Service Tax on Renting Immovable Property: Supreme Court Upholds Tax Liability of Agricultural Produce Market Committees (23 February 2022)

Date of the Judgment: 23 February 2022
Citation: [Not Available in Source]
Judges: M.R. Shah, J. and B.V. Nagarathna, J.
Can Agricultural Produce Market Committees (APMCs) be exempted from service tax on renting out immovable property? The Supreme Court of India recently addressed this question, clarifying the tax liabilities of APMCs regarding the renting of shops and land. This judgment clarifies that APMCs are liable to pay service tax on rental income from immovable properties for the period up to 30.06.2012. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with the judgment authored by Justice M.R. Shah.

Case Background

The case involves multiple appeals by Krishi Upaj Mandi Samitis (Agricultural Produce Market Committees) from various parts of Rajasthan. These committees were established under the Rajasthan Agricultural Produce Markets Act, 1961, to regulate the sale of agricultural produce in notified market areas. They collect “market fees” from traders and rent out land and shops, collecting allotment fees or lease amounts. The Revenue Department sought to impose service tax on the rental services provided by these committees. While the tax on “market fee” was not imposed, the committees were held liable for service tax under the category of “renting of immovable property,” leading to the appeals.

Timeline:

Course of Proceedings

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) initially ruled that the Market Committees were not liable for service tax on renting immovable property used for agricultural produce storage after 01.07.2012, due to the introduction of the Negative List Regime. However, for the period before 01.07.2012, the CESTAT held that the Market Committees were liable for service tax on renting of immovable property. The Market Committees then appealed to the Supreme Court against this part of the CESTAT order.

Legal Framework

The core legal issue revolves around the interpretation of the Rajasthan Agricultural Produce Markets Act, 1961, and the applicability of a 2006 circular that exempted certain statutory activities of public authorities from service tax. Section 9 of the Act, 1961, outlines the duties and powers of the Market Committees. Specifically, Section 9(2)(xvii) states that a Market Committee may allot or dispose of land or any movable or immovable property for the purpose of carrying out its duties. Section 9(2)(xiii) authorizes the Market Committees to levy, recover, and receive rates, charges, fees, and other sums of money.

The 2006 circular, which is central to the case, states:

“the activities performed by the sovereign/public authorities under the provision of law are in the nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activities is in the nature of compulsory levy as per the provision of the relevant statute, and it is deposited into the Government treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore, such an activity performed by a sovereign/ public authority under the provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such activities.”

The circular further clarifies that if an authority performs a service not in the nature of a statutory activity and undertakes it for consideration, service tax would be applicable.

Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963, specifies that all money received by the Market Committee shall be credited to the Market Committee fund and deposited into the Government Treasury or a bank.

Arguments

Appellants’ Arguments

• The appellants argued that the allotment of shops and spaces for storage and marketing of agricultural produce is a statutory activity mandated under Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961.
• They contended that they are exempt from service tax on such services as per Circular No. 89/7/2006, dated 18.12.2006.
• They submitted that under Section 9(2)(xvii), it is their duty to allot/dispose of land for effectively carrying out their duties.
• They argued that the fees collected are deposited in the Market Committee Fund and are used for the betterment of the market area.
• The appellants claimed that since they are public authorities performing a statutory function, they are entitled to the exemption under the 2006 circular.
• The appellants relied on Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963, to argue that the fees collected are deposited with the Government Treasury.

Revenue’s Arguments

• The Revenue argued that the allotment/renting/leasing of shops/land is not a mandatory statutory activity.
• They pointed out that Section 9 of the Act, 1961, is an enabling provision, using the words “market committee may,” not “shall.”
• The Revenue contended that the activities of renting/leasing by the Market Committees to traders cannot be considered a statutory activity.
• They argued that the exemption notification should be strictly construed, and the Market Committees do not fulfill the conditions for exemption.
• The Revenue stated that the 2006 circular only exempts activities that are statutory obligations, with fees deposited into the Government Treasury.
• They argued that the activity of renting/leasing is for consideration and not a mandatory statutory duty.
• The Revenue also pointed out that the inclusion of such activities in the Negative List after 01.07.2012 indicates that they were not intended to be exempted under the 2006 circular.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the activity of allotment/renting/leasing of shop/land/platform/space by the Market Committees is a statutory activity, entitling them to exemption from service tax under the 2006 circular.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases

• The court did not rely on any specific case laws in the judgment.

Statutes and Rules

• Rajasthan Agricultural Produce Markets Act, 1961: Section 9(1), Section 9(2), Section 9(2)(xiii), Section 9(2)(xvii)

Section 9(1) states the Market Committee shall be responsible for the administration of the market area. Section 9(2) states that a Market Committee may undertake the activities specified therein. Section 9(2)(xiii) authorizes the Market Committees to levy, recover, and receive rates, charges, fees, and other sums of money. Section 9(2)(xvii) states that a Market Committee may allot or dispose of land or any movable or immovable property for the purpose of carrying out its duties.

• Rajasthan Agricultural Produce Markets Rules, 1963: Rule 45

Rule 45 specifies that all money received by the Market Committee shall be credited to the Market Committee fund and deposited into the Government Treasury or a bank.

Judgment

How each authority was viewed by the Court?

• The Court interpreted Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961 to mean that the activity of renting out properties was not a mandatory statutory duty. The use of the word “may” in Section 9(2) indicated that the Market Committees had discretion in such matters, and it was not an obligation.
• The Court interpreted Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963 to mean that the fees collected by the Market Committees were deposited into the Market Committee Fund and not the Government Treasury. This was a key factor in determining that the Market Committees did not meet the conditions for exemption under the 2006 circular.
• The Court interpreted the 2006 circular strictly, emphasizing that it applied only to activities that were mandatory statutory obligations with fees deposited into the Government Treasury. The Court held that the Market Committees did not meet these criteria.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the statutory provisions and the 2006 circular. The Court emphasized that exemption notifications must be strictly construed and that the conditions for exemption must be fully met. The following points weighed heavily in the Court’s decision:

• Discretionary vs. Mandatory Duty: The Court highlighted that Section 9(2) of the Rajasthan Agricultural Produce Markets Act, 1961, uses the word “may,” indicating that the activity of renting out property is a discretionary function rather than a mandatory statutory duty. This was a crucial factor in denying the exemption.
• Nature of Fees Collected: The Court noted that the fees collected by the Market Committees were not deposited into the Government Treasury but rather into the Market Committee Fund. This did not meet the conditions outlined in the 2006 circular for exemption.
• Strict Interpretation of Exemption Notifications: The Court reiterated that exemption notifications must be strictly construed, and all conditions must be met for the exemption to apply. The Market Committees failed to meet these conditions.
• Legislative Intent: The Court also considered the fact that the activities of the Market Committees were placed in the Negative List after 01.07.2012, indicating that they were not intended to be exempted under the 2006 circular.

Logical Reasoning

The Court rejected the argument that the activities of renting/leasing of shops/land/platforms were a mandatory statutory duty of the Market Committees. The Court reasoned that the use of the word “may” in Section 9(2) of the Act, 1961, indicated that such activities were discretionary and not obligatory. The Court also noted that the fees collected were not deposited into the Government Treasury, which was a requirement for the exemption under the 2006 circular. The court emphasized the importance of strict interpretation of exemption notifications and held that the Market Committees did not meet the necessary conditions for exemption.

The court also considered the fact that the activities of the Market Committees were placed in the Negative List after 01.07.2012. This indicated that they were not intended to be exempted under the 2006 circular. The Court thus concluded that the Market Committees were liable to pay service tax on renting of immovable property for the period up to 30.06.2012.

The Supreme Court’s decision was unanimous, with both Justices M.R. Shah and B.V. Nagarathna concurring in the judgment.

“The exemption notification should not be liberally construed and beneficiary must fall within the ambit of the exemption and fulfill the conditions thereof.”

“In the present case, it is the case on behalf of the appellants that the activity of rent/lease/allotment of shop/land/platform/space is a statutory activity and the Market Committees are performing their statutory duties cast upon them under Section 9 of the Act, 1961 and therefore they are exempted from payment of service tax on such activities.”

“Under Section 9(2), it is not a mandatory statutory duty cast upon the Market Committees to allot/lease/rent the shop/platform/land/space to the traders. Hence, such an activity cannot be said to be a mandatory statutory activity as contended on behalf of the appellants.”

Key Takeaways

• Agricultural Produce Market Committees (APMCs) are liable to pay service tax on rental income from immovable properties for the period up to 30.06.2012.
• The renting of shops and land by APMCs is not considered a mandatory statutory activity, as it is a discretionary function under the Rajasthan Agricultural Produce Markets Act, 1961.
• Exemption notifications must be strictly construed, and all conditions must be met for the exemption to apply.
• Fees collected by APMCs for renting out properties are not deposited into the Government Treasury, which is a requirement for exemption under the 2006 circular.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the activity of renting out immovable property by Agricultural Produce Market Committees is not a mandatory statutory activity and therefore is not exempt from service tax under the 2006 circular. This clarifies the scope of the 2006 circular and emphasizes the importance of strict interpretation of exemption notifications.

Conclusion

The Supreme Court dismissed the appeals, upholding the CESTAT order that held Agricultural Produce Market Committees liable for service tax on renting of immovable property for the period up to 30.06.2012. The Court clarified that the renting activity is not a mandatory statutory duty and that the committees did not meet the conditions for exemption under the 2006 circular. This judgment reinforces the principle that exemption notifications must be strictly construed and that all conditions for exemption must be met.

Category

Parent Category: Service Tax
Child Category: Renting of Immovable Property
Child Category: Agricultural Produce Market Committees
Child Category: Rajasthan Agricultural Produce Markets Act, 1961
Parent Category: Rajasthan Agricultural Produce Markets Act, 1961
Child Category: Section 9, Rajasthan Agricultural Produce Markets Act, 1961

FAQ

Q: Are Agricultural Produce Market Committees (APMCs) required to pay service tax on renting out shops and land?
A: Yes, APMCs are liable to pay service tax on rental income from immovable properties for the period up to 30.06.2012. The Supreme Court clarified that this activity is not a mandatory statutory duty and therefore not exempt from service tax.

Q: What is the significance of the 2006 circular in this case?
A: The 2006 circular exempted certain statutory activities of public authorities from service tax. However, the Supreme Court held that the renting of shops and land by APMCs did not meet the conditions for exemption under this circular because it was not a mandatory statutory obligation, and the fees were not deposited into the Government Treasury.

Q: What does the Supreme Court mean by “strict interpretation” of exemption notifications?
A: Strict interpretation means that exemption notifications must be interpreted literally, and all conditions for exemption must be met precisely. The court cannot liberally interpret the notification to grant exemptions that are not explicitly provided.

Q: What is the difference between a mandatory and discretionary duty in this context?
A: A mandatory duty is an obligation that must be performed, while a discretionary duty is one that an authority may choose to perform. The Supreme Court held that the renting of shops and land by APMCs was a discretionary duty, not a mandatory one, based on the use of the word “may” in Section 9(2) of the Rajasthan Agricultural Produce Markets Act, 1961.

Q: What are the practical implications of this judgment for APMCs?
A: APMCs need to be aware that they are liable to pay service tax on rental income from immovable properties for the period up to 30.06.2012. They should also understand that the 2006 circular does not exempt them from service tax on such activities.