Taxability of grants and donations received by Trusts -AAR Maharashtra in Re: Jayshankar Gramin Va Adivasi Vikas Sanstha
The whole issue w.r.t. decision by AAR Maharashtra, in the matter of Jayshankar Gramin Va Adivasi Vikas Sanstha (for short referred to as Sanstha hence forth) revolves around the applicability of Sr. No.1 of Exemption Notification No. 12/2017 CGST (Rate) dated 26-06-2017 exempting services by WAY OF CHARITABLE ACTIVITIES by an entity registered under Section 12 AA of The Income Tax Act, 1961(43 of 1961). The same exemption is reproduced herewith.
Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities
“charitable activities” means activities relating to –
(I) public health by way of ,-
(A) care or counseling of
(I) terminally ill persons or persons with severe physical
or mental disability;
(II) persons afflicted with HIV or AIDS;
(III) persons addicted to a dependence-forming
substance such as narcotics drugs or alcohol; or
(B) public awareness of preventive health, family planning
or prevention of HIV infection;
(II) advancement of religion , spirituality or yoga;
(III) advancement of educational programmes or skill
development relating to,–
(A) abandoned, orphaned or homeless children;
(B) physically or mentally abused and traumatized persons;
(C) prisoners; or
(D) persons over the age of 65 years residing in a rural area;
(iv) preservation of environment including watershed, forests and wildlife;
In the light of above definition various points explaining inapplicability of this decision are discussed in this article.
A. Section 103 0f The CGST Act is very clear that the applicability of the decision by AAR remains confined only to the applicant, who asked for the decision.
For immediate reference the same is reproduced herewith.
103. Applicability of advance ruling.—
(1) The advance ruling pronounced by the Authority or the Appellate Authority under this Chapter shall be binding only—
(a) on the applicant who had sought it in respect of any matter referred to in sub-section (2) of section 97 for advance ruling;
(b) on the concerned officer or the jurisdictional officer in respect of the applicant.
(2) The advance ruling referred to in sub-section (1) shall be binding unless the law, facts or circumstances supporting the original advance ruling have changed.
Secondly the decision, though leading to an unlawful conclusion, should not be construed to mean that the grants, non-philanthropic donations received by trust are chargeable to 18% GST.
Fundamentally this decision treats ‘grants by government’ /’donation by donors’, as the consideration paid for the services rendered to the orphans and the destitute by Sanstha. Also as per AAR the Sanstha is not rendering Exempted services as are covered by the aforesaid exemption. So considering both aspects, the reporting is being done in a skewed way to the effect that non-philanthropic donations and grants are taxable @ 18%, which is totally out of context. The decision, though unlawful, need to be understood in a right perspective.
Donations per se cannot be considered as non –philanthropic. As AAR has held the view that donations/grants are used by Sanstha towards non-exempted services, the words ‘Non-Philanthropic donations seem to have been coined out. Hope readers understand this fact in the right perspective.
The decision is not at all judicious and should be considered as against the basic concepts of supply. The reasons for the same are analysed in below mentioned paras. At the same time it is very painful to note that such a sensitive issue is handled with a very indifferent attitude.
B. Neither Facts of the case considered by AAR; nor relevant and applicable limbs of exemption notification applied by AAR
(I) Para 2.1 of the order wherein the objectives of Sanstha are reproduced.
- The trust undertakes supply of services to 50 orphans and homeless children by way of shelter, education, guidance, clothing, food and health for the Women and Child welfare. The Govt. of Maharashtra women and child welfare department pays a sum of Rs. 2,000/ per month per Other expenses for children are made from donations. The trust is also registered under Income Tax Act 1961 as Charitable trust vide registration number PN/CITI/REGN./12A (a)/ 63/ 2009 –10/ 5304. The trust is also registered under section BOG (5) of Income Tax Act.
Above objects regarding educating and guiding are very well covered by following sub clause of the relevant exemption Notification,
{iii) Advancement of educational programmes or skill development relating to,
- Abandoned, orphaned or homeless children:
- physically or mentally abused and traumatized persons;
Aforesaid sub-clauses categorically make mention of educational programmes for abandoned, orphaned or homeless children and for physically or mentally abused and traumatized persons. AAR seems to have ignored the written words of the exemption notification without referring to the same or commenting upon the same.
C. AAR miserably fails to give meaningful and substantive interpretation
Para 2.4 of the order is reproduced below ,wherein further objectives of Sanstha are mentioned.
2.4 The trust also render services to destitute women who are litigating divorce or homeless or the victim of domestic violence. Central Government also gives grants though Women and Child Welfare Ministry for awarding shelter, food, and medical facilities, clothing etc., to destitute women who are victims of domestic violence or are divorcee or are homeless and also to rape victims. The trust represents them before legal forums including lodging FIR at police stations against the culprits, the trust also arrange for counselling them through expert counsellors to bring them out of trauma and help them to lead normal life. These victim women’s are sent by police stations or anybody who knows that women’s are victim of violence.
Above objects are very well covered by following sub clauses of the relevant exemption Notification if one really understands the substance of the words used in it.
“charitable activities” means activities relating to –
public health by way of ,-
(A) care or counseling of
(I) terminally ill persons or persons with severe physical or mental disability;
First of all, women who are destitute and subjected to domestic violence are invariably suffering from some or the other kind of physical/mental distress/ trauma /disability. Most of them are injured due to domestic violence. They are already malnourished. So the words ‘care and counselling of persons with severe physical or mental disability’ do cover them. In fact the efforts to bring them to normal life (as written in the order) do indicate that they are not living like normal human beings. Also the word ‘care’ includes medical facilities.
For the information of readers I am reproducing the meaning of domestic violence as contained in THE PROTECTION OF WOMEN FROM DOMESTIC VIOLENCE ACT, 2005. It is so comprehensive that all of the activities of Sanstha are doubtlessly covered by the various limbs of the definition of Charitable Activities as contained in the Exemption Notification.
CHAPTER II DOMESTIC VIOLENCE
3. Definition of domestic violence.—For the purposes of this Act, any act, omission or commission or conduct of the respondent shall constitute domestic violence in case it—
(a) harms or injures or endangers the health, safety, life, limb or well-being, whether mental or physical, of the aggrieved person or tends to do so and includes causing physical abuse, sexual abuse, verbal and emotional abuse and economic abuse; or
(b) harasses, harms, injures or endangers the aggrieved person with a view to coerce her or any other person related to her to meet any unlawful demand for any dowry or other property or valuable security; or
(c) has the effect of threatening the aggrieved person or any person related to her by any conduct mentioned in clause (a) or clause (b); or
(d) otherwise injures or causes harm, whether physical or mental, to the aggrieved person.
Explanation I.—For the purposes of this section,—
(i) “physical abuse” means any act or conduct which is of such a nature as to cause bodily pain, harm, or danger to life, limb, or health or impair the health or development of the aggrieved person and includes assault, criminal intimidation and criminal force;
(ii) “sexual abuse” includes any conduct of a sexual nature that abuses, humiliates, degrades or otherwise violates the dignity of woman;
(iii) “verbal and emotional abuse” includes—
(a) insults, ridicule, humiliation, name calling and insults or ridicule specially with regard to not having a child or a male child; and
(b) repeated threats to cause physical pain to any person in whom the aggrieved person is interested;
(iv) “economic abuse” includes—
(a) deprivation of all or any economic or financial resources to which the aggrieved person is entitled under any law or custom whether payable under an order of a court or otherwise or which the aggrieved person requires out of necessity including, but not limited to, house hold necessities for the aggrieved person and her children, if any, stridhan, property, jointly or separately owned by the aggrieved person, payment of rental related to the shared house hold and maintenance;
(b) disposal of household effects, any alienation of assets whether movable or immovable, valuables, shares, securities, bonds and the like or other property in which the aggrieved person has an interest or is entitled to use by virtue of the domestic relationship or which may be reasonably required by the aggrieved person or her children or her stridhan or any other property jointly or separately held by the aggrieved person; and (c) prohibition or restriction to continued access to resources or facilities which the aggrieved person is entitled to use or enjoy by virtue of the domestic relationship including access to the shared household.
Explanation II.—For the purpose of determining whether any act, omission, commission or conduct of the respondent constitutes “domestic violence” under this section, the overall facts and circumstances of the case shall be taken into consideration.
D. Very relevant circular referred to by the applicant is not considered at all by AAR.
Sanstha submitted following circular, which is neither referred to, neither discussed nor refuted. The circular deals with the same kind of query, which is raised here before AAR. Therein the issue to be sorted out was as follows:
A representation has been received seeking clarification whether donations and grants-in aid received from different sources by a charitable Foundation imparting free livelihood training to the poor and marginalized youth, will be treated as “consideration‘ received for such training and subjected to service tax under ‘commercial training or coaching service’.
In reply to the above query the clarification issued by the CBEC is as follows:
In this connection a Circular bearing No. 127/9/2010-ST, dated 16-8-2010 was issued. The clarification in this regard was received for whether the Service tax on commercial training and coaching – Whether donation’ is ‘consideration’. The Text of the Circular is as follows:
The matter has been examined. The important point here is regarding the presence Or absence of a link between ‘consideration’ and taxable service. It is a settled legal position that unless the link or nexus between the amount and the taxable activity can be established, the amount cannot be subjected to service tax.
‘Donation or grant-in –aid is not specifically meant for a person receiving such training or to the specific activity, but is in general meant for the charitable cause championed by the registered Foundation. Between the provider of donation/grant and the trainee there is no relationship other than universal humanitarian interest. In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to specific trainee or training’
The said Circular is pertaining to Service Tax regime but remains applicable in GST regime on all the fours, more so when Service Tax was an existing law before GST and on its enactment got subsumed into GST Act. For this reference may be made to Madras High court decision in the case of Gannan Dunkerley And Co. (Madras) … vs. State Of Madras on 5 April, 1954 Equivalent citations: AIR 1954 Mad 130, wherein the learned judges observed that…………. “Every statute should be regarded as a part of the whole body or system of law. Consequently in construing a statute, the constitution, the common law and other statutes, particularly those ‘parimateria ‘ and those expressly referred to should be examined, in the effort to ascertain the intention of the legislature.
The applicant’s matter is absolutely covered by the logic or the substantive part of the aforesaid circular when it says that “‘Donation or grant-in -aid is not specifically meant for a person receiving such training or to the specific activity, but is in general meant for the charitable cause championed by the registered Foundation. Between the provider of donation/grant and the trainee there is no relationship other than universal humanitarian interest. In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to specific trainee or training’”.
In the matter in hand, there is absolutely no relationship between the government/donors, who are the givers of grant/donations and the orphans / divorcee/tortured women, who are getting benefited by the same. It is patently clear that the grant/donations to Sanstha are totally out of humanitarian considerations and nothing else. So the element of supply by government or from the donors is missing. So no question of taxability arises.
E. An absolutely relevant case law referred to by the applicant is not considered at all by AAR.
Sanstha submitted following case law.
- Further, In the case of APITCO vs Commissioner of Service Tax, Hyderabad, the SC upheld the decision of Tribunal that Assesse Company implemented welfare schemes consisting of training, technology facilitation, for the Government for the benefit of the vulnerable weaker sections of the society and grant in aid received from the Government was utilized for this purpose alone. Tribunal had held that in implementation of the Governmental schemes, the assesse as implementing agency did not render any taxable “service” to the government. The Judgment further stated that the department seems to be considering the Governments to be, a client . The question now is whether there was “service provider-client” relationship between the assesse and the Here, again, the nature of the amounts paid by the governments to the assesse is decisive. A client must not only pay the expenses of the service but also the consideration or reward for the service to the service provider. Admittedly, in the present case, there was no payment, by any government to the assesse, of any amount in excess of what is called “grant-in –aid”. Thus any service provider–client relationship between the assesse and the governments is ruled out.
Above case law is absolutely to the point that receiving grants from government as an implementing agency can not be construed as rendering of service to the government. Above decision makes a very categorical assertion that when any amount is paid in excess of grant in aid then only it could be considered as a reward or consideration flowing from government. Same is the case here. Government gives grant to the Sanstha out of humanitarian considerations to meet part of the expenses spent by Sanstha on orphans/ divorcees and destitute and nothing in excess of the same. In fact sum of RS. 2000 itself indicates that it is a helping hand extended by government which is too small a sum to take care. So no consideration can be said to have flowed from government to Sanstha, in which case there cannot be said to be any supply inviting taxability.
F. It seems a prejudged decision:
To reach to the conclusion that the activities of the Sanstha are taxable, AAR reproduces definition of Charitable activities alongwith definitions of ‘Supply’, ‘consideration’, ‘and business’ and concludes as follows without any further discussion or analysis of the points, pleas , circular and case law as are submitted during the course of hearing. Also a stand is taken that by AAR that only ‘subsidy’ is excluded but not ‘grants’. The point is when something is not a ‘supply’ at all, such exclusion does not make any difference. That apart in catena of decisions it is held that Exemption cannot make something taxable.
- In order to arrive at a definitive conclusion on the taxability of service, the main ingredients which need to be necessarily present, as per GST statute, are the service (supply), the service provider (supplier), the service receiver (recipient) and the consideration for the service. In the instant case, if we refer to definition of “supply” (which is very much exhaustive), it covers almost all activities of the applicant. Moreover, definition of “consideration” includes grants and excludes only “subsidy”. The profit motive is not important, if we make combined reading of all above definitions, including that of the “business”.
- The above provision provides that if there is supply of goods and services, made for a consideration in furtherance of business, then it is liable for In present case all these ingredients are met. The receipts are from Government in the form of grants and the activities for which the grants are received are not charitable activities as discussed above
It’s a very ironical to point out that such a humanitarian and sensitive issue is dealt with in such a crude and in indifferent way.
Secondly as pointed out earlier, Sanstha is not rendering any service to the government so that the grant can be treated as a consideration. Services are to the orphans/divorcee –tortured women and not to the government who is giving the grant. Similarly under no circumstances government grant/donations can be considered as a consideration as there is no prid quo pro between the government/donors and the Sanstha.
Basically the sum and substance is that, simple help/grant in aid by the government can not be construed as creating any kind of relationship between the government and the receiver alike a client (i.e. the government) and the service giver (i.e. Sanstha).
Also as pointed out earlier, it is absolutely impossible to meet expenses of lodging/boarding/health care/counselling of a single orphan out of grant of Rs.2000 per month per orphan. So there can not be a contract between the government and Sanstha on that account. So from this perspective too grant is nothing but a helping hand extended by government on humanitarian grounds. The government seems to have a policy to do his bit for the welfare of orphans which they do by giving a grant on humanitarian ground but in no way it can convert such grant into a consideration. The word donation itself indicates nonexistence of a contract.
G. The decision falls flat while analysing on parameters/ingredients of a transaction required to identify transaction as a ‘Taxable supply’. For the said purpose the definition of initial part of the definition of ‘Supply as contained in section 7 is reproduced herewith.
“7. Scope of supply.— (1) For the purposes of this Act, the expression ―supply includes––
- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;“.
In this part of definition, the words, ‘agreed to be made’ are of great significance. It implies a conscious act of entering into a specified, identifiable and enforceable contract, wherein one party agrees to give/render goods/service to another at a specified consideration. Here it is not the case at all as Rs.2000 is just not sufficient for the maintenance of even a single orphan to be maintained for a month. Even the circular and the decision referred to above make it very clear.
So the trustees of the charitable trusts/society need not pass a single sleepless night on this issue.
Conclusion:
Let us accept that the institution of AAR is a new one. So the success depends on with how much clarity the grounds asking for the relief are correlated with the relief asked for. In this case it is very clear that the services by the Sanstha could have been correlated, preferably word to word, to the extent possible, with the clauses /sub clauses of the definition of charitable activities.
Also in all such cases, it is advisable to bring to the notice of AAR that ‘Supply’ as understood in GST law is not taking place at all, while rendering services to the orphans and deserted traumatized women.
One of the finest interpretation of the word ‘supply’ is given by Bombay High court in the case of Bai Mamumbai Trust And 2 Ors vs Suchitra Wd/Of Sadhu Koraga … on 13 September, 2019.
In this case a very wonderful interpretation is given to the word ‘supply’ that, supply implies the presence of contemplated enforceable consideration. In other words there has to be mutual enforceable obligations on both the sides. Without that the transaction cannot be called a supply.
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