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Exemption on input service cannot be granted solely on the ground that outward service of appellant is exempt from GST.

Nurseryman Co-operative Society - AAAR, Karnataka - Appeal dismissed

The appeal has been filed by Nurseryman Co-operative Society against the ruling of lower authority. The appellant provides services to the goverment departments through sub-contracting. The appellant prayed that since the services provided by appellant to goverment are exempted vide Notification No.12/2017 - Central Tax (Rate) therefore its sub-contracting by appallant to sub-contractors should also be made exempt from GST, because appellant is not able to avail ITC on input service as its outward services are exempt. And if exemption is not provided, it would become cost to the appellant and ultimately to the goverment department. 

Facts of the case are:

a) That the appellant has received contract from Government departments like BBMP and KSRTC for undertaking gardening and landscaping activities which is exempt from GST vide Notification No. 12/2017 - Central Tax (Rate).

b) In order to execute the work, the appellant has engaged sub-contractors.

c) The sub-contractors bill the appellant for the gardening and landscaping work done at the government departments. The appellant in turn bills the Government department in terms of the contract given to them.

d) The issue to be determined is whether the supply of services by the sub-contractor to the appellant for executing the gardening and landscaping work for government departments is exempt from GST.

Arguments by the appellant are:

a) That the appellant provide services to the Government organisations through sub-contractors. 

b) That if the sub-contractor charges GST, the appellant is not in a position to avail input tax credit as the outward supply is exempt and it would become cost to the appellant and ultimately to the the government organisation. 

c) That when the outward supply is exempt, inward supply should be exempted;

d) That the main intention of the Government is the cost of the service rendered to the Government agencies should not be taxed, but in this case, government agencies are taxed indirectly by non-availing of input tax credit from the sub-contractors bills. In view of the above, appellant prayed that the ruling given by the lower Authority be set aside.

Held by AAAR, Karnataka

In the instant case, the issue being examined is whether the services supplied by the sub-contractors to the appellant, who is the recipient of the services, is exempted from GST. The exemption vide Notification No.12/2017 - Central Tax (Rate) is available only if the recipient of services is a Government (central/State/UT) or local authority or a Governmental authority or a Government Entity.

In this case, the appellant who is the recipient of the supply from the sub-contractor is a Co-operative Society and not an entity specified in SI.No 3 and 3A. When this criterion of the Notification is not satisfied, the sub-contractors as suppliers of service, will not be eligible for the exemption under the entries 3 or 3A of the above said Notification.

It is the argument of the appellant that if the exemption is not available to the sub-contractors, then the GST paid by the Appellant on the inward supply from the sub-contractors will become a cost to them since they will not be eligible to avail the input tax credit of the tax paid on the inward supply, for the reason that the output supply made by them to the Government Department is exempted. While we agree that the Appellant will not be eligible for the input tax credit of the tax paid on the inward supply from the sub-contractors, we do not agree that this should be a ground for allowing the sub-contractors to avail the benefit of exemption.

It is a well settled law that exemption notifications are to be interpreted strictly as to their eligibility. One cannot be influenced by extraneous factors while determining a person's eligibility to an exemption notification. Therefore, on a strict interpretation of the entry Sl.No 3 and 3A, we hold that the supply of services by the sub-contractors to the Appellant is not eligible for the benefit of exemption under either SL.No 3 or 3A of Notification No 12/2017 CT (R) dated 28-06-2017.

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on May 20, 2020


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