Amounts received for sovereign functions and government fund allocations were not taxable consideration.

The Executive Engineer, Central Water Commission (CWC), an organisation under the Ministry of Water Resources, undertook survey and investigation work for the Tuichang Hydro Electric Project.

The Department treated funds of ₹8,07,47,000 allocated through the North Eastern Council (NEC) as consideration for taxable services and confirmed service tax of ₹83,12,000.

CWC had also raised bills totalling ₹2,37,14,574 on NTPC, including service tax of ₹6,17,402, but received only ₹1,87,19,406 and did not remit the service tax, contending that no tax was payable.

The adjudicating authority confirmed the demand, interest and penalties; CWC appealed.

It also argued that the demand for the extended period was time-barred because it had acted under a bona fide belief that its activities were not taxable.

Whether the NEC funds allocated to CWC constituted consideration for a taxable service, given the absence of a service-provider–recipient relationship between CWC and NEC.

Whether the amounts billed to NTPC were liable to service tax, having regard to the nature of CWC’s functions and Circular No. 96/7/2007-ST.

Whether the extended period was invocable in the absence of suppression or an intention to evade service tax.

The Tribunal applied the principle that an amount is taxable as consideration for a service only where it is received in connection with a service provided to a recipient; a government fund allocation, without a service-provider–recipient relationship, is not consideration for a taxable service.

It also relied on Circular No. 96/7/2007-ST dated 23 August 2007, which clarifies that activities performed by sovereign or public authorities as mandatory statutory functions, and amounts collected under law and deposited into the Government account, are not services provided for consideration and are not liable to service tax.

For the extended-period issue, the Tribunal considered whether the Revenue had established suppression, taking account of CWC’s bona fide belief and the fact that it had not collected the service tax from NTPC.

The Tribunal found that the Ministry of Water Resources routed funds to CWC through NEC and that no service-provider–recipient relationship existed between CWC and NEC; accordingly, the NEC allocation could not be treated as consideration, and the associated demand was unsustainable.

As to NTPC, the Tribunal accepted CWC’s position that it performed a sovereign function, collected amounts on behalf of the Government and remitted them rather than retaining them.

It also noted that NTPC had not paid the service-tax amount shown on the invoices and applied the clarification in Circular No. 96/7/2007-ST to hold the demand unsustainable on merits.

On limitation, it found no suppression: CWC’s status as part of the Ministry, its bona fide belief that the activities were not taxable, and its failure to collect service tax from NTPC weighed against an inference of evasion.

It further held that the extended period was unavailable because suppression had not been established.

The appeal was allowed, the confirmed demand was set aside, and CWC was held eligible for consequential relief, if any, in accordance with law.