Summary: In the case of Ernst and Young LLP (Advance Ruling No. KAR/ADRG/30 of 2024), the AAR Karnataka determined that professional services provided to the Bangalore Water Supply & Sewerage Board (BWSSB) for corporate tax return filing are not exempt from GST. The ruling clarified that BWSSB does not qualify as a “Local Authority” under the GST Exemption Notification No. 12/2017-Central Tax (Rate) amended by Notification No. 16/2021. The exemption criteria require services to be provided to a Local Authority performing functions under Articles 243G or 243W of the Indian Constitution, which BWSSB does not fulfill. BWSSB, established by the Bangalore Water Supply & Sewerage Board Act, 1964, acts as an extension of the state government rather than a municipal body with elected members or direct self-government functions. Consequently, Ernst and Young’s services did not meet the conditions for GST exemption, emphasizing the need for clarity on the nature of services and the classification of entities under GST regulations. This decision aligns with the consistent interpretation of similar cases, such as the KSF-9 Corporate Services (P.) Ltd. case.
Introduction: The AAR, Karnataka in case of In re., Ernst and Young LLP [Advance Ruling No. KAR/ADRG/30 of 2024 dated July 02, 2024], held that the professional services for assistance in filing of corporate tax returns provided by the Assessee to Bangalore Water Supply & Sewerage Board (“BWSSB”) were not exempt supply under per S. No. 3 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017 amended via Notification No. 16/2021-Central Tax (Rate), dated November 18, 2021 (“the Exemption Notification”) because these services are not provided by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of Constitution or in relation to any function entrusted to a Municipality under Article 243W of Constitution.
Facts:
M/s. Ernst and Young LLP (“the Applicant”), were engaged in providing services in auditing, accounting and taxation. They had entered into an engagement letter for rendering professional services related to corporate tax return filing to BWSSB.
The BWSSB was established by the Bangalore Water Supply & Sewerage Board Act, 1964. It was constituted by the Government of Karnataka to discharge the public duties on behalf the State Government i.e., to make provision of supply of water and disposal of sewage within Bangalore Metropolitan Area and other areas. Thus, the board is an extended arm of the State Government and akin to municipality and is not into any business operations. The main functions of BWSSB are adequate water supply to meet demand, creation of sewerage network, safe disposal of sewage, levy and collection of water charges on ‘no loss no profit basis’ for sustainability of the system.
The Income Tax Act, 1961 requires every assessee to file a Return of Income (‘ROI’) offering to tax the income earned by it during the relevant financial year. According to prevalent laws, the tax return for assessee having no international transactions with Associated Enterprises, whose accounts are required to be audited under the act or under any other law for the time being in force and is due for filing on or before October 31, 2022 for the year ended on March 31, 2022.
It is not considered as a Local Authority under the GST Act. The ruling examined if the services are qualified as ‘Pure Services’ and if BWSSB’s functions fell under the functions of Panchayats or Municipalities as defined in Articles 243G and 243W of the Constitution.
The Applicant states that they are of the view that assistance in filing of corporate tax return provided by the Applicant to BWSSB is exempt from GST as per Exemption Notification .Hence, the Applicant sought an advance ruling on the same.
Issue:
Whether professional services provided to BWSSB are exempt from GST?
Held:
The AAR, Karnataka in Advance Ruling No. KAR/ADRG/30 of 2024 held as under:
- Observed that, as per Entry 3 of the Exemption Notification, in order to claim an exemption on supply of services, two conditions should be satisfied,
- the services must be ‘Pure Services’ (excluding works contract service or other composite supplies involving any goods) provided to the Central Government, State Government or Union territory or Local Authority, and
- the services must be related to any function entrusted to a Panchayat under article 243G of the Constitution or to a Municipality under Article 243W of the Constitution.
Hence, BWSSB is neither the Central Government nor the Union Territory. BWSSB is a Board set up by The Bangalore Water Supply and Sewerage Act 1964, hence, the same cannot be considered as State Government. Therefore, the first condition was not satisfied. Additionally, the services provided were not related to any function entrusted to a Panchayat under Article 243G of the Constitution or to a Municipality under Article 243W of the Constitution. Thus, the second condition was also not satisfied. As per clause (e) of Article 243 and Article 243Q of Indian Constitution, Municipality is an institution of self-government at transitional area, smaller and larger urban areas.
- Noted that, one of the distinctive attributes and characteristics of Local Authority is that their members are elected through direct elections by the inhabitants of the defined area. But as per section 3 of BWSSB Act, 1964, all the members of BWSSB are appointed by the State Government. BWSSB is also not a Municipal Committee or a Zilla Parishad or a District Board, since it is not vested with the control or management of a municipal or local fund. Hence, BWSSB is not Local Authority.
- Held that, the professional services for assistance in filing of corporate tax returns provided by the Applicant to BWSSB did not qualify as an exempt supply under S. No. 3 of the Exemption Notification.
Our Comments:
Entry No. 3 of the Exemption Notification reads as follows:
“Pure Services (excluding works contract service or other composite supplies involving any goods) provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”
Article 243G of the Constitution of India discusses about ‘Powers, authority and responsibilities of Panchayat’. Its states that Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow the Panchayats with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Panchayats at the appropriate level, subject to such conditions as may be specified therein, with respect to—
A. the preparation of plans for economic development and social justice;
B. the implementation of schemes for economic development and social justice as may be entrusted to them including those in relation to the matters listed in the Eleventh Schedule.
Further, Article 243W of the Constitution of India discusses about ‘Powers, authorities and responsibilities of Municipalities etc.’ It states that subject to the provisions of the Constitution, the Legislature of a State may, by law, endow:
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to-
i. the preparation of plans for economic development and social justice
ii. the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.
In Pari Materia case of KSF-9 Corporate Services (P.) Ltd., In re [Advance No. KAR ADRG 33 of 2024 dated July 02, 2024] AAR, Karnataka held that the Applicant was providing security services to Bruhat Bengaluru Mahanagara Palike (“BBMP”). However, these services were not provided by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of Constitution or in relation to any function entrusted to a Municipality under Article 243W of Constitution. Hence, supply of security services to BBMP were not exempted from GST.
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