Services Provided to IIT & NIT Exempt From Service Tax: Supreme Court Holds After Interpreting 'Or' & Semicolon In Exemption Notification

In an interesting judgment, the Supreme Court held that the Indian Institute of Technology and the National Institute of Technology will come under the Mega Service Tax Exemption Notification issued by the Department of Revenue in 2012(and amended and clarified by a subsequent notification issued in 2014).

The issue in the case related to the service tax liability of M/s Shapoorji Pallonji and Company Pvt.Ltd. over the contract works executed for the IIT-Patna and NIT-Rourkela.

In 2012, the Department of Revenue issued a Mega Service Tax Exemption Notification, in exercise of powers under Section 93 of the Finance Act, 1994, specifying the services exempted from service tax. This notification was further amended on January 30, 2014. 

As per the notification, services provided to a "governmental authority" are exempted from service tax. "Governmental authority" was defined as per Clause 2(s) of the 2014 notification 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 High Courts of Patna and Orissa, interpreting the clause, held that the service tax was not leviable on the contracts done for the IIT and the NIT. 

The Department challenged the High Courts' judgments by relying on the last line in the definition clause, which is a condition that there should be 90% or more participation by the government by way of equity or control. So, it was the case of the Department that an institute cannot be a "governmental authority" merely because it was set up by a statute; in addition to that, there should be 90% or more government control.

The case, decided by a bench comprising Justices S Ravindra Bhat and Dipankar Datta, turned on the impact of the word "or" in between sub-clauses (i) and (ii) of the above definition and the implication of the use of semi-colon after clause (i).

The judgment authored by Justice Datta held that "or" in the definition clause cannot be read as "and", as argued by the Department, in view of the plain and unambiguous language.

"Going by the golden rule of interpretation that words should be read in their ordinary, natural, and grammatical meaning, the word “or” in clause 2(s) clearly appears to us to have been used to reflect the ordinary and normal sense, that is to denote an alternative, giving a choice; and, we cannot assign it a different meaning unless it leads to vagueness or makes clause 2(s) absolutely unworkable," the judgment stated. 

The judgment also noted that the use of the punctuation is also relevant in interpreting the meaning.  Referring to the Supreme Court's judgment in Kantaru Rajeevaru vs. Indian Young Lawyers Association & Ors, the Court said,  "punctuation, though a minor element, may be resorted to for the purpose of construction."

The Court said that the use of a semicolon is not a trivial matter but a deliberate inclusion with a clear intention to differentiate it from sub-clause (ii). While there is a semicolon after sub-clause (i), sub-clause (ii) closes with a comma. In this backdrop, the Court observed :

"This essentially supports the only possible construction that the use of a comma after sub-clause (ii) relates it with the long line provided after that and, by no stretch of imagination, the application of the long line can be extended to sub-clause (i), the scope of which ends with the semicolon. We are, therefore, of the opinion that the long line of clause 2(s) governs only sub-clause (ii) and not sub-clause (i) because of the simple reason that the introduction of semicolon after subclause (i), followed by the word “or”, has established it as an independent category, thereby making it distinct from sub-clause (ii). If the author wanted both these parts to be read together, there is no plausible reason as to why it did not use the word “and” and without the punctuation semicolon."

The Court also said that the Department has not cited any example of such statutory authorities having 90% or more government control. It added that an interpretation which makes the provision unworkable cannot be adopted.

"Merely because the statute does not yield intended or desired results, that cannot be reason for us to overstep and cross the Lakshman Rekha by employing tools of interpretation to interpret a provision keeping in mind its outcome. Interpretative tools should be employed to make a statute workable and not to reach to a particular outcome." 

With these observations, the appeals were dismissed, affirming the views taken by the High Courts of Patna and Orissa.

Case Title : Commissioner, Customs Central Excise and Service Tax, Patna v. M/s Shapoorji Pallonji and Company Pvt Ltd; Union of India v.M/s Shapoorji Pallonji and Company Pvt Ltd

Citation : 2023 LiveLaw (SC) 885

Click here to read the judgment