Finance Act, 1984 | Civic Body Not Exempt From Paying Service Tax On Payments Made For Obtaining Third-Party Services: Karnataka High Court

The Karnataka High Court has held that the Bruhat Bengaluru Mahanagara Palike (BBMP)/civic body would not be exempted from the payment of service tax on payments made for availing third-party services to impart computer education to persons belonging to economically weaker sections.

A single judge bench of Justice Suraj Govindaraj allowed the petitions filed by Vasundhara A.G.K and others and said “Respondent is directed to consider the representations submitted by the petitioners within a period of four weeks from today and calculate the service tax due on the amounts paid and payable by the respondent to the petitioners and release the said amounts to the petitioners within a period of four weeks from the date of receipt of copy of this order.”

It was submitted that the corporation had introduced a Scheme to start Computer Educational Institutes in the Bangalore Mahanagara Palike area to provide free computer education to persons belonging to economically weaker sections of society. Being satisfied with the qualification of the petitioners, it was submitted that the corporation engaged them for three years and issued a work order.

The petitioners submitted that they provided the services without any complaint from the respondent and were paid a sum of Rs.3,500/- per candidate. Since the payment was not paid including the service tax component, they approached the high court seeking a direction to the respondent to consider the representation which came to be allowed by way of order dated 17.07.2012.

Pursuant to the direction, it was submitted that the respondent released the balance amount but did not make the payment of the service tax amount. It was argued that despite the petitioners having brought to the notice of the respondent that they had partly paid the service tax amount, the respondent refused to reimburse the service tax paid on the ground that they had received legal advice that they were not liable to pay service tax.

The petitioners contended that they had rendered services to the students on behalf of the Corporation and that it was the bounden duty of the Corporation to pay service tax with the tax authorities having initiated proceedings against the petitioners leading to their inconvenience due to the inaction of the Corporation.

The corporation contested the claim by saying that they were not liable to pay any service tax and relied on Section 66D(a) of the Finance Act, 1994.

It was argued that whenever a local authority was involved in a transaction service, it would be exempted from service tax and that merely because proceedings are initiated by an authority, it would not make the Corporation liable to make payment of the amounts claimed.

The bench observed that in this case the payment was not made directly to the Corporation, which would make them eligible for a write-off under the Finance Act, but that the petitioners had rendered service for which the corporation was to pay them. It held: “In the present case, the Corporation has entered into an agreement with the petitioners to render computer training to persons identified by the Corporation as regards which those persons did not make payment of money, but the payment was made by the Corporation to the petitioners.”

Following this it held "Thus when the Corporation makes such payment on a transaction with the petitioners, the service providers would be the petitioners and the service availer would be the Corporation and as such, it cannot be said to be that services are provided by the Corporation.”

It added that the present transaction would not come within the purview of sub-section (a) of Section 66D of the Finance Act, 1994, and said that while the case would have been different if the concerned candidate paid the money to the Corporation, the payment, in this case, was made by the Corporation to the petitioners, for which there was an obligation on the petitioners to collect the service tax from the payee and remit it to the concerned department.

Accordingly, it allowed the petition.

Appearance: Senior Advocate Jayakumar S.Patil, for Advocate Mahammed Tahir for petitioners.

Advocate B.V.Krishna for Advocate S.N.Prashanth Chandra, for respondent.

Citation No: 2023 LiveLaw (Kar) 496

Case Title: Vasundhara A.G.K AND The Bruhat Bangalore Mahanagara Palike

Case No: WRIT PETITION NO. 44252 OF 2015 (LB-BMP) C/W WRIT PETITION NO. 48639 OF 2015(LB-BMP) WRIT PETITION NO. 48640 OF 2015

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