Karnataka HC: Civic Body Not Exempt from Paying Service Tax on Payments Made for obtaining Third-Party Services

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Published on: December 23, 2023 at 12:45 IST

The Karnataka High Court has determined that the Bruhat Bengaluru Mahanagara Palike (BBMP) or civic body cannot claim exemption from paying service tax on payments made for acquiring third-party services to provide computer education to individuals from economically weaker sections.

Justice Suraj Govindaraj, presiding over a single-judge bench, sided with petitioners Vasundhara A.G.K and others, directing the respondent to review their representations within four weeks.

The Court emphasized the obligation to calculate and release the service tax due on amounts paid by the respondent to the petitioners within the stipulated timeframe.

The dispute arose from the BBMP’s introduction of a scheme to establish Computer Educational Institutes in the Bangalore Mahanagara Palike area, offering free computer education to economically disadvantaged individuals.

The petitioners, having qualified for the initiative, were engaged by the corporation for three years under a work order. Despite rendering services without complaint, the petitioners faced issues with payment, specifically the service tax component.

Petitioner approached the high court seeking direction for the respondent to address their representation, a plea granted by the court.

Following the court’s directive, the respondent released the balance amount but did not settle the service tax portion.

The petitioners highlighted the respondent’s refusal to reimburse the service tax despite partial payment by the petitioners, citing legal advice suggesting non-liability.

The Court observed that the petitioners provided services on behalf of the corporation, making it the corporation’s duty to pay the service tax.

The BBMP argued against service tax liability, citing Section 66D(a) of the Finance Act, 1994, claiming exemption for local authorities in transaction services.

The court held that the BBMP’s involvement did not absolve them of paying service tax, as the payment was not directly to the corporation.

The petitioners rendered services, and the corporation was obligated to compensate them. The court clarified that the corporation acted as the service availer, making it inappropriate to categorize the transaction under Section 66D(a) of the Finance Act, 1994.

The ruling emphasized the distinct nature of the case, where the corporation paid for services directly to the petitioners, and upheld the petition accordingly.

Case Title: Vasundhara A.G.K AND The Bruhat Bangalore Mahanagara Palike

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