2025 (6) TMI 443 - AT - Service Tax

Levy of pay Service Tax - Security Agency service for the period 2006-07 to 2011-12 - appellant a police department providing security services to scheduled banks and government organizations on a cost-recovery basis - HELD THAT - As per the clarification vide Circular issued dated May 20 2011 there was confusion as appellant was of the view that they were performing sovereign function of providing security service which is in nature of statutory obligations and clarification came only on May 20 2011. In that circumstances for the period prior to 20th May 2011 the appellant is not liable to pay Service Tax as held by this Tribunal in the case of The Deputy Commissioner of Police Jodhpur Superintendent of Police versus Commissioner of Central Excise and Service Tax Jaipur 2016 (12) TMI 289 - CESTAT NEW DELHI wherein this Tribunal observed that police department which is an agency of the State Govt. cannot be considered to be a person engaged in the business of running security services. Consequently the activity undertaken by the police is not covered by the definition of Security Agency under Section 64(94) of the Act. Conclusion - Following the decision in the case of Deputy Commissioner of Police Jodhpur Superintendent of Police it is held that no Service Tax is payable by the appellant during the impugned period. Consequently no penalty can be imposed on the appellant. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this case are:

1. Whether the appellant, a police department providing security services to scheduled banks and government organizations on a cost-recovery basis, is liable to pay Service Tax under the category of "Security Agency service" for the period 2006-07 to 2011-12.

2. Whether the charges recovered by the appellant for providing additional police force constitute consideration for a taxable service or are fees collected in discharge of statutory/sovereign functions exempt from Service Tax.

3. Whether the appellant falls within the definition of "person" and "security agency" under the Finance Act, 1994, thereby attracting Service Tax liability.

4. The applicability and effect of the Circular dated May 20, 2011, clarifying the levy of Service Tax on escort charges collected by State Police.

5. The validity of penalty and interest imposed along with the demand of Service Tax.

Issue-wise Detailed Analysis:

Issue 1 & 4: Liability to Service Tax and Effect of the Circular dated May 20, 2011

The relevant legal framework includes Section 65(105)(w) of the Finance Act, 1994 (defining Security Agency service), and the Circular F. No. 137/131/2010-CX.4 dated May 20, 2011, issued by the Central Board of Excise & Customs (CBEC). The Circular clarified that service tax is leviable on escort charges collected by State Police from banks under "Security Agency service" only from the date of the Circular onwards, i.e., May 20, 2011. Prior to this, there was ambiguity whether such charges constituted taxable services or statutory fees exempt from tax.

The Court noted that the appellant provided security services against payment but the question was whether such activity was taxable. The Circular explicitly stated that prior to May 20, 2011, no demand of Service Tax could be sustained on such activities. The Court relied on this clarification to hold that the appellant is not liable to pay Service Tax for the period before May 20, 2011.

Issue 2 & 3: Nature of Charges and Definition of "Person" and "Security Agency"

The Court examined the definition of "Security Agency" under Section 65(94) of the Finance Act, 1994, which includes any person engaged in the business of rendering security services. The appellant argued that as a State Police department, it is not a "person" within the meaning of the statute and is not engaged in business but discharging statutory duties.

The Court referred to the General Clauses Act, 1897, and relevant Supreme Court jurisprudence which held that the term "person" does not include the State or its instrumentalities unless specifically defined. The definition of "person" including government entities was introduced only from July 1, 2012, under Section 65B(37) of the Finance Act. Therefore, for the impugned period, the appellant did not qualify as a "person" liable to pay Service Tax.

Further, the Court analyzed the nature of the charges recovered by the appellant. The charges were levied under Section 46 of the Police Act, which empowers the State Government to collect user charges for deployment of additional police force for public security or maintenance of peace. Notifications issued under this section prescribed the rates and mandated deposit of collected amounts into the Government treasury.

The CBEC Circular No. 89/7/2006-ST dated December 18, 2006, was pivotal in this analysis. It clarified that fees collected by sovereign/public authorities for statutory functions, which are compulsory levies deposited into Government accounts, do not constitute taxable services. The Court found that all three conditions of the Circular were satisfied: the duties were statutory, fees were levied as per law, and amounts were deposited into the treasury.

The Court rejected the Revenue's argument that the activity was commercial or business in nature, emphasizing that the charges were cost recovery for statutory obligations, not profit-making business activities.

Issue 5: Penalty and Interest

Since the Court held that no Service Tax was payable for the impugned period, it logically followed that the imposition of penalty and interest was unsustainable. The appellant was thus absolved from these liabilities.

Competing Arguments and Treatment

The Revenue contended that the appellant was providing taxable security services and thus liable for Service Tax. They relied on the Circular dated May 20, 2011, to support their demand. The appellant countered by relying on the same Circular to argue non-liability prior to that date and further contended that their activities were statutory functions exempt from tax.

The Court carefully balanced these arguments, giving due weight to the statutory provisions, Circulars, and judicial precedents. It emphasized the sovereign nature of police functions and the statutory basis for charges, rejecting the Revenue's commercial characterization.

Key Evidence and Findings

The critical evidence included the Circulars issued by CBEC, the Police Act provisions, notifications prescribing charges, and the deposit of fees into the Government treasury. The Court also relied on prior Tribunal decisions, particularly the case involving the Deputy Commissioner of Police, Jodhpur, which dealt extensively with similar issues and reached analogous conclusions.

Conclusions

The Court concluded that:

• The appellant is not liable to pay Service Tax for the period prior to May 20, 2011, as per the CBEC Circular clarifying the levy.
• The appellant, being a State Police department discharging statutory functions under the Police Act, does not fall within the definition of "person" or "security agency" liable to Service Tax during the impugned period.
• The charges recovered are statutory fees, deposited into Government treasury, and exempt from Service Tax under the CBEC Circular dated December 18, 2006.
• Consequently, penalty and interest imposed along with the demand are not sustainable.

Significant Holdings

The Court preserved the following crucial legal reasoning verbatim from the prior Tribunal decision:

"The activities assigned to and performed by the sovereign / public authorities under the provisions of any law are statutory duties. The fee or amount collected as per the provisions of the relevant statute for performing such functions is in the nature of compulsory levy and are deposited in the Govt. Account. However, if a sovereign or public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for 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."

"The Superintendent of Police is an extended arm/ instrumentality/ agency of the State Government and is controlled and managed by the State Government. It is carrying out the activities as entrusted to it vide the Police Act which are statutory and constitutional in nature."

"The charges recovered by Police are in the nature of cost recovery for the additional police force deployed on request for maintaining security and law and order... the activities undertaken by the police, for which charges have been recovered, cannot be held to be in the nature of business activity."

"The police department, which is an agency of the State Govt., cannot be considered to be a person engaged in the business of running security services. Consequently, the activity undertaken by the police is not covered by the definition of Security Agency under Section 64(94) of the Act."

Core principles established include:

• Service Tax is not leviable on statutory functions performed by sovereign/public authorities where fees are prescribed by law and deposited into Government treasury.
• The definition of "person" under the Finance Act prior to July 1, 2012, does not include the State or its instrumentalities.
• Charges collected by State Police for deployment of additional force under statutory provisions are statutory fees, not consideration for taxable services.

Final determinations:

• No Service Tax liability arises for the appellant for the period 2006-07 to 2011-12.
• No penalty or interest is payable in respect of the impugned demand.
• The impugned order demanding Service Tax and imposing penalty is set aside and the appeal is allowed.