No Power Lies at the Behest of CBEC to Modify the Scope of Exemption Notification issued by the Central Government

The CESTAT has ruled that the Central Board of Excise and Customs (CBEC) cannot alter the scope of exemption notifications issued by the Central Government. In this case, a coaching institute was denied service tax exemption on study materials. The CBEC's circular had restricted the exemption to standard textbooks with an MRP, which the Tribunal found to be an unauthorised modification of the original exemption notification.

The CESTAT, New Delhi Bench, in the case of M/s Lakshya Education Solutions Pvt. Ltd. v. The Commissioner (Appeals), Customs, Central Excise & Service Tax [SERVICE TAX APPEAL NO. 50233 OF 2016], ruled that the Central Board of Excise and Customs ("CBEC") does not have the power to modify the scope of an exemption notification that the Central Government has issued.

Facts

M/s Lakshya Education Solutions Pvt. Ltd. ("the Appellant") engaged in the business of providing commercial training and coaching to students appearing in IIT (JEE)/AIEEE exams. The coaching provided by the Appellant is chargeable to service tax and that the same is being paid by the Appellant only on the coaching and not on the cost of the study materials provided by them.

The Appellant provide study materials in the nature of loose sheets bound together, supplied periodically to its students and not in the form of a book with maximum retail price ("MRP") printed on it. The Appellant did not pay service tax on the study material supplied in lie of Notification No. 12/2003-ST dated June 20, 2003 ("Exemption Notification") providing exemption towards study material. 

The department issued a show cause notice dated March 12, 2013 ("SCN") to the Appellant demanding service tax amounting to Rs. 5,89, 698/- stating that the exemption towards the cost of study materials under Exemption Notification was available only if the study materials were standard text books which are priced and have an MRP printed on it. for the same, department relied on paragraph 2.91 of CBEC's Circular dated June 20, 2003 which stated as "in case of commercial training and coaching institutes, the exemption in respect of study materials would be available only on the sale value of standard text books, which are priced. Any study material or written text provided by study institute as a part of service which does not satisfy the above criteria will be subjected to service tax".

The SCN therefore demanded service tax from the Appellant and extended the period of limitation under proviso to Section 73(1) of the Finance Act, 1994 ("the Finance Act") along with interest under Section 75 of the Finance Act. Penalties were proposed to be imposed under Section 77 and 78 for contravention of Sections 68, 69 and 70 of the Finance Act, 1994. The Adjudicating Authority passed Order-In-Original ("OIO") dated August 30, 2013 confirming the demand and interest as proposed but did not imposed penalties under Section 77 and 78 of the Finance Act. 

Both the Appellant and department appealed against the OIO, while Appellant contested the confirmation of demand and interest, the department contested no-imposition of penalty. The Appellate Authority passed Order-In-Appeal ("OIA") dated November 17, 2015, allowing department's Appeal and imposed a penalty of Rs. 5,89,698/- under Section 78 of the Finance Act and a penalty of Rs. 10,000/- under Section 77 of the Finance Act. Hence, the Appellant filed appeal before the Tribunal contesting that

Exemption Notification cannot be modified by the department by a Circular. 

Issue

Whether CBEC can alter the scope of the exemption notification issued by the Central Government?

Held

The CESTAT noted as follows:

• The Exemption Notification does not place any restriction on the type of goods or materials for which exemption can be granted. As long as there is a documentary proof indicating the value of the goods and materials sold by service provider to the service recipient, their value gets excluded from the taxable value and hence no service tax shall be leviable on such goods. 
• The reason for denying the exemption was the CBEC Circular, which had restricted the entitlement of the exemption to only such materials as constituted standard text books which have MRP. 
• The Exemption Notification is issued by the Central Government in exercise of the powers conferred under Section 93 of the Finance Act. Therefore, the Exemption Notification is a delegated legislation made under power granting exemption to the Central Government and not to anybody else including to CBEC.
• Therefore, OIA passed denying the benefit of Exemption Notification relying upon CBED Circular dated June 20, 2003 cannot sustain as CBEC has no power to modify the scope of Exemption Notification. 

The CESTAT, therefore, held that the CBEC was not given authority under Section 93 of the Finance Act, hence it is not permitted to provide exemptions or alter those already granted by the Central Government. As a result, the CBEC's circular cannot change the parameters of the exemption notification.