Custom, Excise & Service Tax Tribunal
Tamilnadu Medical Services ... vs Service Tax - Chennai on 12 September, 2023
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL, CHENNAI
Service Tax Appeal No.41820 of 2013
(Arising out of Order in Original No. 02/2013 dated 29.1.2013 passed
by the Commissioner of Service Tax, Chennai)
Tamil Nadu Medical Services Corporation Ltd. Appellant
No. 147, 2nd Floor
Pantheon Road
Egmore, Chennai - 600 008.
Vs.
Commissioner of GST & Central Excise Respondent
Chennai North Commissionerate
26/1, Mahatma Gandhi Road
Nungambakkam, Chennai - 600 034.
APPEARANCE:
Shri P.C. Anand, Chartered Accountant for the Appellant
Shri R. Rajaraman, AC (AR) for the Respondent
CORAM
Hon'ble Shri P. Dinesha, Member (Judicial)
Hon'ble Shri M. Ajit Kumar, Member (Technical)
Final Order No.40784/2023
Date of Hearing : 02.08.2023
Date of Decision: 12.09.2023
Per M. Ajit Kumar,
This is an appeal filed by the appellant M/s. Tamil Nadu Medical
Services Corporation Ltd. (TNMSCL) against Order in Original No.
2/2013 dated 29.1.2013 passed by the Commissioner of Service Tax,
Chennai.
2. Brief facts of the case are that the appellant who is a State
Government Public Limited Company are engaged in procurement and
distribution of drugs and medicines for Tamil Nadu State Government
Hospitals. They are providing taxable services viz. Transport of Goods
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by Road and Management Consultancy Service and are registered for
service tax purposes with the Service Tax Department under the
categories of "Transport of Goods by Road" and "Management
Consultancy Services". On the basis of intelligence that the appellants
are not paying service tax on storage and warehousing and cargo
handling service, the officers of DGCEI, Chennai Zonal Unit undertook
investigation. During the course of investigation, it was noticed that
the appellants are engaged in providing storage and warehousing
services to the Government of Tamil Nadu; that for the storage and
warehousing services the appellants are receiving 'administrative
charges' from Tamil Nadu State Government; further that the appellant
deducted 'Handling and Testing' Charges @ 1.5% of the value of drugs
as per the terms agreed in the tender towards handling activities like
loading, unloading and transportation to the various Government
hospitals. It appeared from the investigation that the appellant is liable
to pay service tax on the above activities. However, the appellant
neither obtained service tax registration nor paid service tax for the
said services. Hence a Show Cause Notice dated 28.12.2011 was
issued to the appellant proposing demand of service tax of
Rs.7,12,45,295/- for the period from 1.10.2006 to 31.3.2011 along
with interest besides proposing penalties under various sections of the
Finance Act, 1994. After due process of law, the adjudicating authority
after dropping certain service tax demands and granting relief under
cum-tax benefit on the services rendered viz. storage and warehousing
service and cargo handling service, ordered the appellants to pay
balance service tax demand of Rs.1,71,28,672/- along with interest
and imposed equal penalty under sec. 78 of the Finance Act, 1994
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besides imposing penalty of Rs.5,000/- under sec. 77(2) of the Finance
Act, 1994. Hence the present appeal before the Tribunal. In their
Appeal memorandum at Sl. No. 11 hey have described the service as
'sovereign service'.
3. No cross-objections have been filed by the respondent-
department.
4. We have heard Shri P.C. Anand, Chartered Accountant for the
appellant and Shri R. Rajaraman, Assistant Commissioner (AR) for
Revenue.
4.1. The learned consultant Shri P.C. Anand submitted that the
formation of the appellant-company was by the Government of Tamil
Nadu as per G.O. Ms. No.446 dt.12.4.1993. The sole objective was
procurement and distribution of drugs, surgical and medical supplies.
The drugs and medicines are to be clearly marked 'government
supplies not for sale'. Over a period of time, in addition to drugs and
medicines, the role of the TNMSCL has expanded to include
procurement and supply of equipment for the use of the Health
Department. In addition, TNMSCL is also involved in the provision of
diagnostic and other medical services through the maintenance of
CT/MRI Scan Centers at various Government Hospitals and payment
wards. It is now an ISO 9001: 2008 Certified Organization. As TNMSCL
has been nominated as the sole agency of the Government, for
procurement and supply of drugs and equipment's to Government
Hospitals / Institutions, the Government have decided to levy
nomination charges at 7.5% on the total revenue earned (except
interest receipt). The company has been directed to open its own
warehouses where the medicines are stored prior to distribution. As
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per G.O.No.431 dt.18.12.1996 exemption has been granted in respect
of sales tax payable by TNMSCL for the drugs and medicines procured
and distributed to the various medical institutions. As per G.O.No.243
dt.28.9.2005 the appellant has been permitted to draw service charges
up to a maximum of 5% of the total turnover. As per G.O.No.93
dt.2.6.2006 the nomenclature of the 5% Services Charges was
changed to Administrative Charges. Vide G.O.No.461 dt.31.12.2007
Administrative Charges, amounting to a maximum of 5% of the total
turnover or at the rate as approved by the Board of Directors of the
company may be utilized towards payment of any liquidated damages
transport fines, penalties, forfeiture of EMD, as also writing off expired
drugs, etc. He prayed that considering the services done by an
extended limb of the Government of Tamil Nadu, viz. the company,
and the service is with reference to the public health; such service finds
a place in the Central Government Publication on Service Tax as being
a service done to the Sovereign State, the Hon'ble Bench may dispose
off the matter accordingly.
4.2. Shri R. Rajaraman, Assistant Commissioner (AR) stated on
behalf of Revenue that TNMSCL was created by a G.O. and not by an
Act of Parliament or State Legislature. He stated that as per mega
Notification 25/2012-ST dated 20/06/2012 to be eligible for exemption
as a governmental authority TNMSCL should have primarily been set
up by an Act of Parliament or the State Legislature. The appellant
company was providing services of warehousing, unloading, stacking
and indenting of goods belonging to the government of Tamil Nadu to
the various hospitals and was deducting certain amounts received from
the suppliers of drugs and medicines towards loading, unloading,
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packing, unpacking and transporting of drugs. This shows that the
appellant was only providing a commercial function which could also
be done by any other private entity and hence they were not
discharging any sovereign function. He reiterated the points given in
the impugned order and prayed that the impugned order be upheld.
5. We have heard the rival parties. The main plea taken by the
appellant is that they are not liable to pay tax as they are discharging
'sovereign functions'. The issue will have to be examined and decided
in the context of indirect taxation.
5.1 In re. The Bill to Amend the Sea Customs Act (1878), [1963
AIR 1760/ 1964 SCR (3) 787] pertaining to indirect taxation, a Special
Bench of eight judges of the Hon'ble Apex Court exercising its advisory
jurisdiction decided on whether the provisions of Art. 289 of the
Constitution precluded the Union from imposing, or authorising the
imposition of (a) Customs duties on the import or export or (b) excise
duties on the production or manufacture in India of the property of a
State used for purposes other than those specified in cl. (2). of that
Article. In a majority decision the Hon'ble Chief Justice speaking for
himself and four other Judges held that the immunity granted to the
States in respect of Union taxation, under Art. 289(1) does not extend
to duties of customs including export duties or duties of excise.
Relevant portions of the judgment are extracted below:
"11. It will thus appear that both s. 154 and Art. 285 set out above
speak only of "property" and lay down that property vested in the
Unions shall be exempt from all taxes imposed by a State or by any
authority within a State, subject to one exception of saving the pre-
existing taxes on such property until Parliament may by law
otherwise provide. Similarly whereas s. 155 of the Government of
India Act exempts from federal taxes the Government of a Province
in respect of lands or buildings situate in British India or income
accruing, arising or received in British India, Art. 289(1). says "the
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property and income of a State shall be exempt from Union
taxation". Section 156 aforesaid has two provisos (a) & (b); (a)
relating to trade or business of any kind carried on by or on behalf of
the Government of a Province, and (b) which is not relevant, relating
to a Ruler. It will be seen that "income" is repeated in both the
provisions, but what was "lands" or "buildings" has become simply
"property" in Art. 289(1). .
12. The question naturally arises why "income" was at all mentioned
when it is common ground that "income" would be included in the
generic term "property". It was suggested on behalf of the Union that
the juxta-position of the terms "property" and "income" of a State
which have been declared to be exempt from Union taxation would
indicate that the tax from which they were to be immune was tax on
"property" and on "Income", i.e., in both cases a direct tax, and not a
indirect tax, which may be levied in relation to the property of a State,
namely, excise duty, which is a tax on the manufacture or production
of goods and customs duty which is a tax on the event of importation
or exportation of goods.
...
33. Similarly in the case of duties of customs including export duties though they are levied with reference to goods, the taxable event is either the import of goods within the customs barriers or their export outside the customs barriers. They are also indirect taxes like excise and cannot in our opinion be equated with direct taxes on goods themselves. Now, what is the true nature of an import or export duty? Truly speaking, the imposition of an import duty, by and large, results in a condition which must be fulfilled before the goods can be brought inside the customs barriers, i.e., before they form part of the mass of goods within the country. Such a condition is imposed by way of the exercise of the power of the Union to regulate the manner and terms on which goods may be brought into the country from a foreign land. Similarly an export duty is a condition precedent to sending goods out of the country to other lands. It is not a duty on property in the sense of Art. 289(1). Though the expression "taxation", as defined in Art. 366(28), "includes the imposition of any tax or impost, whether general or local or special", the amplitude of that definition has to be cut down if the context otherwise so requires. The position is that whereas the Union Parliament has been vested with exclusive power to regulate trade and commerce, both foreign and inter-State (Entries 41 and 42) and with the sole responsibility of imposing export and import duties and duties of excise, with a view to regulating trade and commerce and raising revenue, an exception has been engrafted in Art. 289(1) in favour of the States, granting them immunity from certain kinds of Union taxation. It, therefore, becomes necessary so to construe the provisions of the Constitution as to give full effect to both, as far as may be. If it is held that the States are exempt from all taxation in respect of their export or imports, it is not difficult to imagine a situation where a State might import or export all varieties of things and thus nullify to a large extent the exclusive power of Parliament to legislate in respect of those matters. The provisions of Art. 289(1) being in the nature of an exception to the exclusive field of legislation reserved to Parliament, the exception has to be strictly construed, and therefore, limited to taxes on property and on income of a State. In other words, the immunity granted in favour of States 7 ST/41820/2013 has to be restricted to taxes levied directly on property and income. Therefore, even though import and export duty or duties of excise have reference to goods and commodities, they are not taxes on property directly and are not within the exemption in Art. 289(1).
(emphasis added) The ratio of this judgment would also be applicable to an indirect tax like service tax which is a much later levy. The salient points of the judgment are:
(1) Though the expression "taxation", as defined in Art. 366 (28), "includes the imposition of any tax or impost, whether general or local or special", the amplitude of that definition has to be cut down if the context otherwise so requires.
(2) Whereas the Union Parliament has been vested with the exclusive power to regulate trade and commerce and with the sole responsibility of imposing export and import duties and duties of excise, with a view to regulating trade and commerce and raising revenue, an exception has been engrafted in Art. 289 (1) in favour of States granting them immunity from certain kinds of Union taxation and it is necessary that the general words of the exemption in that Article should be limited in their scope so as not to come in conflict with the power of the Union to regulate trade and commerce.
(3) Though the Constitution of India does not make a clear distinction between direct and indirect taxes, the exemption provided in Art., 289 (1) from Union taxation to property must refer to direct taxes on property and not to indirect taxes like duties of customs and excise which are in their essence trading taxes and not tax on property.
5.2 The main contention of the appellant is in terms of Entry 25 of the Mega Exemption Notification 25/2012-ST dated 20.06.2012, as amended which reads as under:
8
ST/41820/2013 "25. Services provide to Government, a local authority or a governmental authority by way of -
(a) Water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation; or]
(b) Repair or maintenance of a vessel];"
We find that Notification 25/2012-ST dated 20.06.2012 came into force on the 1st day of July, 2012 i.e. after the period in dispute which is from 1.10.2006 to 31.3.2011. The notification was issued post the introduction of the negative list of services when Parliament by the Finance Act, 2012 introduced an altogether new system of taxation of services w.e.f. 1-7-2012 thus making a paradigm shift in the law and is hence not relevant in deciding the facts in issue. The appellant has drawn attention to the educational guide published by the government of India, wherein the activity/ function of a government or a municipality which is also eligible for the benefit has been clarified under question 7.3.2. They have stated that public health is specifically ear marked as one such activity. We find that the said guide is also issued with reference to Notification 25/2012-ST and is not relevant to the present issue. The relevant para from the Education Guide as extracted from their synopsis is reproduced hereunder:
"7.3 Services provided to or by a governmental Authority 7.3.1 Are various corporations formed under Central Acts or State Acts or various government companies registered under the Companies Act, 1956 or autonomous institutions set up by special acts covered under the definition of 'governmental authority'?
No. In terms of its definition in mega notification 25/2012-ST, following conditions should be satisfied for a board, body or an authority to be eligible for exemptions as a governmental authority:9
ST/41820/2013 • set up by an act of the Parliament or a State Legislature;
• established with 90% or more participation by way of equity or control by Government; and • carries out any of the functions entrusted to a municipality under article 243W of the Constitution.
7.3.2 What are the functions entrusted to a
municipality under article 243W of the
Constitution?
Article 243W of the Constitution is as under:
'Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow--
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to--
(i) the preparation of plans for economic development and social justice;
(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.' Matters listed in twelfth schedule are:
..................
6. Public health, sanitation conservancy and solid waste management.
........."
The appellant has also relied on Boards clarification dated 18.12.2006. It is seen that the same was withdrawn vide Master Circular No. 96/7/2007-ST dated 23.8.2007, however the Master Circular covers the clarification issued in the Circular dated 18.12.2006 also. The 10 ST/41820/2013 Circular covers the period under dispute. Relevant portion of the same is reproduced below for ease of reference:
Reference Issue Clarification
code
(1) (2) (3)
999.01 / Sovereign/public authorities Activities assigned to and
23.08.07 perform functions assigned to performed by the sovereign /
them under the law in force, known public authorities under the
as "statutory functions". For provisions of any law are
example, statutory duties. The fee or
amount collected as per the
· Regional Reference Standards provisions of the relevant
Laboratories (RRSL) undertake statute for performing such
verification, approval and functions is in the nature of a
calibration of weighing and compulsory levy and are
measuring instruments; deposited into the Government
account.
· Regional Transport Officers
(RTO) issue fitness certificate to Such activities are purely in motor vehicles; public interest and are undertaken as mandatory and · Directorate of Boilers inspects statutory functions. These are and issues certificates for boilers; not to be treated as services or provided for a consideration.
Therefore, such activities · Explosive Department inspects assigned to and performed by and issues certificate for a sovereign / public authority petroleum storage tank, LPG/CNG under the provisions of any tank in terms of provisions of the law, do not constitute taxable relevant laws. services. Any amount / fee collected in such cases are not Authorities providing such to be treated as consideration functions, required to be for the purpose of levy of performed as per law, may collect service tax.
specific amount or fee and the amount so collected is deposited However, if a sovereign / public into government account. authority provides a service, Whether such activities of a which is not in the nature of sovereign / public authority, statutory activity and the same performed under a statute, can be is undertaken for a considered as 'provision of consideration (not a statutory service' for the purpose of levy of fee), then in such cases, service tax and the amount or fee service tax would be leviable collected, if any, for such purposes as long as the activity can be treated as consideration for undertaken falls within the the services provided? scope of a taxable service as defined.
The clarification does not come to the help of the appellant as the clarification relates to provisions of service where a fee is prescribed and it clearly states that , if a sovereign / public authority provides a 11 ST/41820/2013 service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined.
6. Having laid out the legal context, we now examine the issues involved:
(A) Whether Tamil Nadu Medical Services Corporation Ltd. is an instrumentality of the Sovereign State and is exempted for its activities from Service tax.
(B) Whether the services rendered by TNMSCL to the Government of Tamil Nadu in warehousing and related activities for drugs and medicines is classifiable under the category of 'Storage and Warehouse Services' in terms of Section 65(102) read with section 65(105)(zza) of the Finance Act 1994.
(C) Whether the services rendered by TNMSCL in relation to loading, unloading, packing, unpacking and transporting of drugs to Government Hospitals should not be classified under the category of 'Cargo Handling Services' in terms of section 65(23) read with section 65(105)(zr) of the Finance Act 1994.
(D) Whether the extended time limit for issue of SCN is valid as there is no evidence that TNMSCL had attempted to evade Service Tax liability, neither is there evidence of fraud or suppression. Hence the question of paying interest and penalty does not arise.
6.1 From the submissions made by the appellant it is seen that appellant-company was created by a G.O. of the Government of Tamil Nadu and not by an Act of the State Legislature. It is admittedly an autonomous corporation registered and incorporated under the 12 ST/41820/2013 Companies Act, 1956. The company is registered for service tax purposes with the Service Tax Department under the categories of "Transport of Goods by Road" and "Management Consultancy Services"
which is not under dispute. Further from clause III (A) of the 'Memorandum of Association of TNMSCL' a sample of the various objects of the company are listed below to give a flavour of its activities.
Clause III (A) states:
(A) Main object to be pursued by the company on its incorporation are:-
..........
4. To establish modern Warehouse and Engineering workshops to manufacture, assemble, repair or otherwise maintain various medical equipments, surgical instruments, diagnostic equipment, fire-fighting equipment, furniture and fittings including hospital furniture and also to undertake civil and other general maintenance of hospitals. .........
5. To buy, sell, supply, distribute, store, stock, maintain and otherwise handle, deal in and carry on business in all kinds and varieties of patent and non-patent vetyerinary science, medicines, drugs, mixtures, formulation, capsules, tablets, pills, powder, pharmaceutical, chemical, medical and medicinal products, preparation and materials, sterilized injections, vaccines, immunogens, chemical and surgical dressings relating to all kinds of animal husbandry i.e. live-stock, veterinary, aquatic living poultry, equine, canine etc. whether domestic or otherwise.
Clause III (B) states:
(B) The objects incidental or ancillary to the attainment of the above main objects are:-
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3. To establish warehouses, storage rooms, godowns and cold storage facilities in various districts in Tamil Nadu for providing safe and convenient places for storage of medicines, surgical products and other medical and para-
medical products of all kinds and description.
.......
9. To accept advance payment, deposits and / or to lend money to any department, institution, person, firm association, society, corporation or company on such terms and on such security as may be seen expedient and to give guarantees and indemnities.
10. To invest and deal with the money of the corporation which is not immediate required in such manner and upon such security as the company may from time to time think fit.
.........
13. To enter into partnership or any arrangements for sharing of or pooling of profits, including amalgamation, joint ventures, reciprocal concessions or otherwise with any person, firm, association or body corporate, carrying on or engaged in or about to carry on or engage in any business or transaction which may seem capable of being carried on or conducted.
15. To enter into any arrangement with any Government, local authority or Corporation or Boards etc. which may seem conducive to the Corporation 's objects and / or to obtain from Government or any authority any rights, privileges and / or concessions, which the company may think fit or desirable to obtain and to carry out, exercise and to comply with any such arrangement, rights, privileges and concessions.
Clause III (C) states:
(C) Other objects for which the company is established are:-
..........14
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5. To manufacture or deal in various inorganic and organic compounds.
6. To manufacture or deal in acids, alkalies or such other kinds of chemicals either in solid, liquid or gaseous form.
7. To carry on the business of manufacture and dealing in toilet preparations, colours, dyes, glue paper of all kinds plastics rexines, woven and non-woven fabrics, cellophane, paper, adhesive-tapes and other articles.
8. To undertake, transact and execute all kinds of agency business and also trusts of all kinds.
9. To carry on the business of transportation of goods and commodities either directly or through others.
10. To act as advertising agents either directly or through others.
11. To carry on the business of packing and forwarding agents.
Again, from the 'Articles of Association of TNMSCL' it is seen that the Company is a Public Limited Company. Clause 7 of the 'Article' allows the Board of Directors to allot or otherwise dispose of the Company's shares to such persons on such terms and conditions as they think fit. Clause 99 states that profits made on the sale, or a part of the undertaking shall be made available for dividend. These make it clear that the Corporation is a separate legal entity which is not 'Governmental' in nature and is like any other private company. The objective of the company is multifarious and relates to activities which are not in the exclusive domain of government and can also be provided by private persons. The company is hence not discharging mandatory and statutory functions and are receiving a consideration for their services. The adequacy or otherwise of the consideration received is not a relevant issue. The income derived by the appellant 15 ST/41820/2013 from its trading activities is not income of the State, but its own to be spent by the Company. As per G.O. dt.2.6.2006, after the introduction of the Finance Act, 1994, the Government of Tamil Nadu changed the nomenclature of the 5% element - monies collected from the government from 'Services Charges' to 'Administrative Charges'. However, this may not come to their help as it is an accepted legal principle that the nomenclature of a service, is not decisive of the nature of the service provided. Even as per the educational Guide cited by the appellant, they are not covered under the definition of 'governmental authority'. The relevant portion is cited below.
"7.3.1 Are various corporations formed under Central Acts or State Acts or various government companies registered under the Companies Act, 1956 or autonomous institutions set up by special acts covered under the definition of 'governmental authority'?
Answer: No. As stated earlier the appellant company is also not set up by an Act of the State Legislature. They further claim that they are established with 90% or more participation by way of equity or control by Government and they carry out functions entrusted to a municipality under article 243W of the Constitution with respect to Public health. From the Memorandum and Articles of Association of TNMSCL listed above, it is clear that the Corporation is a separate legal entity which is not 'Governmental' in nature and is like any other private company. State activities are multifarious. Considering the wide ramifications, sovereign functions should be restricted to those functions, which are primarily inalienable, and which can be performed by the State alone.
In its judgment in Agricultural Produce Market Committee Vs Ashok Harikuni [AIR 2000 SC 3116] the Apex Court held in para 22;16
ST/41820/2013 "Even if a statute confers on any statutory body, any function which could be construed to be "sovereign" in nature would not mean every other functions under the same statute to be also sovereign. The Court should examine the statute to severe one from the other by comprehensively examining various provisions of that statute."
Para 33 of the judgment further amplifies this point;
"33. So, sovereign function in the new sense may have very wide ramification but essentially sovereign functions are primary inalienable functions which only State could exercise. Thus, various functions of the State, may be ramifications of 'sovereignty' but they all cannot be construed as primary inalienable functions. Broadly it is taxation, eminent domain and police power which covers its field. It may cover its legislative functions, administration of law, eminent domain, maintenance of law and order, internal and external security, grant of pardon. So, the dichotomy between sovereign and non-sovereign function could be found by finding which of the functions of the State could be undertaken by any private person or body. The one which could be undertaken cannot be sovereign function. In a given case even in subject on which the State has the monopoly may also be non-sovereign in nature. Mere dealing in subject of monopoly of the State would not make any such enterprise sovereign in nature. Absence of profit making or mere quid pro would also not make such enterprise to be outside the ambit of "industry" ......"
(emphasis added) The impugned activities of the appellant are not primary inalienable functions and are liable to be done by a private body. It is also relevant to note the State Government has issued a conditional notification exempting sales tax payable by TNMSCL for the drugs and medicines procured and distributed to the various medical institutions. (G.O.Ms No 431 dated 18/12/96). The exemption is not on account of its sovereign functions. Had the exemption not been granted or if the conditions of the notification are violated TNMSCL would be liable to pay sales tax. The said notification is reproduced below:
NOTIFICATION 17 ST/41820/2013 "In exercise of the powers conferred by sub-section (1) of section 17 of the Tamil Nadu General Sales Tax Act, 1950 (Tamil Nadu Act 1 of 1950), the Government of Tamil Nadu hereby makes an exemption in respect of the tax payable by Thiruvalar Tamil Nadu Medical Services Corporation Limited, Chennai - 14 under the said Act on the drugs and medicines procured and distributed to the Medical institutions of the Government of Tamil Nadu, subject to the following conditions, namely:-
i) Such drugs and medicines shall be clearly marked as "Government supply - Not for Sale"
ii) The Corporation shall not sell the said drugs and medicines in the open market
2. This notification shall be deemed to have come into force on the 12th April 1993.
(emphasis added) The notification states exemption in respect of "tax payable", this shows that had the notification not been issued TNMSCL would have to pay sales tax and the benefit of 'sovereign function' has not been recognized by the State Government itself in the appellant's case. Further as held in 'In re. The Bill to Amend the Sea Customs Act' (supra) the immunity granted to the States in respect of Union taxation, under Art. 289(1) does not extend to indirect taxes. For the reasons discussed above we are of the opinion that in the absence of a specific notification by the Central Government exempting their activities from service tax, like that issued by the State Government in the case of sales tax reproduced above, the appellant will not be eligible to claim exemption from service tax citing the 'sovereign function' principle.
6.2 The next issue is whether the services rendered by TNMSCL to the Government of Tamil Nadu is classifiable under the category of 'Storage and Warehouse Services' in terms of Section 65(102) read with section 65(105)(zza) of the Finance Act 1994. The relevant provisions of Finance Act, 1994, relating to storage & warehousing 18 ST/41820/2013 service which came into effect from 16.08.2002 are reproduced below for ease of reference:
Section 65(102):
"'storage and warehousing' includes storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage"
Section 65(105) "'taxable service' means any service provided or to be provided to any person, by a storage or warehouse keeper in relation to storage and warehousing of goods"
Further, the Board explained the scope of storage and warehousing service in F.No.B11/1/2002-TRU dated 01.08.2002 as follows:
"
3. Storage and warehousing service for all kinds of goods are provided by public warehouses, private warehouses, by agencies such as the Central Ware Housing Corporation, Air Port Authorities, Rallways, Inland Container Depots, Container Freight Stations, storage godown and tankers operated by private individuals etc. The storage and warehousing service provider normally make arrangement for space to keep the goods, loading, unloading and stacking of goods in the storage area, keeps inventory of goods, makes security arrangements and provide insurance cover etc. Service provided in ports has already been covered under the category of port service.
............
5. It has been stated that in some case a storage owner only rents the storage premises. He does not provide any service such as loading/unloading, stocking security etc. A point has been raised as to whether service tax would be leviable in such cases. It is clarified that mere renting of space cannot be said to be in the nature of service provided for storage or warehousing of goods. Essential test is whether the storage keeper provides for security of goods, stacking, loading/unloading of goods in the storage area." The appellant has not contested that they are operating their own warehouses where medicines procured by them are stored prior to distribution to various Government Hospitals in the state of Tamil 19 ST/41820/2013 Nadu. Their main averments are based on the Boards Circular and Education Guide extracted at para 5.2 above. We have found that the Boards Education Guide and Master Circular do not come to their help for reasons discussed above. The appellant has stated that they discharge a statutory function and collect only a basic cost of the drugs and deposit the same in the account of government. There is no consideration received. Therefore, it would not be correct to charge Service Tax in relation to storage and warehousing services. This legal issue has been examined at para 6.1 above and for the reasons discussed we have found no merits in their claim for exemption from tax citing the 'sovereign function' principle. We hence do not find any merits in their appeal in this regard.
6.3 TNMSCL have stated that the activity in relation to loading, unloading, packing, unpacking and transporting of drugs to Government Hospitals should not be classified under the category of 'Cargo Handling Services' in terms of section 65(23) effective from 16.08.2002 read with section 65(105)(zr) of the Finance Act 1994, reproduced below for ease of reference:
"cargo handling service" means loading, unloading, packing or unpacking of cargo and includes,-
(a) cargo handling services provided for freight in special containers or for non containerised freight, services provided by a container freight terminal or any other freight terminal, for all modes of transport, and cargo handling service incidental to freight; and
(b) service of packing together with transportation of cargo or goods, with or without one or more of other services like loading, unloading, unpacking, but does not include, handling of export cargo or passenger baggage or mere transportation of goods"
As per provisions of Section 65(105)(z) of the Act.
"taxable service means any service provided or to be provided to any person, by a cargo handling agency in relation to cargo handling services"20
ST/41820/2013 It is seen from the facts of the case that the impugned goods are received and stored in the warehouses. Subsequently samples are sent for testing and on completion of the testing process, the goods are dispatched to respective destinations as per the requirements. This being the factual position, the essential activities undertaken by the assessee like packing, repacking, loading, unloading etc. are a part of cargo handling service. In fact sub clause 11 of clause III (C) of the 'Memorandum of Association of TNMSCL' dealing with other objects for which the company is established, states 'To carry on the business of packing and forwarding agents.' The appellant has not mainly contested the classification they are aggrieved that the amount received by them cannot be considered as 'consideration', hence the taxability and valuation adopted is not correct. They are receiving 1.5% deduction towards 'handling and testing' charges from the suppliers. It is the appellants case that TNMSCL had a policy whereby each individual supplier was responsible for providing a certificate as to the quality of the drugs supplied. But the method of execution was changed, and it has become standard policy for TNMSC to withhold the amount from the suppliers and to get the testing done at the suppliers' cost, as per the tender document. However, the fact remains that these charges are not statutory fees and hence are a consideration for their service. The amounts are also accounted for under 'income from operations' in their profit and loss account. If any part of this payment is also paid as statutory fees for testing to Government Authorities on behalf of their suppliers, it is for the appellant to bifurcate the said amount received from the total receipts separately towards cargo 'handling' and for 'testing'. They should have disclosed the factual 21 ST/41820/2013 information within their exclusive knowledge. We feel that the matter needs to be considered afresh by the Original Authority after giving the appellant sufficient opportunity to put forward his submissions both on law and fact before deciding the matter.
7. The appellant has averred that the extended time limit for issue of SCN is not valid as there is no evidence that TNMSCL had attempted to evade Service Tax liability, nor is there evidence of fraud or suppression. Hence the question of paying interest and penalty does not arise. We have gone through the facts of the case and the impugned order and find that the main issue involved is relating to their claim of 'sovereign function' pertaining to activities, like that of the appellant which they claim takes the colour of governmental activities and is subject to exemption from taxation. We find that the company is registered for service tax purposes with the Service Tax Department under the categories of "Transport of Goods by Road" and "Management Consultancy Services" and they have not disputed the same on grounds of 'sovereign function'. Further the appellant has stated that per G.O.No.431 dt.18.12.1996 exemption has been granted in respect of sales tax payable by TNMSCL for the drugs and medicines procured and distributed to the various medical institutions. This in itself shows that TNMSCL is not a 'sovereign/ governmental authority'' even by the State Governments own understanding as discussed above. This being so, there should not have been any confusion in the interpretation of law especially in the light of the Apex Courts advisory 'In re. The Bill to Amend the Sea Customs Act' in the early 1960's. The declaratory responsibility of an assessee in the self-assessment regime is much bigger and the non-disclosure of taxable activity in the 22 ST/41820/2013 ST-3 Return and non-payment of duty has to be viewed strictly and can only be held to be an act of suppression of facts with an intention to evade payment of duty. Hence the extended period of limitation has been rightly invoked and the appeal in this regard is without merit.
8. We have examined the case laws cited by the appellant. The judgment of the Apex Court in the case of Indian Oil Corporation Ltd Vs Chief Inspector of Factories [1999 (113) ELT 761 (SC)] is in context of Section 2(n) of the Factories Act. The question sought to be answered therein was, who is to be deemed 'occupier' of a factory of a government company incorporated under the Indian Companies Act? The issue is distinguished from the facts of this case which pertains to taxation. The more relevant judgement pertaining to indirect taxation is 'In re. The Bill to Amend the Sea Customs Act' (supra) where the immunity granted to the States in respect of Union taxation, under Art. 289(1) was found to be not applicable. Similarly, the decision of a coordinate Bench of this Tribunal in UTI Technologies Services Ltd Vs CST, Mumbai [2012 (26) STR 147 (TRI-MUM)] relates to the issue of PAN cards on behalf of the Income Tax Department. Collection of taxes has been recognized as a core activity of government. A taxation department of the Union cannot be equated with a corporation and hence the facts are not similar. We have above, discussed the reasons why TNMSCL cannot be considered as having discharged sovereign functions based on facts that are peculiar to the appellant's case. We have also discussed relevant case laws pertaining to taxation matters, in this regard. Hence, we find that the decisions cited by the appellant are distinguished and do not come to their help. 23
ST/41820/2013
9. Having regard to the discussions above, we modify the impugned order to the extent that we remand the matter back to the Original Authority to decide the issue of 'Cargo Handling Services' only, afresh. The lower authority shall follow the principles of natural justice and afford a reasonable and time bound opportunity to the appellant to state their case both orally and in writing if they so wish, before issuing a speaking order in the matter. The appellant should also co-operate with the adjudicating authority in completing the process expeditiously and in any case within ninety days of receipt of this order. The impugned order is otherwise upheld except for the matter remanded as indicated above. The appeal is disposed of accordingly.
(Pronounced in open court on 12.09.2023)
(M. AJIT KUMAR) (P. DINESHA)
Member (Technical) Member (Judicial)
Rex