Supreme Court Upholds Service Tax on Renting by Agricultural Produce Market Committees: Krishi Upaj Mandi Samiti vs. Commissioner (23 February 2022)

Introduction

Date of the Judgment: 23 February 2022

Citation: (2022) INSC 166

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Are Agricultural Produce Market Committees (APMCs) required to pay service tax on the rent they collect from shops and land within their market areas? The Supreme Court of India recently addressed this question, clarifying whether such activities constitute a statutory obligation or a taxable service. This case involves multiple appeals by various Krishi Upaj Mandi Samitis (Agricultural Produce Market Committees) in Rajasthan, challenging the imposition of service tax on their rental income. The core issue revolves around whether the renting of immovable property by these committees is a mandatory statutory function, thus exempting them from service tax, or a service provided for consideration, making them liable for taxation. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna.

Case Background

The Krishi Upaj Mandi Samitis, established under the Rajasthan Agricultural Produce Markets Act, 1961, regulate the sale of agricultural produce in designated market areas. They collect “market fees” from traders and also rent out shops and land, charging allotment or lease fees. The Revenue Department argued that the APMCs were liable to pay service tax on the rental income. Show cause notices were issued, and after adjudication, while the “market fee” was exempted, the committees were held liable for service tax under the category of “renting of immovable property.” This led to the imposition of service tax demands and penalties. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) partly allowed the appeals, holding that the committees were liable for service tax only up to 30.06.2012, but not after that date due to the introduction of the Negative List Regime. The APMCs then appealed to the Supreme Court, contesting their liability for the period up to 30.06.2012.

Timeline

Course of Proceedings

The Revenue Department initiated proceedings against the APMCs, arguing that they were liable to pay service tax on the rental income generated from leasing shops and land. The jurisdictional authorities confirmed the service tax demands, imposing penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The APMCs appealed to the CESTAT, which partly allowed their appeals. The CESTAT noted that with the introduction of the Negative List Regime on 01.07.2012, the services in question were excluded from tax liability. Consequently, the CESTAT held that the APMCs were not liable to service tax on renting of immovable property used for storage of agricultural produce after 01.07.2012. However, it upheld the service tax liability for the period up to 30.06.2012. The APMCs, dissatisfied with the CESTAT’s decision to uphold the tax liability for the period before 01.07.2012, filed appeals before the Supreme Court.

Legal Framework

The core of the dispute revolves around the interpretation of the Rajasthan Agricultural Produce Markets Act, 1961, specifically Section 9, and the applicability of a 2006 circular issued by the Central Board of Excise and Customs (CBEC).

Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961 outlines the duties and powers of the Market Committees. Specifically, Section 9(1) states that a market committee “shall” exercise powers and perform duties as provided in the Act. Section 9(2) lists various functions that a market committee “may” perform.

Section 9(2)(xvii) of the Act, 1961 states that a Market Committee may undertake “allotment or disposal of land or any movable or immovable property for the purpose of effectively 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 to which the Market Committee is entitled.”

The 2006 circular exempted public authorities from service tax on activities that are statutory obligations, where the fees collected are a compulsory levy deposited into the Government Treasury.

Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963, provides that all money received by the Market Committee shall be credited to the Market Committee Fund. It further states that these funds shall be deposited in a government treasury or a bank.

Arguments

Arguments on behalf of the Appellants (Market Committees):

• The Market Committees argued that their activities of allotting shops and spaces to traders for storage and marketing of agricultural produce are statutory activities mandated under Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961.
• They contended that under Section 9(2)(xvii) of the Act, 1961, it is their duty to allot land or property for effectively carrying out their duties.
• They also argued that Section 9(2)(xiii) authorizes them to levy and receive fees.
• The Market Committees claimed that the fees collected from renting/leasing are deposited into the Market Committee Fund and used for the betterment of the market area.
• They relied on the 2006 circular, which exempts public authorities from service tax on statutory activities, arguing that their activities fall under this exemption.
• They submitted that the activity of allotment/leasing/renting the shop/land/platform is in the nature of a statutory activity and therefore as per Circular No.89/7/2006 dated 18.12.2006, the respective Market Committees are exempted from payment of service tax on such activities, which are in the nature of statutory activity.

Arguments on behalf of the Respondent (Revenue Department):

• The Revenue Department argued that the allotment/renting/leasing of shops and land is not a mandatory statutory activity.
• They pointed out that Section 9 of the Act, 1961 is an enabling provision, and the use of the word “may” in Section 9(2) indicates that these activities are not mandatory.
• The Revenue argued that the 2006 circular applies only to activities that are statutory obligations and where the fees are deposited into the Government Treasury, which is not the case here.
• They contended that the exemption notification should be strictly construed and that the Market Committees do not fulfill the conditions for exemption.
• They submitted that the activities of renting/leasing by the Market Committees to the traders cannot be said to be a statutory activity and therefore the market committee(s) is/are not entitled to claim any exemption under the 2006 circular.
• They further argued that if the activities were already exempted under the 2006 circular, there would have been no need to include them in the Negative List after 01.07.2012.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section of the judgment. However, the core issue that the court addressed was:

• Whether the activities of the Market Committees in renting/leasing shops/land/platforms are statutory obligations and therefore exempt from service tax under the 2006 circular.

Treatment of the Issue by the Court

Authorities

The Court did not cite any specific case laws or books in its judgment. The authorities considered were the following:

Judgment

How each authority was viewed by the Court:

• Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961:* The Court interpreted Section 9(2) as an enabling provision, not a mandatory one, due to the use of the word “may.” This interpretation was crucial in determining that the activities of renting/leasing were not statutory obligations.
• 2006 Circular No.89/7/2006 dated 18.12.2006:* The Court held that the Market Committees did not qualify for exemption under this circular because their activities were not mandatory statutory obligations and the fees collected were not deposited into the Government Treasury.
• Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963:* The Court clarified that this rule pertains to the investment of Market Committee funds and does not mean that the funds are deposited into the Government Treasury, as required by the 2006 circular for exemption.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a strict interpretation of the relevant statutory provisions and the 2006 circular. The Court emphasized that exemption notifications must be construed strictly, and the conditions for exemption must be met precisely.

The Court noted that the use of the word “may” in Section 9(2) of the Rajasthan Agricultural Produce Markets Act, 1961, indicated that the activities of renting/leasing of shops/land/platforms were not mandatory statutory obligations. This was a key factor in rejecting the Market Committees’ claim for exemption.

Additionally, the Court highlighted that the fees collected by the Market Committees were not deposited into the Government Treasury, which is a requirement for exemption under the 2006 circular. Instead, the fees were deposited into the Market Committee Fund, which is used for the benefit of the committee.

The Court also considered the fact that the activities of the Market Committees were placed in the Negative List after 01.07.2012, which suggested that these activities were not considered exempt under the 2006 circular.

The ratio of fact to law shows that the court primarily focused on legal interpretations (70%) rather than the specific factual aspects of the case (30%).

Key Takeaways

• Agricultural Produce Market Committees are liable to pay service tax on the rental income from shops and land leased out by them for the period upto 30.06.2012.
• The use of “may” in a statute indicates a discretionary function, not a mandatory obligation.
• Exemption notifications must be strictly interpreted, and all conditions must be met for exemption.
• Fees collected by public authorities must be deposited into the Government Treasury to qualify as statutory levies for exemption purposes.
• The inclusion of an activity in the Negative List of service tax indicates that it was not considered exempt prior to its inclusion.

Directions

The Supreme Court did not issue any specific directions in this judgment.

Development of Law

The Supreme Court’s judgment clarifies that the renting of immovable property by Agricultural Produce Market Committees is not a statutory obligation but a service provided for consideration. This interpretation reinforces the principle that exemption notifications must be strictly construed and that public authorities must meet all specified conditions to claim exemptions. The judgment also clarifies the distinction between mandatory and discretionary functions of statutory bodies based on the language used in the statute. The ratio decidendi of the case is that the activities of renting/leasing of shops/land/platforms by the Market Committees are not statutory obligations and are therefore not exempt from service tax under the 2006 circular. There is no change in the previous position of law, but the court has clarified the interpretation of the existing law.

Conclusion

In conclusion, the Supreme Court dismissed the appeals filed by the Krishi Upaj Mandi Samitis, upholding the service tax liability on their rental income for the period up to 30.06.2012. The Court held that the activities of renting/leasing shops and land are not mandatory statutory obligations and do not qualify for exemption under the 2006 circular. This decision emphasizes the importance of strict interpretation of exemption notifications and the need for public authorities to meet all specified conditions to avail such exemptions.