GST on Audit Services by CAG to Ports

CA. Ganesh V shandage

Whether CAG is Government or Not ?

CAG is one of the pivotal offices in the Government of India who controls the entire financial system of the country. The appointment of CAG is done by President of India under Article 148.  President of India is the Executive head of the Union of India.  Audit is conducted by CAG under section 18 of the Comptroller & Auditor General’s (DPC) Act 1971 and the fees are being charged to the service recipient.

In order to keep CAG office independent, the important elements like CAG’s removal, salary fixation, service conditions, reporting duties, etc. are not kept under the control of President of India. For instance, to ensure necessary checks and balances are in place in the performance of duties by CAG, in situation of his removal same procedure as applicable for the removal of Supreme court judge has been laid down under constitution, further such removal is effected only and only based on an address from both Houses of Parliament and also based on the grounds of removal of either being ‘Proved misbehavior’ or ‘Incapacity’.  His salaries and conditions of service are being governed by a separate Act of Parliament that is ‘Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act 1971. Thus from the explanation so far it is quite clear that, CAG is although part of Central Government performing Executive functions would come neither under the direct control of President nor he is subordinate officer to President of India as referred in Article 53(1).

However it is ironic to note that both paragraph 2.4.7 of ‘Taxation of Service: An Education Guide’ issued in June 2012 by CBEC and Q. No. 3 of FAQ’s on Government Services under GST by CBEC, says that ‘Central Government “means”, the President and the officers subordinate to him while exercising the executive powers of the union vested in the President and in the name of the President.’ Both these clarifications echo the same meaning of term ‘Central Government’ and were based on the definition of ‘Central Government’ as given in section 3(8) of General Clauses Act 1897. According to this disposition, the CAG does not fall in the category of Government as it does not function under the President. So the Audit fees collected by CAG have to pay GST under forward charge and not under reverse charge as envisaged in notification 13/2017 – CTR.

This position taken by the guidance paper and FAQ is not acceptable because it has made the fundamental error of mistaking the inclusive definition of Government in section 3(8) of General Clauses Act as an exhaustive definition.  It is further surprising to realize that ICAI has straight away copied the same ditto interpretation of term ‘Central Government’ in page no. 9 of its publication ‘E-publication on supplies by/to Government under GST’.

In the definition in the General Clauses Act the expression used is “includes” which means that there are other institutions which are Government. But the guidance paper and FAQ says, the central Government “means” per-se President and officers subordinate to him. Thus it is a flawed way of interpreting the definition of Government in the General Clauses Act. If we take the definition as inclusive we come to the correct conclusion that there are certain institutions such as CAG, UPSC, Parliament, legislature, high court and Supreme Court which are constitutional bodies and they are surely Government but are not working under the President or governor. The revenue earned by the CAG goes to the Consolidated Fund of India under the Article 266 of the Constitution. So also the fees earned by the UPSC go to the Consolidated Fund of India. And high court and Supreme Court also are Government, they being part of the system of maintaining law and order which is a basic (sovereign) function of the State. One cannot imagine how institutions created by the Constitution can be considered as not Government. The definition of the guidance paper and FAQ completely cuts out the legislature and judiciary from the scope of Government which is absurd. So this position taken by the guidance paper and FAQ is basically incorrect and needs modification.

If we apply incorrect interpretation of guidance note or FAQ as mentioned above, the services of CAG would be held at par with services of any other non-Governmental service provider and therefore the GST will have to be paid under forward charge as Reverse charge notification no. 13/2017 – CTR would be out of question for applicability.

And in rationale view, CAG is Government and its fees are subject to GST under reverse charge if service recipient is a Business Entity (and Not Government).

Whether Port established under ‘Major Port Trusts Act 1963’ is Government or Business Entity?

Port established under ‘Major Port Trusts Act 1963’ is a statutory autonomous body and functions under the Administrative control of the Ministry of Shipping, Government of India and its day to day operations are administered by a Board of Trustees set up by the Government of India which is being headed by a Chairman.

Referring to the earlier discussion on the definition of Government, Ports established under separate Union Legislature would not qualify to be Government as defined in section 3(8) of General Clauses Act 1897 read with Article 53(1) of the Constitution. The reason being employees, officers, etc. of such Ports do not work as subordinates to President of India as required under Article 53(1) of Constitution.

Reference to Supreme Court Judgments:

The law established in Ajay Hasia, etc.  v. Khalid Mujib Sehravadi & Others (1981 AIR 487), wherein Supreme court has listed 6 testing criterions to determine whether a Government corporation, entity, authority, body, etc. established as independent organization could be said to be a “State” under Article 12 of the Constitution.

• 6 test criterions to be applied whenever like situation arises are as below –

1. 1. Whether entire share capital is owned by Govt
   2. Whether financial assistance by Govt was to cover up 100% expenditure of corporation, etc.
   3. Whether corporation, etc. enjoys monopoly status conferred or protected by state
   4. Existence of deep or pervasive state control
   5. Functions of the corporations, etc. are of public importance and are closely related to Governmental functions
   6. Whether Department of the Govt is transferred to a corporation, etc.

• In the present case the question was whether one of the respondents being a Society established under Societies Registration Act of a particular state which was completely funded by and under the pervasive administrative control of Government, can such Society be connoted as “State” under Article 12 of the Constitution?
• Can the fundamental right to equality under Article 14 be enforced by the aggrieved person by knocking the doors of the Supreme Court under Article 32?
• The Supreme Court in its analysis gave complete disregard to the genesis of the Society as to how and under which statute it was formed, but placed more reliance and looked in to reason of formation of this Society and how the management controls were being employed.
• The aggrieved petitioner in this case had challenged the violation of Right to Equality by the respondent Society which is being referred as “State” in terms of Article 12.
• Supreme Court held that, although the respondent is a Society registered Society Registration Act of relevant state, it is because Government of India and State Government have a deep and pervasive control over the respondent Society, it is therefore that the impugned respondent Society would come under the garbs of expression “other authorities” which being one of the subsets of expression “State” in Article 12.
• However Supreme Court had also cautioned that this decision would be restricted for its application only on matters related to Part III or Part IV of constitution which namely deal with safeguard of fundamental rights of citizens and directive principles to be followed while Parliament and State legislatures.
• This apart even Article 12 (Part III) and Article 36 (Part IV) also clearly restricts application of expression “State” to Part III and part IV of the Constitution respectively.

As legislative powers for enactment of GST enactments are drawn from Article 246A to Part XI of the Constitution, this particular decision and interpretations therein would have no consequence and no relevance on matters related to GST notifications.

One more Supreme Court pertinent judgment which we may refer is that in S L Agarwal v. Hindustan Steel (AIR 1970 1150) wherein Supreme Court held that the statutory body, corporation or an authority created by parliament or a state legislature is not a ‘Government’.

• Brief facts of the case are, Mr. S L Agarwal who was employed by Hindustan Steel Ltd. a company whose equity was 100% owned by Government of India.
• He complained that, on ethical grounds his services were terminated by the company without giving him the protection granted by Art. 311 of the Constitution.
• He also complained of breach of the principles of natural justice inasmuch as the enquiry was not proper.
• His contention was that although the action was ostensibly taken according to the terms of the contract of employment, he was really punished and he was entitled, therefore, to the protection of Art. 311 of the Constitution.
• He first under Article 226 filed a writ petition before MP HC, which was ruled against him with remarks that protection of Art. 311 of the Constitution are not available in this case because the appellant was not entitled to it.
• He further approached Supreme Court via civil appeal and challenged the order of MP HC where Supreme Court ruled that Corporation which is Hindustan Steel Limited is not a department of the Government nor are the servants of it holding posts under the State. It has its independent existence and by law relating to Corporations it is distinct even from its members. In these circumstances, the appellant, who was an employee of Hindustan Steel Limited, does not answer the description of a holder of “a civil post under the Union”. The appellant was not entitled to the protection of Art. 311. The High Court was therefore right in not affording him the protection. The appeal fails and is dismissed.

This interpretation and ruling of Supreme Court in this case was based on the premise that the officers or employees of such statutory authorities, etc. do not become officers subordinate to the President under Article 53(1). Hence independent authorities or bodies which are either created by an Act or registered under an Act would not be called as Government and this has been also endorsed in para 2.4.10 of CBEC’s Taxation of Services: An education guide published in June 2012.

It is therefore Ports established under ‘Major Port Trusts Act 1963’ would be placed at par with any other non-governmental entity.  Further such ports providing cargo handling services and other related services partake the inclusive characters of ‘Business’ as listed under section 2(17) of CGST Act. As a consequence such Ports would also satisfy the definition of ‘Business Entity’ as defined in clause 2(n) of notification 12/2017 – CTR and are therefore such Ports are not Government.

Therefore it can be concluded that the Port established under ‘Major Port Trusts Act 1963’ is a non-governmental Business Entity and accordingly notifications issued by CBIC are to be interpreted.

Whether Audit Service by CAG to Port established under ‘Major Port Trusts Act 1963’ liable for payment of GST? If yes, whether under forward charge or reverse charge?

An audit service rendered by CAG to Ports being a Business entity subject to exemptions, if any, is liable for payment of GST at the rate of 18%.  As Central Government also includes CAG and as Audit services by CAG do not form part of functions listed in the Article 243W or 243G of the constitution, the nearest possible entries of exemption notification 12/2017 we can look to are either entry 6 or 7.

Entry 6 principally exempts services provided by Government to either non-business entities or Government. As Port referred above is Business Entity, our case does not fall under this entry.

Entry 7 principally exempts services provided by Government to small and medium Business Entities whose aggregate turnover clocked during last financial year does not exceeding Rs. 20 lakhs or Rs. 10 Lakhs in case of special category states. Assuming Ports aggregate turnover of last financial year exceeds Rs. 20 Lakhs (exceeds Rs.10 Lakhs in case of special category states), then again our case would not fall under this entry or under any other entries of notification 12/2017.

Hence under the backdrop of foregoing discussions and more particularly the decision rendered by honorable Supreme Court in S L Agarwal v. Hindustan Steel, the Audit services rendered by CAG to Ports would suffer payment of GST and there is no exemption as such available for this service.

Notification 13/2017 – CTR, clearly requires payment of GST by recipient of service under RCM where taxable services are rendered by Government to any Business entity.

To finally conclude, the Port being Business Entity would be liable for payment of GST at the rate of 18% under RCM on the invoice value of Audit services received from CAG.

For any clarifications, you may please either write to me on ganesh.shandage@gmail.com or speak to me on 9975016580.