The Customs, Excise and Service Tax Appellate Tribunal has clarified that sanitation and cleaning services rendered to government hospitals qualify for tax exemption under Notification No. 25/2012-ST, overturning a substantial demand and reinforcing that interpretational disputes cannot justify extended limitation periods. This ruling provides critical relief to service providers contracting with public health institutions and sets a binding precedent on the scope of public health exemptions under pre-GST tax law.
Background & Facts
The Dispute
The appellant, M/s Srinivasa Outsourcing Services Ltd., provided cleaning, sanitation, waste disposal, and housekeeping services to multiple government hospitals in Andhra Pradesh, including the Government Mental Care Hospital in Visakhapatnam. These services included cleaning of floors, toilets, bathrooms, drainage systems, and disposal of both general and bio-medical waste. The appellant relied on Notification No. 25/2012-ST, which exempts services provided to the Government relating to functions ordinarily entrusted to municipalities, including public health and sanitation conservancy.
Procedural History
- 2012 - 2016: Appellant rendered services to government hospitals under contractual agreements with hospital superintendents.
- June 2017: Commissioner of Central Tax issued a show cause notice demanding service tax of Rs. 3.40 crore for the period 01.07.2012 to 31.03.2016, alleging non-payment.
- March 2018: Commissioner passed an order-in-original rejecting the exemption claim, holding the services taxable under Section 65B(51) of the Finance Act, 1994, and denied benefit of Notification 25/2012-ST.
- March 2018: Penalty of Rs. 5,000 under Section 77 and Rs. 10,000 under Section 78 was imposed on the company and its director, respectively.
- 2018: Appeals filed before the Customs, Excise and Service Tax Appellate Tribunal (CETAT).
Relief Sought
The appellants sought quashing of the tax demand, interest, and penalties, arguing that the services were exempt under Notification 25/2012-ST, that the issue was interpretational and not fraudulent, and that the extended period of limitation under Section 73(2) could not be invoked.
The Legal Issue
The central question was whether cleaning and sanitation services provided to government hospitals fall within the scope of Notification No. 25/2012-ST, and whether the extended period of limitation can be invoked in cases involving genuine interpretational disputes without evidence of fraud or suppression.
Arguments Presented
For the Appellant
The appellant’s counsel argued that:
- Government hospitals are organs of the State Government, and services rendered to them qualify as services provided to the Government under Notification 25/2012-ST.
- Cleaning and sanitation are integral to public health and sanitation conservancy, explicitly listed in the exemption.
- The Ahmedabad Tribunal in Commissioner of Central Excise and Service Tax, Bhavnagar v. D.G. Nakrani and M.J. Solanki had consistently held such services exempt, and the Supreme Court had dismissed the Revenue’s appeals in both cases.
- The issue was purely interpretational; there was no willful misstatement or suppression. Reliance was placed on Principal Commissioner of Customs v. Felox Technologies India Pvt. Ltd. to argue that extended limitation cannot apply to bona fide interpretational disputes.
For the Respondent
The Revenue contended that:
- The services were not directly provided to the State Government but to hospital authorities, which were not covered under the definition of Government.
- The exemption under Notification 25/2012-ST applied only to services directly linked to municipal functions, and hospital sanitation was a distinct commercial activity.
- The appellant had failed to disclose the nature of services in returns, warranting invocation of extended limitation and imposition of penalty.
The Court's Analysis
The Tribunal undertook a detailed textual and contextual analysis of Notification No. 25/2012-ST. It emphasized that the exemption applies to services provided to the Government “by way of carrying out any activity in relation to any function ordinarily entrusted to a municipality” - including public health and sanitation conservancy. The Tribunal noted that the term “Government” under the General Clauses Act, prior to the 2015 amendment, included State Government and its departments, and government hospitals were unequivocally part of the State’s public health infrastructure.
"We find that the cleaning and housekeeping services are essential parts of sanitation conservancy and waste management and respondent are eligible for exemption under Sl. No. 25(a) of the Mega Notification No. 25/2012-ST..."
The Tribunal relied on the binding precedents from the Ahmedabad Bench, which had been upheld by the Supreme Court in both D.G. Nakrani and M.J. Solanki. It held that the Commissioner had misread the notification by imposing a restrictive interpretation inconsistent with its plain language and legislative intent.
Regarding the extended period of limitation, the Tribunal applied the principle from Felox Technologies: where the dispute arises from ambiguity in the scope of an exemption - and not from concealment or fraud - the extended period under Section 73(2) cannot be invoked. The appellant had acted in good faith, relying on a plausible interpretation of the law, and had not suppressed facts.
The Tribunal further held that since the underlying tax liability was extinguished, penalties under Sections 77 and 78 could not stand. The imposition of penalty requires a finding of fraudulent intent or deliberate evasion, which was absent.
The Verdict
The appellants prevailed. The Tribunal held that cleaning and sanitation services provided to government hospitals are exempt under Notification No. 25/2012-ST, and that extended limitation cannot be invoked in interpretational disputes lacking fraud or suppression. The tax demand, interest, and penalties were set aside in their entirety.
What This Means For Similar Cases
Exemption Applies to Government Hospitals as State Organs
- Practitioners must treat government hospitals as part of the State Government for the purpose of applying pre-GST exemptions under Notification 25/2012-ST.
- Contracts executed by hospital superintendents on behalf of the State are valid for invoking exemption.
- Service providers should retain documentation linking services to public health functions to substantiate exemption claims.
Interpretational Disputes Shield Against Extended Limitation
- Tax authorities cannot invoke extended limitation (beyond three years) for disputes arising from ambiguity in exemption notifications.
- The burden shifts to the Revenue to prove willful misstatement or suppression - mere non-disclosure or differing interpretation is insufficient.
- Cases involving Sujana Metal, Anjuman Islahul Muslimin, and Felox Technologies now form a consolidated doctrine: interpretational bona fides negate penalty and extended demand.
Penalties Are Not Automatic on Disallowed Exemptions
- Penalties under Sections 77 and 78 require proof of intent to evade tax.
- Where the taxpayer’s position is legally tenable, even if ultimately rejected, penalties must be dropped.
- Practitioners should routinely argue against penalty imposition in exemption cases unless Revenue produces evidence of fraud.
