Statutory boards providing security guards without commercial activity are not taxable as security agencies.

M/s Zila Sainik Board, Amritsar, a statutory board established for the welfare of ex-servicemen, facilitated the deployment of ex-servicemen as security guards with Punjab and Sind Bank and other banks on a no-profit/no-loss basis.

The Board received payments from the banks and disbursed the amounts to the deployed guards.

During audit, the Department alleged that the Board had provided taxable “security agency service” under Sections 65(94) and 65(105)(w) of the Finance Act, 1994, during 2006–07 to 2010–11, involving service tax of ₹15,47,643.

The Board had neither obtained service-tax registration nor paid the tax.

A show-cause notice dated 20 October 2011 proposed recovery of service tax and interest under Sections 73(1) and 75, along with penalties under Sections 76, 77 and 78.

The adjudicating authority confirmed the demand and imposed penalties.

The Commissioner (Appeals) upheld the demand but dropped the penalties under Sections 76, 77 and 78, holding that the Board had acted under a bona fide belief that its statutory welfare activities were not taxable.

The Board filed the present appeals against the impugned orders.

Whether the activities of the Zila Sainik Board in facilitating the deployment of ex-servicemen as security guards constituted taxable “security agency service” under Sections 65(94) and 65(105)(w) of the Finance Act, 1994?

Whether the Board, being a statutory body performing welfare and statutory functions on a no-profit/no-loss basis, could be treated as a commercial concern or person engaged in the business of providing security personnel?

Whether the extended period of limitation under the proviso to Section 73(1) could be invoked when the Commissioner (Appeals) had found the Board’s non-payment of tax to be based on a bona fide legal belief and had consequently dropped the penalties?

The Tribunal applied Sections 65(94) and 65(105)(w) of the Finance Act, 1994, under which “security agency” and taxable security-agency service contemplated a person or commercial concern engaged in the business of providing security personnel.

It also applied Sections 73(1) and 75 concerning recovery of service tax and interest, and the extended limitation period requiring fraud, collusion, wilful misstatement, suppression of facts, or contravention of the Act or Rules with intent to evade tax.

Sections 76, 77, 78 and 80 governed the penalties and the power to waive penalties where reasonable cause existed.

The Tribunal relied on Circular Nos. 89/7/2006-Service Tax dated 18 December 2006 and 96/7/2007-ST dated 23 August 2007 regarding the non-taxability of fees collected by public authorities while performing statutory functions.

It further followed decisions including Indian Red Cross Society v. Commissioner of CE & ST, Chandigarh, Superintendent of Police (Rural) v. Commissioner of Central Excise, Superintendent of Police v. Union of India, Steel Authority of India Ltd. v. Commissioner of Central Excise, Agarwal Trading Co. v. Commissioner of Central Excise, and Commissioner of Customs and Central Excise v. Indian Institute of Chemical Technology, particularly on statutory bodies performing non-commercial functions and the principle that the extended limitation period cannot be sustained absent the requisite elements of suppression or intent to evade.

The Tribunal found that the Zila Sainik Board was a statutory body performing welfare functions for ex-servicemen and was not commercially engaged in the business of providing security services.

The payments received from the banks were treated as amounts collected for disbursement to the ex-servicemen deployed as guards, with no profit being retained by the Board.

Accordingly, the Board did not satisfy the statutory concept of a “security agency” or provide taxable security-agency service under Sections 65(94) and 65(105)(w).

The Tribunal also noted that the Commissioner (Appeals) had accepted the Board’s bona fide belief and had dropped the penalties under Section 80.

Since the Revenue had not established fraud, collusion, wilful misstatement, suppression of facts, or intent to evade tax, the extended limitation period under Section 73(1) was held to be unavailable.

The demand therefore failed both on merits and on limitation.

It held that the Board’s statutory and welfare-oriented facilitation of ex-servicemen as security guards did not amount to taxable security-agency service, as the Board was not engaged in the commercial business of providing security personnel.

It further held that the extended period of limitation had been wrongly invoked because the Revenue failed to establish the statutory ingredients necessary for its application.

All three appeals were allowed, the impugned orders were set aside, and consequential relief was granted in accordance with law.