Supreme Court interprets the definition of “Governmental authority” under Service tax

This tax alert summarizes a recent decision of the Supreme Court (SC) interpreting the term “governmental authority” as defined in clause 2(s) of Notification No. 25/2012 dated 20 June 2012 under Service tax. The said term was defined as follows:

“Governmental authority” means an authority or a board or any other body;
(i) set up by an Act of Parliament or a State legislature; or
(ii) established by Government, 
with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution.

The question involved was whether or not the long line after sub-clause (ii) i.e., “with 90% or more …of the Constitution” should be read with sub-clause (i).

The key findings of the SC are:

• There is no need to resort to rules of interpretation when the language of the statute is clear and unambiguous. Harmonious construction is required only when a provision is ambiguous or lacks clarity. 
• A statute should be interpreted in a manner to achieve their ordinary, natural and grammatical meaning. 
• The word “or” between sub-clauses (i) and (ii) indicates the independent and disjunctive nature of sub-clause (i). The use of semicolon in sub-clause (i) and comma in sub-clause (ii) indicates that the long line must be read only with sub-clause (ii). 
• Interpretative tools should be employed to make a statute workable and not to reach to a particular outcome.

SC dismissed the appeal filed by the revenue and upheld the orders passed by the High Courts in favour of taxpayer.

Comments

• It is relevant to note that the definition of “governmental authority” under GST is akin to the one under service tax. Thus, the principles laid down by the SC in interpreting such term may apply under GST as well. Businesses may need to take decision on exemptions under GST in accordance with SC’s interpretation.
  
• Since the term “Government entity” is also defined under GST law in similar manner, one may need to analyse the implication in light of the Apex court ruling.
• This judgement may have impact on few advance rulings under GST where the authority held that the condition of 90% participation etc. is applicable to both the sub-clauses (i) and (ii).
• For the purpose of obligation to deduct tax at source under GST, while clarifying on the Notification specifying certain category of persons, Circular dated 31 December 2018 on similar definition elucidated that long line was applicable to both the sub-clauses (i) and (ii).