CESTAT Quashes Service Tax on TASMAC Bar Licenses

Tamilnadu State Marketing Corporation Ltd. Vs Commissioner of GST and Central Excise (CESTAT Chennai)

Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has set aside demands for service tax on license fees collected by the Tamilnadu State Marketing Corporation (TASMAC) from bar contractors for periods from March 29, 2013, onwards. The Tribunal’s consolidated order, addressing three appeals by TASMAC, affirmed that these activities, after a specific amendment to state rules, constitute a statutory function and thus fall under the negative list of services, exempting them from service tax.

TASMAC’s Role and Department’s Demand

TASMAC, a wholly-owned undertaking of the Government of Tamil Nadu, holds the exclusive privilege for wholesale and retail distribution of Indian Made Foreign Liquor (IMFL) in the state. As part of its operations, TASMAC grants licenses to private contractors to operate bars within or adjoining its retail outlets, allowing them to sell eatables and collect empty liquor bottles. In return, these contractors pay a license fee to TASMAC.

The Department of GST and Central Excise was of the view that this issuance of licenses amounted to a “service” as defined under Section 65B(44) of the Finance Act, 1994, with the license fee serving as consideration. They contended that this service was not covered under the negative list (Section 66D) or any mega exemption notification. Consequently, show cause notices were issued to TASMAC’s outlets in Villupuram, Cuddalore, and Tiruvannamalai districts, demanding service tax on the gross license fees received during April and May 2013, along with interest and proposed penalties. The total demand amounted to approximately ₹28.14 lakh across the three districts.

Following due process, the Adjudicating Authority confirmed these demands, interest, and penalties, prompting TASMAC to appeal to the CESTAT.

Appellant’s Arguments: Sovereign Function and Statutory Backing

TASMAC, represented by its advocate, argued that it acts as an instrumentality of the state, carrying out activities on behalf of the Tamil Nadu Government. The appellant emphasized its exclusive privilege in liquor distribution as a state subject, likening its sovereign rights to those involved in mining, which are exclusively handled by the state. TASMAC asserted that it merely collected a 1% agency commission on this activity, for which it had already paid service tax, remitting the remaining 99% to the state exchequer.

Crucially, TASMAC highlighted that the issue had already been decided in its own favor by the CESTAT in previous orders (F.O.Nos. 41015-41047/2018 dated April 3, 2015, and F.O.Nos. 40054-40061/2025 dated January 9, 2025). These prior rulings were presented as binding precedents for the current appeals.

Department’s Stance and Prior Tribunal Observations

The Department reiterated the findings of the impugned orders, maintaining that the license fees were subject to service tax.

The CESTAT, while hearing the current appeals, referred extensively to its own earlier ruling in TASMAC’s case (F.O.Nos. 41015-41047/2018 dated April 3, 2015). In that detailed order, the Tribunal had analyzed the definition of “service” under the negative list regime (effective July 1, 2012) under Section 65B(44) of the Finance Act, 1994.

The Tribunal’s earlier observations included:

• Sovereign Function Argument: The Tribunal had previously disagreed with TASMAC’s contention that its activities were purely “sovereign functions” excluded from service tax. It noted that the decision to award contracts for running bars was a Board decision and not directly comparable to a sovereign function of the state. It observed that TASMAC’s financial statements were prepared under the Companies Act, 1956, and audited by the Comptroller and Auditor General under the same act, implying a commercial, rather than purely governmental, character.
• CBEC Circulars: The Tribunal had referred to CBEC Master Circular No. 96/7/2007-ST and Circular No. 89/7/2006, which clarified that if a sovereign/public authority provides a service not in the nature of a statutory activity and for consideration (not a statutory fee), then service tax would be leviable.
• High Court Rulings: The Tribunal’s previous order also cited various High Court judgments which held that even government authorities are liable for service tax if they provide services not in the nature of statutory activity. These included:
  • Karnataka State Warehousing Corporation Vs CST Bangalore (2010 / 2011): Where the Karnataka High Court upheld tax liability for the normal period, though not beyond.
  • Karnataka Government Insurance Department Vs Asst.CCE Bangalore (2012): Which echoed the view that services not inherently statutory are taxable.
  • Greater Noida Industrial Developmental Authority Vs CCE & CE (2015): A similar ruling by the Allahabad High Court.
• CBEC Education Guide (2012): The Tribunal had also referenced the CBEC Education Guide, which clarified that statutory bodies, corporations, or authorities constituted under an Act of Parliament or State Legislature are generally not considered “Government” or “local authority” for service tax purposes, and thus regulatory bodies and autonomous entities are separate juristic entities.

The Decisive Factor: Amendment to State Rules

A pivotal development highlighted by the Tribunal was the amendment to the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. Specifically, the insertion of Rule 9A, effective March 29, 2013, accorded statutory backing to TASMAC’s activity of granting bar operating privileges through tenders. This rule stipulated that TASMAC, “as agency,” would collect the tender amount from successful bidders and remit it to the Government on or before the 25th of the following month, retaining only 1% as “agency commission.”

The Tribunal, in its earlier ruling (F.O.Nos. 41015-41047/2018), concluded that “from 29.03.2013, the impugned services of TASMAC would definitely fall in the negative list of services as statutory function being carried out by them based on authority of law.”

CESTAT’s Final Decision

Following the precedent set by its own earlier decisions, particularly the one from April 3, 2015, which was also followed in the subsequent ruling of January 9, 2025, the CESTAT Chennai Bench applied the same logic to the current appeals.

The Tribunal held that:

1. Period prior to July 1, 2012 (October 2008 to June 30, 2012): Demand of service tax under ‘Support of Business and Commerce Services’ was not sustainable and was set aside. (Though not directly applicable to the current appeals’ period of dispute, this was part of the earlier comprehensive ruling).

2. Period July 1, 2012, to March 28, 2013: Service tax liability was applicable under Section 65B(44) of the Finance Act, 1994, as the statutory backing was not yet in place.

3. Period from March 29, 2013, onwards: There would be no service tax liability. The Tribunal emphasized that the services became a “statutory function” carried out by TASMAC based on the authority of law (Rule 9A). This directly covers the periods of dispute (April and May 2013) in the current appeals.

4. Penalties: Penalties imposed under Sections 77 and 78 of the Finance Act, 1994, were set aside, recognizing that the dispute was one of interpretation, with conflicting circulars and High Court judgments indicating a complex legal landscape.

In conclusion, the CESTAT Chennai Bench allowed all three appeals by TASMAC. The Commissioner of Central Excise, Puducherry’s orders, which had confirmed the service tax demands and penalties, were deemed unsustainable and set aside, providing consequential benefits to the appellant.

FULL TEXT OF THE CESTAT CHENNAI ORDER

These three appeals preferred by the Appellant pertain to three Order-in-Original No. 11/2016(C)(ST) dated 05.02.2016 and Orders-in-Original Nos. 13 & 14/2016(C)(ST) dated 08.02.2016 issued by the same Adjudicating Authority, involving identical facts and question of law, and hence are taken up together for disposal vide this common order.

2.1 The facts in common are that M/s. Tamilnadu State Marketing Corporation (TASMAC), the Appellant herein, is a 100% Government of Tamilnadu undertaking and is a company incorporated under the Companies Act, 1956. The Appellant is vested with the exclusive privilege of wholesale distribution as well as retail vending of Indian Made Foreign Liquor (IMFL) in the State of Tamilnadu as per the provisions of Tamil Nadu Prohibition Act, 1937. The Appellant has various shops (Retail Outlets) and many of them have Bars attached to them. The Appellant is authorized by the State Government to float tenders for allowing selling of eatables in the Bar located within or adjoining the TASMAC shops, and also to collect the empty liquor bottles left by the patrons in the Bar. In lieu of such Licence given, the successful bidders (Contractors / Operators) have to pay a Licence Fee.

2.2 The Department was of the view that such issuance of Licence permitting contractors to conduct their Business within the Bar tantamount to service as defined under Section 65B(44) of the Finance Act, 1994, for which the License fee paid by the Contractors was the consideration. It was also observed that such service is neither covered under the Negative list as specified under Section 66D of the Finance Act, 1994, nor is covered under the mega Exemption Notification No. 25/2012-ST dated 20.06.2012. Department therefore issued Show Cause Notices in respect of the outlets of the Appellant in the districts viz., Villupuram, Cuddalore and Tiruvannamalai, demanding Service Tax on the gross amount of Licence fee received by the Appellant from the Bar contractors during the months of April 2013 and May 2013 along with appropriate interest and proposed to impose penalty. The demand notices issued to the TASMAC (Appellant) along with the period and the respective Service Tax demand, are tabulated as under: –

2.3  After due process of law, the Ld. Adjudicating Authority vide the aforementioned three Orders-in-Original, which are the impugned herein had confirmed the demand of service tax along with interest and imposed penalty under Section 76 read with Section 78B of the Finance Act, 1994 as more specifically detailed therein.

2.4 Aggrieved by the impugned Orders-in-Original, the Appellants have preferred these appeals and are before this Tribunal.

3.1 The Ld. Advocate Mr. R. Venkatanarayanan has appeared and argued for the Appellant. He submits that the Appellant during the relevant period received an agency commission of 1% for this activity on which they have paid service tax and the balance 99% is remitted to the State exchequer. It is further submitted that the Appellant is nothing, but an instrumentality of this state as recognized by the High Court Jurisdictional High Court in the case of Hotel & Bar Assciation of Tamil Nadu Vs. Secretary to Government, Commercial Taxes Dept., TN [W.P. No. 22072 of 2012 dated 31.03.2015] and is carrying out activities only on behalf of the State. The Ld. Advocate has submitted that TASMAC exercises its sovereign rights provided by the State Government of Tamil Nadu to retail liquor and liquor is a state subject. It is his submission that such sovereign rights of the Appellant are best equated with rights such as mining rights, i.e. those rights which are all handled exclusively by the State.

3.2 It is further submitted that the issue that has arisen herein has already been decided in the Appellant’s own case by this Tribunal vide [F.O.Nos. 41015-41047/2018 dated 03.04.2015] and [F.O.Nos. 40054-40061/2025 dated 09.01.2025].

4. The Ld. Authorized Representative Ms. Rajini Menon appeared and argued for the Department. She reiterates the findings in the impugned orders.

5. We have heard both sides, perused the appeal records and also the earlier orders of this Tribunal submitted as relied upon.

6. We note that in the Appellant’s own case vide [F.O.Nos. 41015-41047/2018 dated 03.04.2015], the Tribunal has held as under: –

“6.8 However, the position changes after the introduction of the Negative List regime w.e.f. 1.7.2012, from which date the activities which were liable to service tax under Finance Act, 1994 were given a much wider and broad banded scope in Section 65B (44) as under :

“(44) “service” means any activity carried out by a person for another for consideration and includes a declared service, but shall not include-

(a)  an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Explanation 1. – for the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,-

(A) The functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity;’ or

(C) the duties performed by any person as a Chairperson or a Member of a Director in a body established by the Central Government of State Governments or local authority and who is not deemed as an employee before the commencement of this section.

Explanation 2 – for the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

….  …”

6.9 Then, w.e.f. 1-7-2012, all services except those excluded by Section 65B (44), in particular, transfer of title in goods, deemed sale, transaction in money etc. will be liable to service tax or those falling in the negative list of services under Section 66D ibid or those which were specifically exempted otherwise, would be exigible to service tax levy.

6.10 Ld. Advocate has been at pains to argue that the impugned activities of TASMAC is only that performed as a sovereign function and should be considered as a ‚service‛ by government which are excluded from the purview of service tax. We are not able to agree with this contention. 6.11 On the other hand, we find merit in the argument made by Ld. AR that the decision by the Board of Directors of TASMAC giving permission to award such contractors for running a bar, supplying eatables, cleaning, collecting empty bottles etc. is only a decision of the Board and cannot be brought on par with sovereign function exercised by the State. In fact, even from the copies of the audited balance sheets of TASMAC submitted along with the appeal, we find that the balance sheet has been prepared and audited only in terms of Section 227 (4A) of the Companies Act, 1956 and in terms with the accounting standards referred to in Section 211 (3C) of the Companies Act, 1956. Even the Supplementary Audit conducted by the Comptroller and Auditor General of India of TASMAC has been carried out in terms of Section 619 (3) (b) of the Companies Act, 1956 only. The activities of TASMAC for most of the period under dispute cannot therefore be said to be activities assigned and performed by sovereign / public authority under the authority of law.

6.12 We find that this aspect has been also clarified by the CBEC in Master Circular No.96/7/2007-ST dt. 23.08.2007, which is further reiterated by Circular No.89/7/2006 dt. 18.12.2006 where it is inter alia clarified as follows :

“However, if a sovereign / public authority provides a 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.”

6.13 We find that the adjudicating authority has taken note of the decision of the Tribunal which has referred to the above Board’s Circular in the case of Karnataka State Warehousing Corporation Vs CST Bangalore – 2010 (19) STR 32 (Tri-Bang.). In appeal filed by the department, the Hon’ble High Court of Karnataka in its judgement reported in 2011 (23) STR 126 (Kar.) with regard to taxability of the services provided by the Karnataka State Warehousing Corporation, while confirming that there would be no demand of tax beyond the normal period of limitation however did not interfere with the Tribunal decision upholding tax liability for the normal period of limitation.

6.14 Even when the Government authority performed a service which is not in the nature of statutory activity, the same has been held to be leviable to service tax as held by the Hon’ble Karnataka High Court in the case of Karnataka Government Insurance Department Vs Asst.CCE Bangalore – 2012 (26) STR 521 (Kar.), which ratio was echoed by the Hon’ble Kerala High Court as reported in 2012 (28) STR 337 (Kar.) and also by the High Court of Allahabad in the case of Greater Noida Industrial Developmental Authority Vs CCE & CE reported in 2015-TIOL- 1008-HC-ALL-ST.

6.15 Along with the introduction of Negative List of services, CBEC thought it proper to issue an Education Guide, giving the official Guidelines for new system of Levy of Service Tax on the basis of negative List w.e.f. 1.7.2012, wherein the issue whether entities like statutory body, corporation or an authority constituted under an Act passed by Parliament or State Legislature is ‚Government‛ or Local authority‛ was addressed in para 2.4.7 which reads as follows :

“2.4.10 Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State Legislature be ‘Government’ or “local authority”?

A statutory body, corporation or any authority created by the Parliament of a State Legislature is neither ‘Government’ nor a ‘local authority’ as would be evident from the meaning of these terms explained in point nos.2.4.7 and 2.4.8 above respectively. Such statutory body, corporation or an authority are normally created by the Parliament or a Stage Legislature in exercise of the powers conferred under article 53 (3) (b) and article 154 (2) (b) of the Constitution respectively. It is a settled position of law Government (Agarwal v. Hindustan Steel – AIR 1970 Supreme Court 1150) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under article 53 (10 of the Constitution and similarly to the Governor under article 154 (1). Such a statutory body, corporation or an authority as a juristic entity is separate from the state and cannot be regarded as Central or State government and also do not all in the definition of ‘local authority.

Thus regulatory bodies and other autonomous entitled which attain their entity under an act would not comprise either government or local authority.”

6.16 At the same time, we take note that in exercise of the powers conferred by sections 17-C, 17-D, 21 and 22-D read with Section 54 of Tamil Nadu Prohibition Act, 1937, in Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003 was amended by insertion of Rule 9A w.e.f. 29.03.2013 as follows :

“9A. Grant of privilege to run the bar:- The privilege of running bars may be granted to private parties by tender. The Board of the Corporation may decide the upset price and other terms and conditions of tender, from time to time, with the prior approval of the Commissioner of Prohibition and Excise. The Corporation, as agency shall collect the tender amount from the successful tenders and remit the same to the Government on or before teh 25th of the following month and the Corporation may retain 1% of the amount so collected as agency commission”.

This amendment, in our view, has accorded statutory backing and authority to TASMAC under law to grant the privilege of running bars, selling eatables and collecting empty bottles to private entities by tender. The entire tender amount from such successful tenderers, except for 1% of the collected amount retained as agency commission by TASMAC is remitted to the Government of Tamil Nadu.

6.17 In the circumstances, from 29.03.2013, the impugned services of TASMAC would definitely fall in the negative list of services as statutory function being carried out by them based on authority of law.

6.18 Hence we hold that appellants will be exigible to service tax liability in respect of the impugned activities only for the period 1.7.2012 to 28.03.2013 as ‘taxable service’ under Section 65B (44) of the Finance Act, 1994. The Ld. Counsel has argued that after the G.O. dt. 29.3.2013 was passed, the service tax department has agreed that appellant is liable to pay service tax only on the 1% of the payments made by contractors. He has placed copy of OIA No.262/2017 dt. 30.11.2017 before us. The Commissioner (Appeals) vide the said order has held that TASMAC is liable to pay service tax only on the 1% commission retained by them for the period April 2013 to March 2014 and April 2014 to March 2015. The ld. Counsel prays that the same benefit may be extended to the intervening period of 1.7.2012 to 28.3.2013. We are afraid that this contention is not acceptable as it is not based on any legal footing, but only principles of equity. There is no equity in fiscal law. Therefore, we hold that TASMAC is liable to pay service tax of the licence fees received for the period 1.7.2012 to 28.3.2013. So ordered.

6.19 Coming to the matter of penalty, we find that the entire dispute is one of interpretation and even from the record, we find that there are at least two circulars before introduction of negative list regime and one subsequent to that, which have found it necessary to dwell upon the liability to service tax in respect of such activities performed by instrumentalities of the State. We also find that the issue of liability to tax in respect of such activities was also subject matter of litigation as evidenced from number of High Court judgements that have been cited supra. In this scenario, there cannot be any penalty imposed on the appellant. So ordered.

6.19 To sum up,

(1) For the period October 2008 to 30.06.2012, the demand of service tax on the appellant under ‚Support of Business and Commerce Services‛ is not sustainable and is set aide with consequential benefit, if any, as per law.

(2) There shall be service tax liability on the appellant for the period 1.7.2012 to 28.03.2013 under the provisions of Section 65B (44) read with other relevant provisions of the Finance Act, 1994.

(3) There will not be any service tax liability during the period of dispute from 29.03.2013 onwards.

(4) Penalties imposed under Section 77 & 78 of the Finance Act, 1994 are set aside.

Appeal is partly allowed on above terms.”

7. We find that the said decision has been followed by this Tribunal in [F.O.Nos. 40054-40061/2025 dated 09.01.2025], in respect of the demands pertaining to outlets of the Appellant in eight other districts other than ones involved herein for the period of dispute covering April 2013 to March 2015 allowing the benefits as more specifically indicated therein including dropping of penalties imposed.

8. Given that the fact situation in these appeals are the same as that in the above referred Orders, the finding of the Tribunal that since the impugned services of TASMAC definitely fall in the Negative list of services as statutory functions being carried out by them based on authority of law, there will not be any service tax liability for the period from 29.03.2013 onwards under the provisions of Section 65B(44) read with other relevant provisions of the Finance Act, 1994; will hold good for the period involved in these appeals also. Therefore, respectfully following the same, we hold that the impugned Order-in-Original No. 11/2016(C)(ST) dated 05.02.2016 and Orders-in-Original Nos. 13 & 14/2016(C)(ST) dated 08.02.2016 passed by Commissioner of Central Excise, Puducherry are not sustainable and are liable to be set aside. Ordered accordingly.

9. Thus, the appeals are allowed with consequential benefits, if any.

(Order pronounced in open court on 07.05.2025)