DECEMBER 28, 2018

By Deepak Lohiya, CA

THIS article aims to discuss the "Government Entity". In order to further deliberate the same, I shall refer to M/s NHPC LTD - 2018-TIOL-279-AAR-GST. The AAR held that M/s NHPC LTD. is a Government Entity and, therefore, it is eligible to claim exemption on the grants received by it on supply of service of "Work of Construction of Road" to Ministry of External Affairs, Government of India under Notification no. 12/2017-C.T (Rate) dated 28.06.2017 as amended vide Notification 32/2017 - Central Tax (Rate) dated 13.10.2017. The Notification No. 12/2017-C.T (Rate) dated 28.06.2017, as amended above, interalia provides exemption on "Supply of Service by a Government Entity to Central Government" against a consideration received from the Central Government in form of grants". It further held that original supply of service being exempted, subletting of same to PWD, Government of Uttarakhand is also exempted.

Let's discuss the above point wise.

1.  Under GST, the term Government Entity has been defined as under:-

"Government Entity means an authority or a board or any other body Including a Society, Trust, Corporation,

(i) Set up by an Act of Parliament or State Legislature; or

(ii) Established by any Government,

with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority."

[Insertion by Notification 32/2017 - Central Tax (Rate) dated 13.10.2017 amending Notification No. 12/2017 - Central Tax (Rate) dated 28.06.2017]

2. The AAR, first of all , arrived to an understanding that condition of "90% or more participation…" is applicable to only sub-clause (ii) of the definition of Government Entity. It referred to Hon'ble High Court of Patna decision in case of ShapoorjiPaloonji& Company Pvt. Ltd. vs CCE - 2016-TIOL-556-HC-PATNA-ST wherein High Court noted the ";" and the word "or" appearing between two sub-clauses and observed below :-

11…The provisions contained in sub-clause (i) and sub-clause (ii) of Clause 2(s) are independent dis-conjunctive provisions and the expression "90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution" is related to sub-clause (ii) of Clause 2(s) alone. The clause (i) is followed by ";" and the word "or". Therefore, each of the sub-clauses is independent provision . The condition of 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution is relatable to only sub-clause (ii) of Clause 2(s). It means that an authority established by Government should have 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution to be eligible for exemption. The Authority set up by an Act of Parliament or State Legislature is not and cannot be made subject to the condition of 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution …

(Emphasis & underlining supplied)

3  Having relied upon the above, the AAR made some interesting observations-

a. that there are various entities 'established' by the Government by way of 90% or more participation in equity or control; however after the 'establishment' of such entities, the Government participation by way of equity or control is usually diluted to less than 90%.

b.The definitionof 'governmental entity' merely contemplates that an entity is required to be 'established' by the Government by way of 90% or more equity or control.

c. The definition does not contemplate continuous fulfillment of such requirement post 'establishment' of the entity. Therefore, the intention of the notification is to enlarge the scope of definition to cover Government Companies incorporated under the Companies Act also within the ambit of the definition of "Government Entity".

d. Thus, if the criterion is fulfilled, at the time of 'establishment' by way of 90% or more Government Participation in the equity or by way of control, the entity would be considered as 'Government Entity'.

4. Accordingly, AAR concluded that M/s NHPC Ltd. falls under the definition of "Government Entity" inasmuch as at the time of establishment of the Company the Hon'ble President of India and its nominees hold 100% equity shares of the Company.

5. AAR further noted that there can be no "government entity" if the very essential ingredients for being recognized as "government entity" gets lost over a period time and the control or equity by way of 90% or more does not vest with the Government. It observed that a Company or a Society or a trust in addition to an authority or a board may continue be in existence as they get incorporated and brought into existence under different Acts and law, for example a Company gets incorporated under the Companies Act, a society gets incorporated under Societies Registration Act, etc. however, such incorporated legal entity/person cannot claim the benefits or right which are extended in favour of such incorporated bodies recognizing them as "government entity" until and unless they continue to fulfill the requirement for being recognized as Government Entity as per law .

6. Conclusion: The above decision of AAR is binding on the person who applies for it and not on others. However, since the AAR has ably interpreted the term "Government Entity" in a reasoned, cogent and well thought out manner, it can be relied upon in various litigations to claim the benefit of exemption notification or any other purpose. Nevertheless, it would be interesting to see if there would be a different ruling or interpretation.

(The author is Assistant Manager-Taxation, Bharat Petroleum Corporation Limited and the views expressed are strictly personal.)