While dismissing Delhi Development Authority’s twin appeals worth over Rs. 530 crores, the New Delhi Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that statutory bodies engaged in commercial activity cannot escape service tax liability, regardless of sovereign status. The CESTAT clarified that a statutory or governmental authority, even though created under a statute and discharging statutory functions, is liable to pay service tax whenever its activity amounts to an activity for commerce, irrespective of its status as a sovereign or public authority.
The CESTAT also clarified that the exemption carved out under Circular No. 89/7/2006 dated Dec 18, 2006 applies only where the activity is a mandatory and statutory function and the fee collected is a compulsory levy deposited into the Government treasury, and not where the consideration is in the nature of commercial receipts such as lease premium, salami, ground rent, membership or subscription charges.
The Division Bench comprising Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) observed that the lease premium or salami received against renting of immovable property is excisable to service tax under Section 65(105)(zzz) of the Finance Act, 1994 prior to July 01, 2012 and under Section 65B(44) post July 01, 2012, as settled by the Larger Bench decision in RIICO Ltd. [Interim Order No. 1/2025 dated 27.01.2025], and the service provider need not be the owner of the property for the activity to be taxable.
The Tribunal emphasised that the exemption notifications in a taxing statute are to be strictly construed, and the beneficiary must fall within the ambit of the exemption and fulfil the conditions thereof, failing which the question of application of the notification does not arise. The activity of charging membership and subscription for DDA sports complex is a commercial activity and not a sovereign function, and is therefore taxable.
The Tribunal noted that DDA itself had asserted it was only a custodian of Nazul lands and not the owner, and yet this did not absolve it of liability because the definition of renting of immovable property does not require the service provider to hold ownership of the property.
Briefly, DDA was registered with the Service Tax department for rendering services in the nature of Mandap Keeper Service, Health and Fitness Service, Architect Service and Club or Association Service, but during audit it was observed that DDA was not paying service tax on amounts received against the activity of Renting of Immovable Property for commercial use, and was neither registered under this service category nor paying service tax on such receipts. Accordingly, show cause notices were issued proposing demand and recovery of service tax, and the proposals were confirmed by the respective original adjudicating authorities.
