The Kerala High Court has ruled that a charitable society engaged in socio-economic and welfare activities for ex-servicemen and their families is liable to pay service tax if it undertakes commercial ventures.

The Division Bench of Justice A.K. Jayasankaran Nambiar and Justice Easwaran S. observed that transactions aimed at generating income for members qualify as commercial activities, making the organization a "commercial concern."

"Taking cue from the above Circular, we would think that for an association like the appellant before us, the embarking on a transaction that is designed to earn income for its members would have to be seen as a commercial venture, and the appellant who embarks on such a venture, a 'commercial concern'," the Bench said.

The case concerned the Kerala State Ex-Services League, a charitable society whose primary objective is the welfare of ex-servicemen and their families. The society challenged notices issued in 1998 requiring it to register as a service provider under the category of “security agency service,” as defined in Section 65(40) of the Finance Act, 1994 (pre-2006) and Section 65(94) (post-2006 amendment).

The original authority ruled that the League’s activities fell under the purview of "security agency service" and were subject to service tax. Subsequent appeals by the League were dismissed by both the First Appellate Authority and the Appellate Tribunal.

The League contended that its activities, conducted on a no-profit, no-loss basis, did not qualify as "taxable services." It highlighted a 1985 circular from the Directorate of Sainik Welfare, Trivandrum, affirming its welfare-oriented purpose. Additionally, it cited a 2006 circular clarifying that institutions like IITs and IIMs, which primarily engage in non-commercial educational activities, are not deemed commercial concerns even if they charge fees for some services.

Rejecting the League’s arguments, the Court emphasized that the totality of an institution's activities and its objectives determine its commercial nature. The Bench noted that while the League may not have profited in specific years, its ventures were undertaken with the intent of generating income, distinguishing it from entities like educational institutions inherently structured as non-commercial organizations.

The Court concluded that the League’s activities met the criteria for a commercial concern under the Finance Act and dismissed its appeal, affirming the liability for service tax.

"The appellant cannot be treated at par with educational institutions, which, by their very nature and going by the activities intended to be performed by them, cannot be seen as commercial concerns. We therefore find ourselves unable to accept the submissions of the learned counsel for the appellant that the appellant is not a commercial concern for the purposes of levy of service tax. In the result, we see no reason to interfere with the impugned order of the Appellate Tribunal. These C.E. Appeals fail, and are accordingly dismissed," the Court said.

Cause Title: The Kerala State-Ex-Services League State Committee, Thiruvanthapuram v. Commissioner of Central Excise Customs and Service Tax, Trivandrum [Neutral Citation No. 2024:KER:95594]

Appearance:-

Petitioner: Advocates K.P. Pradeep, T.T. Biju, K.P. Kesvan Naid, S. Anand Ramakrishnan, T. Thasmi,

Respondent: Advocate Sreelal N. Warrier

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Justice AK Jayasankaran NambiarJustice Easwaran S.Kerala High Court

Sukriti Mishra

Legal Correspondent

Sukriti Mishra is a Legal Correspondent at Verdictum. She extensively covers the Supreme Court. She has completed her graduation with BA. LL.B (Hons.) from The ICFAI University, Dehradun. Sukriti started covering courts in March 2022, she has previously worked with another legal news portal, where she extensively covered the Delhi High Court and Trial Courts.