Quick answer: In Delhi Development Authority v. Commissioner of Service Tax, Delhi-II, decided on 24 August 2026, the Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal, New Delhi, dismissed two connected appeals by the Delhi Development Authority (DDA) against service tax demands, under Section 65(105)(zzzz) and Section 65B(44) of the Finance Act, 1994, on income from renting Nazul land for commercial use and from membership and subscription charges at its sports complex, for periods running from 2007-08 to 31 March 2015. The Tribunal, presided over by Member (Judicial) Dr. Rachna Gupta and Member (Technical) P.V. Subba Rao, held that DDA had failed to establish that this income arose from a mandatory statutory function rather than a commercial activity, applying the Supreme Court’s test in Krishi Upaj Mandi Samiti, New Mandi Yard, Alwar v. Commissioner of Central Excise and Service Tax, Alwar. The demands under appeal, taken together, exceed Rs. 1,280 crore.
Key Takeaways
- A statutory body’s discretionary powers do not generate an exemption. Renting out land under an enabling provision — one a statute permits an authority to do, rather than compels it to do — is not a “mandatory statutory function” merely because the lessor is a creature of statute.
- Where the fee goes matters as much as who collects it. Following Krishi Upaj Mandi Samiti, income retained in an authority’s own accounts, rather than deposited into the Government Treasury as a compulsory levy, points away from the “sovereign function” exemption under CBEC’s 2006 circular.
- The burden sits with the assessee. DDA’s claim to be acting as a mere custodian of Nazul land for the Union, and not the beneficial recipient of rent, failed for want of evidence — the Tribunal expressly recorded that DDA “could not produce any such document to justify” the claim.
- Lease premium and one-time consideration are not outside the net. The Tribunal relied on a Larger Bench ruling that lease premium or salami is itself exigible to service tax as “renting of immovable property”, foreclosing a structuring route around periodic rent.
- Vintage matters within a single dispute. The Negative List regime from 1 July 2012, and an earlier line of authority excluding vacant land let out before 1 July 2010, meant the Tribunal had to slice the assessment years differently rather than apply one rule uniformly across an eight-year demand.
- Non-appearance is costly in tax litigation. With no one present for DDA at the final hearing, and the appeals already several years old, the Tribunal proceeded on the department’s submissions alone and dismissed both appeals without any contest on the primary facts.
1. Introduction
Statutory development authorities, municipal corporations, market committees, industrial area authorities and similar creatures of state legislation routinely generate substantial revenue by leasing land and buildings they hold for public purposes. For much of the service tax era, many of these bodies resisted tax on that revenue on the footing that they were performing sovereign or statutory functions, immune from a levy meant for ordinary commercial actors. On 24 August 2026, the Customs, Excise and Service Tax Appellate Tribunal’s Principal Bench in New Delhi rejected that defence for the Delhi Development Authority, holding it liable to service tax on income from renting Nazul land for commercial use and from its sports club’s membership fees, across two appeals spanning tax periods from 2007-08 to 2014-15.
The ruling matters beyond DDA because the same fact pattern — a statutory authority holding government land, letting it out for consideration, and claiming the immunity of sovereign function — recurs across market committees, development authorities, municipal corporations and port trusts, several of which litigated identical or closely related points before the same Tribunal and the Supreme Court over the past decade. The aggregate stakes in DDA’s own appeals, on the Tribunal’s own tabulation, exceed Rs. 1,280 crore, underscoring how consequential this class of dispute can be for a single public authority.
This article sets out the facts and the demand structure across the two appeals, works through the Tribunal’s reasoning on the “sovereign function” exemption and the definitional scope of “renting of immovable property” across two regimes of the Finance Act, 1994, and draws out what the ruling means for public authorities carrying legacy service tax exposure and for practitioners handling the remaining pipeline of pre-GST appeals.
2. Case summary and background
2.1 The assessee and the disputed activities
The Delhi Development Authority is a corporate body constituted under Section 3(3) of the Delhi Development Authority Act, 1957, tasked with the development of Delhi according to plan. It was registered with the service tax department for “Mandap Keeper Service”, “Health and Fitness Service”, “Architect Service” and “Club or Association Service”, among others. An audit of its records found that DDA was earning substantial sums from renting out “Nazul land” — land held by DDA as custodian on behalf of the Government of India — to lessees for commercial use, on a ground-rent and one-time-premium basis, without registering for or paying service tax on this income under the “Renting of Immovable Property” head. A parallel stream of income from membership and subscription charges at DDA’s sports complex was also found untaxed under “Club or Association Service”.
2.2 The demands and procedural history
The dispute reached the Tribunal as two separate appeals arising from a common issue. The first, Service Tax Appeal No. 50278 of 2017, arose from an Order-in-Original dated 30 September 2016 confirming demands under two show cause notices: Rs. 157,32,19,353 for the period 1 April 2013 to 31 March 2014 (notice dated 21 April 2015), and Rs. 173,57,28,534 for the period 1 April 2014 to 1 April 2015 (notice dated 13 April 2016). The second, Service Tax Appeal No. 50191 of 2021, arose from an Order-in-Original dated 16 September 2020 confirming demands under four further show cause notices covering earlier years: Rs. 7,49,31,38,305 for 2007-08 to 2009-10 (notice dated 31 August 2010); Rs. 28,22,92,609 for 1 April 2010 to 30 September 2010 (notice dated 11 February 2011); Rs. 1,56,10,51,094 for 1 October 2010 to 30 September 2011 (notice dated 27 March 2012); and Rs. 15,95,43,883 for 1 October 2011 to 31 March 2012 (notice dated 5 September 2012). Added together, the demands confirmed across both appeals come to just over Rs. 1,280 crore.
The second appeal was itself the product of an earlier round of litigation: an earlier DDA appeal (Appeal No. 58914 of 2013) had already been remanded by the Tribunal, by Final Order No. 53021/2017 dated 24 April 2017, for want of any finding on whether the property let out was commercial or non-commercial in character, and on whether renting of vacant land before 1 July 2010 was taxable at all. The Order-in-Original dated 16 September 2020 under appeal in ST/50191/2021 was passed on that remand; it excluded the pre-1 July 2010 vacant-land component from the demand, consistent with the Tribunal’s own precedent in Greater Noida Industrial Development Authority v. Commissioner of Central Excise and Service Tax, Noida, but confirmed the balance.
At the final hearing on 13 May 2026, no one appeared for DDA. Given that one appeal was already nine years old and the other five, the Tribunal declined to adjourn further, heard the department’s Special Counsel, Mihir Ranjan, and reserved the appeals for orders. Judgment was pronounced on 24 August 2026, dismissing both appeals and upholding the demands in full, as elaborated below.
3. Legal analysis
3.1 The statutory definition of the taxable service, across two regimes
Because the demand periods straddle 1 July 2012, the Tribunal had to apply two successive definitions of the taxable activity. For the period up to 30 June 2012, “renting of immovable property” was defined under Section 65(105)(zzzz) of the Finance Act, 1994 to include “renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business or commerce”, expressly excluding property rented to religious or educational bodies, and clarifying that “renting of immovable property” includes permitting use of space irrespective of transfer of possession or control. From 1 July 2012, with the introduction of the Negative List regime, “service” was defined broadly under Section 65B(44) as any activity carried out by one person for another for consideration, excluding a transfer of title in immovable property by sale, gift or otherwise, among other carve-outs; DDA’s letting of land on lease or licence, not being a transfer of title, fell within this general definition, and “renting of immovable property” does not appear among the specified entries of the Negative List under Section 66D. The Tribunal accordingly held the activity taxable as “service” under both limbs of the statute for the periods each governed, rejecting any suggestion that DDA’s arrangements amounted to a sale or transfer of title that would have taken them outside the definition altogether.
3.2 The sovereign-function defence and the Krishi Upaj Mandi Samiti test
DDA’s principal defence was that, as a statutory body created to develop Delhi according to plan, its letting of government land in discharge of that statutory mandate was a sovereign function exempt under CBEC’s Circular No. 89/7/2006, dated 18 December 2006, which excludes from service tax activities performed by a sovereign or public authority that are “in the nature of statutory obligations”, where the fee collected is “in the nature of compulsory levy” and is “deposited into the Government treasury” — as distinct from a service undertaken for consideration that is not a statutory fee or levy, which the same circular expressly makes taxable.
The Tribunal applied the Supreme Court’s construction of that very circular in Krishi Upaj Mandi Samiti, New Mandi Yard, Alwar v. Commissioner of Central Excise and Service Tax, Alwar, reported at (2022) 1 SCR 700, a reportable decision of Nagarathna and M.R. Shah, JJ. That case held Agricultural Produce Market Committees liable to service tax, for the pre-Negative-List period, on renting land and shops to traders, notwithstanding that the Committees were statutory bodies established under the Rajasthan Agricultural Produce Markets Act, 1961. The Supreme Court’s reasoning turned on two features of the Rajasthan statute: the enabling provision permitting allotment of land or property used the word “may”, not “shall”, so the activity was discretionary rather than a mandatory statutory duty; and the fee collected was credited to the Market Committee’s own fund rather than surrendered to the Government Treasury as a compulsory levy, so it lacked the character of a statutory fee even though it passed briefly through treasury accounts for safekeeping. On both counts, the exemption under the 2006 circular was held inapplicable, and only the Committees’ entirely separate “market fee” or “mandi shulk” — collected for regulating the market itself — remained untaxed.
Applying that framework, the Tribunal recorded that DDA is “a corporate body managed by the Members as mentioned in Section 3(3) of Delhi Development Authority Act, 1957”, that DDA itself disclaimed ownership of the Nazul land and asserted it was only a custodian on behalf of the Government of India, and that DDA had nonetheless received the ground rent and premium in its own right. Crucially, the Tribunal found that DDA “has not been proved to be in the nature of statutory fee rather is admitted to be the amounts received against renting of immovable property”, and that DDA “could not produce any such document to justify their claim of rending [sic] the sovereign function while leasing out the Government lands against rent/lease/premium”. On this record, the Tribunal held that “if the appellant was earning some profits while discharging any function under the statute, the same is liable to tax” — the object of the DDA Act being development of Delhi did not immunise every revenue-generating activity carried out in service of that object.
3.3 Lease premium and the Larger Bench ruling in RIICO
A separate strand addressed whether one-time lease premium or “salami” — as opposed to periodic rent — falls within “renting of immovable property” at all. The department relied on a Larger Bench ruling of the Tribunal in RIICO Ltd., Interim Order No. 1/2025, holding that lease premium or salami is exigible to service tax under Section 65(105)(zzz) before 1 July 2012 and under Section 65B(44) thereafter. The Tribunal in DDA’s case treated this as settled, closing off any argument that structuring consideration as an upfront premium rather than periodic rent could avoid the levy — relevant here because DDA’s arrangements were described as involving both “ground rent” and “one time premium”.
3.4 The vacant-land carve-out and its temporal limits
The Tribunal did not treat the entire demand period uniformly. It recorded that, on the earlier remand, the adjudicating authority had already excluded from the Rs. 7,49,31,38,305 demand (period 2007-08 to 2009-10) the component relating to renting of vacant land for the period before 1 July 2010, applying Greater Noida Industrial Development Authority v. Commissioner of Central Excise and Service Tax, Noida, reported at 2015 (38) STR 1062 (Tri.-Del.), which had held such renting to be outside the scope of the taxable service before that date. The balance of the demand — covering built structures throughout, and vacant land from 1 July 2010 onward — was confirmed. The Tribunal’s acceptance of this bifurcation shows that even a wholesale rejection of the sovereign-function defence does not collapse every temporal or definitional nuance in a multi-year demand; the vacant-land exclusion survived on its own, narrower footing.
3.5 Club or Association Service on sports complex membership
The second head of demand, membership and subscription charges at DDA’s sports complex, was dealt with more briefly. The adjudicating authority had held this was not a sovereign activity but a commercial one, taxable as “Club or Association Service”, and the Tribunal found no infirmity in that finding, again in the absence of any contrary submission or evidence from DDA.
3.6 An open question the Tribunal did not need to resolve
The Tribunal noted, without deciding, that the department’s representative had drawn attention to a Chennai Bench ruling — Final Order No. 40819/2025 dated 12 August 2025 in Service Tax Appeal No. 40886 of 2016 — concerning a municipal corporation’s similar liability, which had been remanded rather than finally decided. The Tribunal did not treat that remand as bearing on DDA’s own appeals, which it disposed of on the strength of the Supreme Court’s ruling and DDA’s own failure of proof, but its reference signals that the sovereign-function question continues to generate divergent procedural outcomes — final dismissal in one forum, remand for further fact-finding in another — depending on how squarely the underlying record establishes or negates a statutory compulsion.
4. Practical significance
For development authorities, municipal corporations, market committees, port trusts, and other statutory bodies that lease government land or premises for commercial use, this ruling is a reminder that the “sovereign function” exemption under the 2006 circular is narrow and fact-intensive, not a status-based immunity that attaches automatically to any public authority. Two evidentiary points recur across Krishi Upaj Mandi Samiti and this ruling: whether the enabling statute casts the letting activity as a mandatory duty (a “shall”) or a discretionary power (a “may”), and whether the resulting fee is genuinely surrendered to the Government Treasury as a compulsory levy or retained, even indirectly, for the authority’s own use. Bodies carrying legacy service tax exposure on similar facts should audit their own enabling statutes and fund-flow arrangements against this two-part test before assuming the exemption applies, and should be prepared to produce documentary proof of statutory compulsion — DDA’s failure to do so was treated as effectively dispositive.
The confirmation that lease premium and salami are themselves taxable as renting of immovable property closes off a structuring route some public-sector lessors may have relied on, of characterising land allotments as one-time capital receipts rather than periodic rent to avoid the service tax net; any such arrangement carrying forward into pending assessments should be reassessed on this basis. Conversely, the vacant-land carve-out for the period before 1 July 2010 remains available on its own facts and should not be abandoned merely because a sovereign-function defence otherwise fails — assessees with mixed vacant-land and built-property demands from that era should ensure their own computations reflect the bifurcation the Tribunal accepted here.
Procedurally, the case is a caution against treating an old, low-priority appeal as safe to leave unattended. Non-appearance at a hearing on an aged matter invites exactly the outcome DDA received: the Tribunal proceeding on the department’s submissions alone, with no contest on the underlying facts. Given the scale of the demands at stake — over Rs. 1,280 crore in aggregate here — public authorities should treat legacy service tax appeals with the same diligence as any high-value commercial litigation, including timely engagement with counsel and marshalling of the specific documentary proof the case law requires.
Finally, the sovereign-function litigation this ruling continues is substantially a legacy phenomenon. Under the Central Goods and Services Tax Act, 2017, renting of immovable property is treated as a supply of service under Schedule II, and the exemption architecture for services supplied by government and local authorities is drawn far more narrowly and specifically than the open-textured 2006 circular construed here, with government lessors themselves brought within the tax net — in some cases through the reverse charge mechanism placing the liability on the recipient. Practitioners should not read this ruling, or its GST-era value, as reopening a broad “sovereign function” argument against GST demands on renting income; its real significance lies in the still-substantial backlog of pre-GST service tax appeals raising the same fact pattern, where the Krishi Upaj Mandi Samiti test remains the operative law.
5. Conclusion
CESTAT’s ruling against the Delhi Development Authority rests on a proposition with wide reach across India’s statutory-authority landscape: a public body’s constitutional or statutory pedigree does not, by itself, immunise commercial income from tax. What matters is whether the specific letting activity was compelled by law and whether its proceeds were surrendered as a statutory levy — and on both counts, applying the Supreme Court’s test in Krishi Upaj Mandi Samiti, DDA’s own record supplied no answer in its favour.
The decision is significant less for breaking new doctrinal ground — it applies, rather than extends, a test the Supreme Court settled in 2022 — than for its scale and its procedural lesson. Demands exceeding Rs. 1,280 crore turned on an evidentiary gap that a contested hearing might have narrowed, and the ruling will likely be cited wherever a development authority, market committee or municipal body faces a similar demand on rental or premium income from land it holds in a public capacity. For that substantial population of legacy appeals still working through the Tribunal system, the lesson is direct: produce the proof of statutory compulsion, or expect the demand to stand.
The authorities and provisions relied on
| Authority / Provision | Role in the judgment |
|---|---|
| Finance Act, 1994, Section 65(105)(zzzz) | Defines “renting of immovable property” as a taxable service for the period up to 30 June 2012; held to cover DDA’s leasing of Nazul land for commercial use. |
| Finance Act, 1994, Section 65B(44) and Section 66D | Defines “service” broadly under the Negative List regime from 1 July 2012, excluding transfer of title in immovable property; renting of immovable property does not appear in the Negative List and remained taxable. |
| CBEC Circular No. 89/7/2006, dated 18 December 2006 | The sovereign/public authority exemption DDA invoked; held inapplicable because DDA could not show the letting was a mandatory statutory function or that the fee was a compulsory levy deposited into the Government Treasury. |
| Krishi Upaj Mandi Samiti, New Mandi Yard, Alwar v. Commissioner of Central Excise and Service Tax, Alwar, (2022) 1 SCR 700 (Supreme Court) — applied by the Tribunal | Supplies the operative test for the sovereign-function exemption: whether the enabling provision is discretionary (“may”) rather than mandatory (“shall”), and whether the fee is genuinely a compulsory levy surrendered to the Treasury. |
| RIICO Ltd., Larger Bench, Interim Order No. 1/2025 — applied by the Tribunal | Held that lease premium or salami is itself exigible to service tax as renting of immovable property, both before and after 1 July 2012. |
| Greater Noida Industrial Development Authority v. Commissioner of Central Excise and Service Tax, Noida, 2015 (38) STR 1062 (Tri.-Del.) — applied by the Tribunal | Basis for excluding renting of vacant land from the taxable service for the period before 1 July 2010; the exclusion was carried into the Order-in-Original under appeal and left undisturbed. |
| Delhi Development Authority’s own earlier appeal, Final Order No. 53021/2017, dated 24 April 2017 (Appeal No. 58914 of 2013) | Prior remand of an earlier assessment for want of findings on commercial character and vacant-land taxability; the Order-in-Original under appeal in ST/50191/2021 was passed pursuant to this remand. |
| CESTAT Chennai Bench, Final Order No. 40819/2025, dated 12 August 2025 (Service Tax Appeal No. 40886 of 2016) — noted, not applied | Cited by the department as a similar case involving a municipal corporation, remanded rather than finally decided; noted by the Tribunal without bearing on the outcome of DDA’s own appeals. |
Frequently Asked Questions
What did CESTAT decide in the DDA case?
It dismissed two connected appeals by the Delhi Development Authority against service tax demands on income from renting Nazul land for commercial use and from sports complex membership fees, holding that DDA had not shown these activities were mandatory statutory functions or that the income was a compulsory levy exempt under CBEC’s 2006 circular. The demands confirmed across both appeals total just over Rs. 1,280 crore.
Why didn’t DDA’s status as a statutory authority protect it from service tax?
Because the Supreme Court’s test in Krishi Upaj Mandi Samiti does not exempt a public authority’s activities merely because it is a creature of statute. The exemption applies only where the specific activity is a mandatory statutory duty and the fee collected is a compulsory levy surrendered to the Government Treasury. DDA’s letting of land was discretionary and the proceeds were not shown to have that character, so the exemption did not apply.
Does this ruling mean government bodies can never claim the sovereign-function exemption?
No. The exemption remains available where an authority can show both that the specific activity is genuinely mandatory under its enabling statute and that the fee collected is a compulsory levy deposited into the Treasury rather than retained for the authority’s own use — as with market fees or regulatory fees that are distinct from a rental or lease arrangement.
Does this reasoning apply to GST as well as legacy service tax?
Not straightforwardly. GST treats renting of immovable property as a supply of service under Schedule II to the Central Goods and Services Tax Act, 2017, and its exemption scheme for government and local-authority services is far more specifically drawn than the general 2006 circular construed here, with some renting transactions brought within the reverse charge mechanism. The practical significance of this ruling lies mainly in the substantial backlog of pre-GST service tax appeals still raising the same fact pattern.
What should other statutory authorities with similar leasing arrangements do?
Audit their own enabling statutes to determine whether the letting activity in question is genuinely mandatory (“shall”) or merely permitted (“may”), verify whether the resulting fee is deposited into the Government Treasury as a compulsory levy or retained in the authority’s own funds, and be prepared to produce documentary proof of statutory compulsion — the Tribunal treated DDA’s inability to do so as effectively decisive.
This article is not legal advice and does not create an attorney–client relationship. Readers should verify the certified copy of the judgment and any subsequent clarificatory orders before relying on it, and consult a qualified advocate on the facts of their matter.