Madras High Court Upholds Setting Aside Of ₹2.63 Crore Service Tax Demand On TNCSC Over Storage Godowns

The Madurai Bench of the Madras High Court has upheld an order setting aside a ₹2.63 crore service tax demand against the Tamil Nadu Civil Supplies Corporation (TNCSC).

The demand was raised for the construction of scientific storage godowns used primarily to store paddy procured from farmers for distribution through the Public Distribution System

A Division Bench of Justice M. Dhandapani and Justice N. Dileep Kumar held that TNCSC qualifies as a “governmental authority” under the Mega Exemption Notification and that the construction of its scientific storage godowns is covered by the exemption available for post-harvest storage infrastructure for agricultural produce.

It stated that,

"TNCSC operates under the control of the state government, primarily to execute public welfare functions such as food security and PDS distribution and this strongly supports the non – commercial, public utility nature of the construction and thus it is protected from being classified as a generic commercial warehouse. Thus TNCSC is eligible to claim exemption under Clause 14 [d] Of the mega exemption notification, insofar as the expenses incurred towards construction of these SS Godowns."

The service tax demand related to payments made by TNCSC to private contractors for construction of scientific storage (SS) godowns during the period from October 2015 to June 2017.

The Department had treated the construction services as taxable works contract services and raised a demand of ₹2,63,01,725, along with interest and penalties.

TNCSC had constructed the godowns primarily for storing paddy procured from farmers through District Procurement Centres. The produce was subsequently supplied through the Public Distribution System.

The Department challenged the earlier order of a Single Judge, which had quashed the demand. It argued that TNCSC did not qualify as a governmental authority for the purpose of the exemption and that the godowns could potentially be used for storing commodities other than agricultural produce.

The Department also contended that TNCSC did not perform functions entrusted to municipalities under Article 243W of the Constitution, which was one of the requirements for an entity to qualify as a governmental authority under the relevant exemption notification.

The High Court rejected the contention. The Bench noted that TNCSC had been established by the Government of Tamil Nadu and that the State Government held more than 99% of its equity. It further examined the functions performed by TNCSC, including procurement and distribution of food grains through the Public Distribution System.

The Court observed that these activities were connected with poverty alleviation and social and economic development planning, which corresponded with functions listed under Article 243W and the Twelfth Schedule to the Constitution.

The Court therefore concluded that TNCSC satisfied the requirements of a governmental authority under the Mega Exemption Notification No. 25/2012-ST.

"...TNCSC thus qualifies to be a Governmental Authority, as prescribed under Clause 2(s) of the Mega Exemption Notification and they are certainly eligible for the exemption under Clause 12-A of the said Mega Exemption Notification.", the Court said.

The Bench also considered the separate exemption available under Clause 14(d) of the notification for construction of “post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes”.

The Department had argued that the SS godowns could also be used for storing other commodities and therefore could not qualify for the exemption.

The Court rejected this reasoning, observing that the primary test was the objective, design and actual immediate use of the infrastructure at the time of its construction.

"The primary test for eligibility to claim exemption from service tax is the objective, design and actual immediate use of the infrastructure at the time of its execution. If the SS Godowns are built specifically to house essential commodities/ agricultural produce (such as paddy or rice) for the public distribution system, they fulfil the criteria.", the Court said.

The Bench noted that the godowns were constructed in major paddy-growing districts primarily for storing paddy procured from farmers. It held that the possibility of their future or alternate use could not defeat the exemption.

“As long as the infrastructure fits the definition of post-harvest storage at the time of the service provision, subsequent or auxiliary changes in utilisation do not retro-actively dissolve a valid statutory exemption,” the Court observed.

The Court also upheld the Single Judge's decision to entertain the writ petition despite the availability of an alternative statutory appeal. 

The Bench further noted that the Department had already challenged an earlier appellate order in favour of TNCSC before the CESTAT but had not obtained any interim stay.

Relying on the Supreme Court's decision in Union of India v. Kamlakshi Finance Corporation, the Court held that the Department was bound by the earlier appellate order and could not take a contrary view while the challenge to that order remained pending.

The High Court accordingly upheld the Single Judge's decision to set aside the service tax demand of ₹2.63 crore, along with the consequential interest and penalties.

The writ appeal was dismissed, with no order as to costs.

For Appellants: M/s. R. Gowrishankar, Senior Standing Counsel

For Respondent: B. Saravanan, Additional Advocate General, assisted by G. Mohan Kumar, Additional Government Pleader