03.2013 onwards, following the statutory amendment granting TASMAC authority to grant privileges to private parties by tender.
- The extent of service tax liability for the period prior to the amendment (1.7.2012 to 28.03.2013) and post amendment (from 29.03.2013 onwards).
- Whether penalties under Sections 76, 77, and 78 of the Finance Act, 1994 are sustainable given the nature of dispute and prior judicial and administrative clarifications.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Taxability of Licence Fees as "Service" under Section 65B(44) of the Finance Act, 1994
Relevant legal framework and precedents: Section 65B(44) defines "service" as any activity carried out by a person for another for consideration, excluding certain activities like transfer of title in goods, transactions in money, and services by employees to employers. The Negative List regime introduced from 1.7.2012 widened the scope of taxable services, except those specifically excluded under Section 66D or exempted by notifications.
Precedents such as Karnataka State Warehousing Corporation vs CST Bangalore and Karnataka Government Insurance Department vs Asst. CCE have held that services provided by government instrumentalities, if not statutory or sovereign functions, are liable to service tax.
Court's interpretation and reasoning: The Tribunal observed that the licence fees paid by contractors for running bars and related activities fall within the ambit of "service" as defined under Section 65B(44). TASMAC's act of granting licences and collecting fees is a commercial activity for consideration, not merely a transfer of title or statutory function exempt from tax.
The Tribunal rejected the contention that TASMAC's activities are sovereign functions exempt from service tax, reasoning that the Board of Directors' decision to allow contractors to run bars is a corporate decision, not a sovereign function. TASMAC's audited financial statements prepared under Companies Act provisions further indicate it operates as a commercial entity, not a sovereign authority.
The Tribunal relied on CBEC Circulars (No. 96/7/2007-ST and No. 89/7/2006) clarifying that when a sovereign/public authority provides a service not in the nature of statutory activity and for consideration (not a statutory fee), service tax is leviable.
Key evidence and findings: The audited balance sheets, supplementary audit by CAG under Companies Act provisions, and the tendering process for granting licences demonstrate TASMAC's commercial character. The statutory amendment inserting Rule 9A in the Tamil Nadu Liquor Retail Vending Rules, 2003, effective 29.03.2013, granted explicit statutory authority to TASMAC to grant privileges by tender and retain 1% commission as agency fee.
Application of law to facts: For the period prior to 29.03.2013, TASMAC's activities were not backed by explicit statutory authority to grant such privileges, making the licence fees taxable as service under Section 65B(44). Post 29.03.2013, the statutory amendment placed these activities within the scope of statutory functions, falling under the Negative List and exempt from service tax except for the 1% commission retained.
Treatment of competing arguments: The Appellant argued that TASMAC is an instrumentality of the State performing sovereign functions related to liquor retailing, a state subject, and hence exempt from service tax. The Tribunal disagreed, distinguishing between sovereign/state functions and commercial activities by statutory corporations. The Department's view that licence fees constitute consideration for taxable service was upheld for the pre-amendment period.
Conclusions: Licence fees received by TASMAC from bar contractors are taxable services under Section 65B(44) for the period 1.7.2012 to 28.03.2013. From 29.03.2013 onwards, these activities are statutory functions exempt under the Negative List, with tax liability only on the 1% commission retained by TASMAC.
Issue 2: Applicability of Negative List Regime and Statutory Amendment from 29.03.2013
Relevant legal framework and precedents: The Negative List regime under the Finance Act, 1994 exempts certain services, including statutory functions carried out by government or local authorities. The Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003, as amended by insertion of Rule 9A w.e.f. 29.03.2013, empower TASMAC to grant privileges to private parties by tender and retain 1% commission.
Court's interpretation and reasoning: The Tribunal held that the amendment provides statutory backing to TASMAC's activities, making them statutory functions falling within the Negative List of services exempt from service tax. Thus, from 29.03.2013 onwards, TASMAC's grant of privileges to private parties is not a taxable service except for the agency commission.
Key evidence and findings: The statutory amendment and the tender process with prior approval of the Commissioner of Prohibition and Excise demonstrate the lawful delegation of sovereign authority to TASMAC. The remittance of 99% of the tender amount to the State exchequer further evidences the statutory nature of the activity.
Application of law to facts: The amendment transforms TASMAC's role from a commercial entity to a statutory agency performing sovereign functions. Consequently, the Negative List exempts these services from service tax liability.
Treatment of competing arguments: The Department's contention for service tax on the entire licence fee post amendment was rejected, aligning with earlier Tribunal decisions and the Commissioner (Appeals) order holding tax liability only on the 1% commission.
Conclusions: The Negative List regime exempts TASMAC's activities from service tax liability from 29.03.2013 onwards, except on the agency commission retained.
Issue 3: Penalty Imposition under Sections 76, 77, and 78 of the Finance Act, 1994
Relevant legal framework and precedents: Penalties under the Finance Act are imposed for willful evasion or non-compliance. However, where disputes arise from bona fide differences in interpretation of law, penalties are generally not sustainable.
Court's interpretation and reasoning: The Tribunal found that the dispute involves interpretation of law with multiple circulars and judicial decisions on the issue, indicating absence of deliberate evasion. The presence of conflicting views and ongoing litigation negates the imposition of penalties.
Key evidence and findings: Multiple circulars issued before and after the Negative List regime, High Court judgments on similar issues, and prior Tribunal decisions demonstrate the complexity and ambiguity surrounding the taxability of such services.
Application of law to facts: Given the bona fide nature of the dispute and the existence of divergent authoritative views, penalties are not justified.
Treatment of competing arguments: The Department's demand for penalties was countered by the Appellant's argument on bona fide dispute and reliance on judicial precedents. The Tribunal sided with the Appellant.
Conclusions: Penalties imposed under Sections 76, 77, and 78 are set aside.
Issue 4: Service Tax Liability for Periods Prior to and Post Amendment
Relevant legal framework and precedents: The Finance Act and the Negative List regime, along with the statutory amendment in the Tamil Nadu Liquor Retail Vending Rules, 2003.
Court's interpretation and reasoning: The Tribunal distinguished the periods before and after the amendment. For 1.7.2012 to 28.03.2013, TASMAC's activities are taxable services under Section 65B(44). For the period from 29.03.2013 onwards, these are statutory functions exempt under the Negative List.
Key evidence and findings: The statutory amendment dated 29.03.2013 is pivotal in changing the taxability status. Prior to this, no explicit statutory authority existed for such privileges.
Application of law to facts: The Tribunal applied the law accordingly, holding TASMAC liable for service tax on licence fees for the pre-amendment period and exempt post amendment except on the agency commission.
Treatment of competing arguments: The Appellant's plea for extension of the 1% commission taxability benefit to the pre-amendment period was rejected due to lack of legal basis.
Conclusions: Service tax liability exists on licence fees for 1.7.2012 to 28.03.2013; no liability thereafter except on 1% commission.
3. SIGNIFICANT HOLDINGS
"However, if a sovereign / public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined."
"A statutory body, corporation or any authority created by the Parliament of a State Legislature is neither 'Government' nor a 'local authority'... Such regulatory bodies and other autonomous entities which attain their entity under an act would not comprise either government or local authority."
"The impugned services of TASMAC definitely fall in the Negative list of services as statutory function being carried out by them based on authority of law."
"For the period October 2008 to 30.06.2012, the demand of service tax on the appellant under 'Support of Business and Commerce Services' is not sustainable and is set aside."
"There shall be service tax liability on the appellant for the period 1.7.2012 to 28.03.2013 under the provisions of Section 65B (44) read with other relevant provisions of the Finance Act, 1994."
"There will not be any service tax liability during the period of dispute from 29.03.2013 onwards."
"Penalties imposed under Section 77 & 78 of the Finance Act, 1994 are set aside."
The Tribunal's final determination was to allow the appeals partly, setting aside the impugned orders demanding service tax and penalties for the period post 29.03.2013, confirming service tax liability only for the period 1.7.2012 to 28.03.2013 on the licence fees, and rejecting penalty demands due to bona fide dispute.