Part-5: Which Institutions are included in Local Authority in GST-“Municipal Committee, a Zilla Parishad, a District Board, and any other authority”

Today’s update would discuss about Institutions included in the definition of Local Authority vide “Municipal Committee, a Zilla Parishad, a District Board, and any other authority.Sub-clause (c) of clause (69) of Section 2 of CGST Act, 2017 which defines “Local Authority” is as follows:

 (c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;

The definition covers four Institutions i.e.

1. a Municipal Committee,
2. a Zilla Parishad,
3. a District Board,
4. and any other authority

legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund.

Let’s try to decipher Individual Institution and the scope thereof of each of the Entry provided:

1. Institution Covered under Municipal Committee, District Board:-

The Institutions Municipal Committee and District Board are not followed by the reference of the statute under which they are formed. Hon’ble Apex Court in the matter of Agricultural Produce Market Committee Narela Vs. Commissioner of Income Tax and Another :: (2008) 305 ITR 1(SC) deliberated on the issue and clarified which institutions are covered under Municipal Committee and District Board with reference to Definition of Local Authority given under explanation to section 10(20) of the Income Tax Act, 1961:-

The question still remains as to why Parliament has used the words “Municipal Committee” and “District Board” in Item (iii) of the said Explanation. In our view, Parliament has defined “legal authority” to mean – a Panchayat as referred to in clause (d) of Article 243 of the Constitution of India, Municipality as referred to in clause (e) of Article 243P of the Constitution of India. However, there is no reference to the Article 243 after the words “Municipal Committee” and “District Board”. In our view, the Municipal Committee and District Board in the said Explanation are used out of abundant caution. In 1897 when General Clauses Act was enacted there existed in India Municipal Committees and District Boards. They continued even thereafter. In some remote place it is possible that there exists a Municipal Committee or a District Board. Therefore, in our view, apart from a Panchayat and Municipality, Parliament in its wisdom decided to give exemption to Municipal Committee and District Board. Earlier there were District Board Acts in various States. Most of the States had repealed those Acts. However, it is quite possible that in some remote place District Board may still exists. Therefore, Parliament decided to give exemption to such Municipal Committees and District Boards. Therefore, in our view, advisedly Parliament has retained exemption for Municipal Committee and District Board apart from Panchayat and Municipality. Our view finds support from the provisions contained in Part IX of the Constitution of India. Article 243N provides for continuance of existing laws and Panchayats. It states, inter alia, that notwithstanding anything in Part IX, any law relating to Panchayats in a State immediately before commencement of the Constitution (Seventy-third Amendment) Act, 1992, which is inconsistent with the provisions of Part IX, shall continue to be in force until repealed by a competent Legislature. Similarly, under Part IXA there is Article 243ZFwhich refers to the “Municipalities”. This Article, inter alia, states that notwithstanding anything in Part IXA, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of Part IXA, shall continue to be in force until amended or repealed by a competent Legislature. In our view, Article 243N and Article 243ZF indicates that there could be enactments which still retain the entities like Municipal Committees and District Boards and if they exist, Parliament intends to give exemption to their income under Section 10 (20) of the 1961 Act.

Thus, these are Institutions which might exist somewhere in India and as per the legislative wisdom, these Institutions have been included in the definition of local authority under 2(69) of CGST Act, 2017 just as they have been included in definition of local authority as provided in explanation to section 10(20) of the Income Tax Act, 1961.

• Zila Parishad:

It is not very clear that why Zila Parishad have been specified when they are covered under Panchayat under sub-clause(a) of clause (69) of section 2 of CGST Act under the entry:

• a “Panchayat” as defined in clause (d) of article 243 of the Constitution;

 It would be apt to refer to the judgement of Andhra Pradesh High Court in the matter of A.P. Sarpanches Association and ors. Vs. Union of India (Uoi) and ors.- AIR2007AP273; 2007(4)ALD783; 2007(5)ALT707 wherein differences between Municipality, Municipal Corporations, Gram Panchayats and Zila Parishad was elaborated and held that Zila Parishad are “Panchayats”.

• The petitioner’s plea of discrimination vis-a-vis other local authorities is based on a misconceived assumption of similarity between the municipal bodies operating in the urban areas and Zilla Parishads etc., operating in the rural areas. The Municipal Corporations owe their existence to two legislative instruments i.e., Hyderabad Municipal Corporation Act, 1955 and the Andhra Pradesh Municipal Corporations Act, 1994. The Municipalities and Nagar Panchayats owe their existence to the Andhra Pradesh Municipalities Act, 1965, the Cantonment Boards owe their existence to the Cantonments Act, 1924(The 1924 Act has been repealed by the Cantonments Act, 2006), and Zilla Parishads and Mandal Parishads owe their existence to the Andhra Pradesh Panchayat Raj Act, 1994. Section 5 of the 1955 Act provides that the Corporation shall consist of such number of elected members as may be notified from time to time by the Government of Andhra Pradesh and other persons specified in Sections 1A, 1B and 1C. Sections 8 to 12 of the 1955 Act contain the procedure for holding election of members by dividing the city into Single Member Wards on the basis of population. Similar provisions are contained in the Municipal Corporations Act, 1994. Elections to the Nagar Panchayats and Municipalities are held in accordance with the provisions contained in Sections 8 to 12 of the 1965 Act. It is thus, evident that voters list for election of members of the Hyderabad Municipal Corporation, other Municipal Corporations, Municipalities and Nagar Panchayats are different because these bodies operate in different geographical areas and represent different compartments of people living in the urban areas. There cannot be a Municipal Corporation and Municipality for the same urban area. This is not true of the villages. In terms of Article 243(d), ‘Panchayat’ is an institution of self-government constituted for the rural areas. Article 243-B mandates the constitution of Panchayats at the village, intermediate and district levels. Gram Panchayat is the body constituted for local administration of a village. Mandal Parishad is a body constituted for each Mandal, which is defined as an area in a district declared by the State Government to be a Mandal under Section 3 of the Andhra Pradesh Districts (Formation) Act, 1974 (for short, ‘the 1974 Act’). Zilla Parishad is a body constituted by the Government for a district which necessarily comprises Mandals notified by the State Government under Section 3 of the 1974 Act and the villages. To put it differently, the Gram Panchayat administers a smaller rural area, which is declared as a village under the 1994 Act. The Mandal Parishad is a Panchayat at intermediate level. It exercises power and discharges functions qua villages included within the Mandal and defined under Section 222 of the 1994 Act. Within a district, there are more than one Mandal and each Mandal has a Mandal Parishad. Zilla Parishad is a Panchayat at the district level. It is the representative of the entire population of the rural area of the district.

                                                                                                                                                “Emphasis Supplied”

• The most significant difference between the local bodies operating in the urban areas i.e., Municipal Corporations, Municipalities and Nagar Panchayats and similar bodies operating in the rural areas i.e., Gram Panchayats, Mandal Parishads and Zilla Parishads is that the geographical areas of urban bodies as well as their electors are distinct and separate whereas the area of the Mandal Parishads is inclusive of various villages for which separate Gram Panchayats are constituted and the area of every Zilla Parishad is a district, which comprises of the villages of different Mandals constituted in the particular district. The Electoral College which elects the members of the Gram Panchayat and the Sarpanch and Members of the Mandal Parishads and Zilla Parishads is the same. This is clearly evinced from a bare reading of Sections 8, 11, 12, 140, 151 and 179 of the 1994 Act. It is, thus, evident that while the Municipal Corporations, Municipalities and the Nagar Panchayats are representative of different segments of the urban area and different sets of people living in those geographical constituencies, the Gram Panchayats, Mandal Praja Parishads and Zilla Praja Parishads represent the same set of people.

Thus, reference to Zila Parishad Separately in this sub-clause (c) of section 2(69) of CGST Act, 2017 when it is already covered under sub-clause (a) of section 2(69) of CGST Act, 2017 requires clarification and what purpose it serves. Further it would be apt to highlight that sub-clause similar to the sub-clause (c) of section 2(69) of CGST Act, 2017 founds mention in the definition of local authority under the Income Tax Act, 1961 but there it does not contain any reference to Zila Parishad. However, still Zila Parishad falls under the definition of Local Authority.

• Institution covered under the clause “any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund”

It would be apt here to refer to the decision of Hon’ble Apex Court in the matter of Union of India & Ors vs R. C. Jain & Ors on 17 February, 1981 wherein Hon’ble Apex Court while deliberating on the definition of “Local Authority” under General Clauses Act, provided guidelines for the classification of Institutions under “any other authority” as provided under this clause.

 Before referring to the decision, definition of local authority under General Clauses Act is being reproduced herein below for ready reference and to highlight the fact that definition of “Local Authority” under clause (c) of section 2(69) of CGST Act, 2017 and Section 3(31) of General Clauses Act, 1897 is broadly on similar lines. The definition of local authority under Section 3(31) of the General Clauses Act 1897 is as follows:

 “Local Authority shall mean a Municipal Committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the Government with the control or management of a municipal or local fund”.

The Hon’ble Apex Court in the landmark decision in the matter of Union of India & Ors vs R. C. Jain & Ors on 17 February, 1981 provided that

 A proper and careful scrutiny of the language of Sec.3(31) suggests that an authority in order to be a local Authority, must be of like nature and character as a Municipal Committee, District Board or Body of Port Commissioners, possessing, therefore, many, if not all, of the distinctive attributes and characteristics of a Municipal Committee, District Board, or Body of Port Commissioners, but, possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with, the control and management. Of a municipal or local fund. What then are the distinctive attributes and characteristics, all or many of which a Municipal Committee, District Board or Body of Port Commissioners shares with any other local authority?

The Hon’ble Apex Court then listed out following distinctive attributes and characteristics as follows:

1. The authorities must have separate legal existence as Corporate bodies. They must not be mere Governmental agencies but must be legally independent entities.
2. They must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area.
3. They must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of the dependence may vary considerably but, an appreciable measure of autonomy there must be.
4. They must be entrusted by Statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. etc. Broadly we may say that they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions.
5. They must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.

Thus, before any institution falls under the definition of Local Authority under sub-clause (c) of section 2(69) of CGST Act, it must satisfy the conditions as laid down by Hon’ble Apex Court in the above decision. After referring to the above conditions, Hon’ble Apex Court provided that

We see that the Delhi Development Authority is constituted for the specific purpose of ‘the development of Delhi according to plan’. Planned development of towns is a Governmental function which is traditionally entrusted by the various Municipal Acts in different States to municipal bodies. With growing specialisation, along with the growth of titanic metropolitan complexes, legislatures have felt the need for the creation of separate town-planning or development authorities for individual cities. The Delhi Development Authority is one such. It is thus an authority, to which is entrusted by Statute a Governmental function ordinarily entrusted to municipal bodies. An important feature of the entrustment of Governmental function is the power given to the Authority to make regulations (which are required to be laid before Parliament). The power to make regulation is analogous to the power usually given to municipalities to frame bye-laws.

 The activities of the Authority are limited to the local area of the Union Territory of Delhi. The High Court appears to have assumed that the Delhi Development Authority has extra-territorial powers extending to peripheral areas in the adjoining States. There is no basis in the Statute for the assumption made by the High Court.

There is then an element of popular representation in the constitution of the Authority. Representatives of the inhabitants of the locality, three elected from among the members of the Delhi Municipal Corporation and two elected from among the members of the Delhi Metropolitan Council, figure among its members.

What of autonomy? The Master Plan and the Zonal plans prepared by the Authority have to be approved by the Central Government, the budget has to be forwarded to the Central Government, annual returns have to be submitted to the Government and the directions that the Central Government may give have to be carried out. But within these bounds, the Authority enjoys a considerable degree of autonomy, as is seen from the summary of the provisions of the Act which has been set out by us. The powers of the Central Government over the Delhi Development Authority are the usual supervisory powers which every State Government exercises over municipalities, district boards etc. Such powers of supervision do not make the municipalities disautonomous and mere satellites.

We finally come to the important question whether the legislature has vested any power of taxation in the Authority.

One of the submissions of the learned counsel for the respondent was that the fund of the Authority, required to be maintained by Sec. 23 of the Delhi Development Act, was not a local fund as no part of it flowed directly from any taxing power vested in the Delhi Development Authority. The submission of the learned counsel was that the fees collected under Sec. 12 of the Act and the charges levied under Sec. 37 of the Act did not part-take the character of tax but were mere fees which were the quid pro quo for the services which were required to be performed by the Delhi Development Authority under the Act. We were referred to Hingir-Rampur Coal Co. Ltd. & Ors. v. The State of Orissa & Ors. We are unable to agree with the submission made on behalf of the respondents. In the first place when it is said that one of the attributes of a local authority is the power to raise funds by the method of taxation, taxation is to be understood not in any fine and narrow sense as to include only those compulsory exactions of money imposed for public purpose and requiring no consideration to sustain it, but in a broad generic sense as to also include fees levied essentially for services rendered. It is now well recognised that there is no generic difference between a tax and a fee; both are compulsory exactions of money by public authority. In deciding the question whether an authority is a local authority, our concern is only to find out whether the public authority is authorised by Statute to make a compulsory exaction of money and not with the further question whether the money so exacted is to be utilised for specific or general purposes. In the second place the Delhi Development Authority is constituted for the sole purpose of the planned development of Delhi and no other purpose and there is a merger, as it were, of specific and general purposes. The statutory situation is such that the distinction between tax and fee has withered away. In the third place we see no reason to hold that the charge contemplated by Sec. 37 is a fee and not a tax.

Hon’ble Apex Court finally concluded that

On a consideration of all the aspects of the matter placed before us we are of the opinion that the Delhi Development Authority is a Local Authority and therefore, the provision of the Payment of Bonus Act are not attracted.

Thus, any Institution which satisfies the conditions laid down the Hon’ble Apex Court in the matter of in the matter of Union of India & Ors vs R. C. Jain & Ors on 17 February, 1981 would fall under the definition of “any other authority”. Some of the relevant citations are as follows:

 In Valjibhai Muljibhai Soneji and Anr. v. The State of Bombay (Now Gujarat) & Ors. one of the questions was whether the State Trading Corporation was a local Authority as defined by Sec. 3(31) of the General Clauses Act, 1897. It was held that it was not, because it was not an authority legally entitled to or entrusted by the Government with, control or management of a local fund. It was observed that though the Corporation was furnished with funds by the Government for commencing its business that would not make the funds of the Corporation ‘local funds’.

Hon’ble Apex Court in the matter of The Commissioner Of Income Tax, … vs U.P. Forest Corporation on 2 March, 1998 held that U.P. Forest Corporation is not a local authority under the Income Tax Act. It would be apt here to clarify that definition of local authority under section 10(20) of the Income Tax Act has been inserted with effect from 01.04.2003 for that section. Prior to that the term “local authority” was not defined under Income Tax Act and reference had to be made to definition as provided under the General Clauses Act, 1897.

Hon’ble Apex Court in the matter of Calcutta State Transport … vs Commissioner Of Income-Tax, West … on 4 April, 1996 following the decision of Apex Court in the matter of R.C. Jain held that Calcutta State Road Transportation is not a local authority under the Income Tax Act referring to the definition of “Local Authority” under the General Clause Act.

Next Update would discuss that whether authorities like the Delhi Development Authority can fall under the definition of “Local Authority or not” in CGST Act, 2017 vis-a-vis  Income Tax Act, General Clauses Act, Service Tax Regime and impact of decision of AAR of Rajasthan in the matter of Tata Projects Ltd and clarification issued by CBEC.