GST Updates

Part-6-Whether Development Authority are Local Authority under GST vis-a-vis Income Tax, Service Tax, General Clauses Act, AAR Ruling on JDA and clarification issued by CBEC

What’s the big point in whether development Authorities like Delhi Development Authority, Jaipur Development Authority are “Local Authority or not. Amongst the other issues, the biggest issue is about their status of taxability as Entry No. 6 of the Notification No. 12/2017 exempts “Services by the Central Government, State Government, Union territory or local authority excluding the following services…”. There are other issues as well worth contemplating and therefore lets analyses whether these Institutions fall under the definition of “Local Authority” or not 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.

Let’s set the ball rolling with the clarification issued by CBEC wherein they have categorically held that these Institutions are not Local Authority.

 

  1. Clarification issued by CBEC under Sectoral FAQ:

The clarification issued by CBEC in Sectoral FAQ of Government Services is reproduced herein below:

Question 5: Are all local bodies constituted by a State or Central Law regarded as local authorities for the purposes of the GST Acts?

 Answer: No. The definition of ‘local authority’ is very specific and means only those bodies which are mentioned as ‘local authorities’ in clause (69) of section 2 of the CGST Act, 2017. It would not include other bodies which are merely described as a ‘local body’ by virtue of a local law. For example, State Governments have setup local developmental authorities to undertake developmental works like infrastructure, housing, residential & commercial development, construction of houses, etc. The Governments setup these authorities under the Town and Planning Act. Examples of such developmental authorities are Delhi Development Authority, Ahmedabad Development Authority, Bangalore Development Authority, Chennai Metropolitan Development Authority, Bihar Industrial Area Development Authority, etc. Such developmental authorities formed under the Town and Planning Act are not qualified as local authorities for the purposes of the GST Acts.

 

It has been clearly provided that Authorities like Delhi Development Authority, Ahemdabad Development Authority, Bangalore Development Authority, Chennai Metropolitan Development Authority, Bihar Industrial Area Development Authority are not local authority under CGST Act, 2017. Now we take a look at the relevant acts under which each of the above referred Institutions have been set up

 

Particular Act
Delhi Development Authority Delhi  Development Act,  1957
Ahemdabad Development Authority Gujarat Town Planning and Urban Development Act, 1976
Bangalore Development Authority Bangalore Development Authority Act, 1976
Chennai Metropolitan Development Authority Tamil Nadu Town and Country Planning Act, 1971

 

 

  1. Definition of “Local Authority” was introduced in Section 10(20) of Income Tax Act, 1961 w.e.f. 1st April 2003 and prior to that Definition of “Local Authority” as provided under General Clauses Act, 1897 prevailed.

It would be apt here to refer that Ahemdabad Development Authority was enjoying exemption under Section 10(20A) of the Income Tax Act till 31st March 2002. However, subsequently   Section   10(20A)   of   the   Act   came   to   be   deleted/omitted by the Finance Act, 2002 w.e.f. 1.4.2003. That simultaneously, exemption granted under Section 10(20A) of the Income Tax Act also came to be withdrawn by Finance Act, 2002. The same was the fate for Delhi Development Authority. Therefore, it became apt to analyse that whether these authorities were Local Authority under Income Tax.

Alongwith deletion of Section 10(20A) of the Income Tax Act, definition of local authority was also introduced for the purpose of 10(20) of the Income Tax Act w.e.f. 1st April 2003. Prior to that there was no definition of local authority under the Income Tax and reference was made to definition of local authority under the General Clauses Act, 1897.

Had such definition not been inserted w.e.f. 1st April 2003, such institution would have been classified as “Local Authority” under Income Tax Act, 1961 referring to the definition of “Local Authority” under General Clauses Act, 1897. It was in the case of Union of India & Ors vs R. C. Jain & Ors on 17 February, 1981 that while refereeing to the decision of general Clauses Act, 1897, Hon’ble Apex Court held that Delhi Development Authority is a Local Authority under General Clauses Act, 1897. Thus, as per the definition as provided under the General Clauses Act, 1897, Delhi Development Authority and Authorities having similar characteristics are Local Authority.

 

  1. Why Delhi Development Authority is not a Local Authority under the Income Tax Act, 1961:

 It’s the word “any other authority” which plays a significant role in interpreting which institutions are local authority covered by this clause and which institutions fall out of the same. Explanation to Section 10(20) of Income Tax Act, 1961 defines local authority as follows:

Explanation.—For the purposes of this clause, the expression “local authority” means—

 (i)  Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii)  Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);

 

Now if we compare the definition of “Local Authority” under the General Clauses Act, 1897 vis-a vis definition of Local Authority under Income Tax, it would be clear that why such Institutions have fallen out of the purview of Local Authority under the Income Tax Act and still are Local Authority under the General Clauses Act, 1897. This comparison of the two definitions has been made by the 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).Hon’ble Apex Court in the given matter was faced with the issue that

 

“Whether Agricultural Market Committee (“AMC”, for short) is a “local authority” under the Explanation to Section 10(20) of the Income-tax Act, 1961 (“1961 Act”, for short)”.

 

The Hon’ble Apex Court then provided a comparative chart of the definition of local authority under Income Tax Act and General Clauses Act as follows:

Before analyzing the above question, we quote herein below a comparative chart containing the Explanation to Section 10(20) of the 1961 Act on one hand in juxtaposition to Section 3(31) of the General Clauses Act, 1897:

Explanation to Section 10(20) of the 1961 Act Section 3(31) of the 1897 Act
“Explanation.- For the purposes of this clause, “local authority” means –

(i)    Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii)  Municipality as referred to in clause (e) of article 243P of Constitution; or

(iii)Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv)Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924)

3. DEFINITIONS.- In this Act, and in the expression all  Central Acts and Regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context, –

(31). “local authority” shall       mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted the by the Government with, the control or management of a municipal or local fund.

Hon’ble Apex Court then held that

  1. Certain glaring features can be deciphered from the above comparative chart. Under Section 3(31)of the General Clauses Act, 1897, “local authority” was defined to mean “a municipal committee, district board, body of port commissioners or other authority legally entitled to the control or management of a municipal or local fund. The words “other authority” in Section 3(31)of the 1897 Act has been omitted by Parliament in the Explanation/definition clause inserted in Section 10(20)of the 1961 Act vide Finance Act, 2002. Therefore, in our view, it would not be correct to say that the entire definition of the word “local authority” is bodily lifted from Section 3(31) of the 1897 Act and incorporated, by Parliament, in the said Explanation to Section 10(20) of the 1961 Act. This deliberate omission is important. It may be noted that various High Courts had taken the view prior to Finance Act, 2002 that AMC(s) is a “local authority”. That was because there was no definition of the word “local authority” in the 1961 Act. Those judgments proceeded primarily on the functional tests as laid down in the judgment of this Court vide para `2′ in the case of R.C. Jain (supra). We quote hereinbelow para `2′ which reads as under:

 

  1. One more aspect needs to be mentioned. In the case of R.C. Jain (supra) the test of “like nature” was adopted as the words “other authority” came after the words “Municipal Committee, District Board, Body of Port Commissioners”. Therefore, the words “other authority” in Section 3(31)took colour from the earlier words, namely, “Municipal Committee, District Board or Body of Port commissioners”. This is how the functional test is evolved in the case of R.C. Jain (supra). However, as stated, earlier Parliament in its legislative wisdom has omitted the words “other authority” from the said Explanation to Section 10(20)of the 1961 Act. The said Explanation to Section 10(20) provides a definition to the word “local authority”. It is an exhaustive definition. It is not an inclusive definition. The words “other authority” do not find place in the said Explanation. Even, according to the appellant(s), AMC(s) is neither a Municipal Committee nor a District Board nor a Municipal Committee nor a Panchayat. Therefore, in our view functional test and the test of incorporation as laid down in the case of R.C. Jain (supra) is no more applicable to the Explanation to Section 10(20) of the1961 Act. Therefore, in our view the judgment of this Court in the case of R.C. Jain (supra) followed by judgments of various High Courts on the status and character of AMC(s) is no more applicable to the provisions of Section 10(20) after the insertion of the Explanation/definition clause to that sub- section vide Finance Act, 2002.

 

Hon’ble Allahabad High Court in the matter of New Okhla Industrial Development Authority  V/s Chief Commissioner Of Income Tax, Meerut Camp & Others following the above decision held that after 1.4.2003, New Okhla Industrial Development Authority (Noida) is not a local authority within the meaning of section 10(20) of the Income Tax Act, 1961.

 The above two definitions clearly highlight that why the development authority are not local authority in terms of Definition provided under the Income Tax Act w.e.f. 1st April 2003 and why they were Local Authority under the Income Tax Act prior to 1st April 2003 when “Local Authority” was not defined under the Income Tax Act and reference had to be made to the definition of “Local Authority” provided under General Clauses Act, 1897.

 

 

  1. Definition of Local Authority under Service Tax

 If we analyses the definition of “Local Authority” under the Service Tax Regime, the definition of “Local Authority” as provided under clause (31) of section 65B of Finance Act 1994 was as follows:

“local authority” means—

(a)  a Panchayat as referred to in clause (d) of article 243 of the Constitution;

(b)  a Municipality as referred to in clause (e) of article 243P of the Constitution;

(c)  a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;

(d)  a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);

(e)  a regional council or a district council constituted under the Sixth Schedule to the Constitution;

(f)  a development board constituted under article 371 of the Constitution; or

(g a regional council constituted under article 371A of the Constitution;

 

The words “any other authority” under sub-clause (c) of clause 31 of section 65B was not present and the situation was to the similar which is present under Income Tax Act, 1961. Therefore, such Institutions would never have been classified as “Local Authority” under the Service Tax Regime.

 

  1. Similarity of the Definition of Local Authority as provided under Section 3(31) of General Clauses Act, 1897 and sub-clause(c) of Section 2(69) of the CGST Act, 2017

 

Sub-clause(c) of Section 2(69) of the CGST Act, 2017 Section 3(31) of the General Clauses Act, 1897
(69) “local authority” means––

 (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;

“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.

 

                                                                                                                                      “Emphasis Supplied”

 The above two definitions as provided in juxtaposition clearly highlight that the words used “other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund” in the definition of “Local Authority” under General Clauses Act, 1897 are similar to the words used in CGST Act, 2017. Upon these terms only Hon’ble Apex Court held that Delhi Development Authority is local authority under the General Clauses Act, 1897. Thus, there should not be any other interpretation of the similar words used in other Statute i.e. CGST Act, 2017 and development authorities fulfilling the conditions laid down by Hon’ble Apex Court should also be local authority under GST.

 

 

  1. Impact of Decision of AAR-Rajasthan in the matter of Tata Projects Limited 94 taxmann.com 86

In the given case, Jaipur Development Authority has been held to be covered under the status of Government Authority. However on going through the order, it seems that there was never a question before the AAR by the applicant that JDA is a Local Authority. The relevant extract of the judgement is as follows:

 

Issues to be decided :

  1. The issue involved in this case is, whether Jaipur Development Authority is covered under the status of Government Authority/Entity or not?

Thus, issue that whether JDA is a Local Authority or not under CGST Act, 2017 was not raised before the AAR, therefore the said decision is not applicable on the matter. Further, it is possible that an Institution might fall under two limbs of different provisions and the most beneficial one can be opted by them.

 

Conclusion: In my humble view Development Authority satisfying the conditions as laid down by Hon’ble Apex Court in the matter of Union of India & Ors vs R. C. Jain & Ors on 17 February, 1981should be treated as “Local Authority” under the CGST Act, 2017 and the Sectoral FAQ as detailed out by the CBEC on this issue requires reconsideration and as this issue was not raised before the AAR Rajasthan therefore said decision is not entirely applicable on the issue.

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