CA. Ganesh V shandage
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).
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.
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’.
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.
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.
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