“Exemptions Cannot Be Curtailed by Artificially Narrowing Down the Width of the Exemption”: Madras High Court Quashes GST Demand on Railway Works Executed for RVNL
Safiya Malik
The Madurai bench of the High Court of Madras Single Bench of Justice Mohammed Shaffiq quashed five GST assessment orders demanding differential tax at 18% on works contract services rendered for railway infrastructure projects. The Court held that the contract in question fell squarely within the concessional 12% GST rate under Notification No.11/2017. The impugned orders were set aside, with the Court directing that the works executed under the railway contract were to be taxed at 12%, as originally claimed by the petitioner. The writ petitions were disposed of, and all connected miscellaneous petitions were closed.
The petitioner, a joint venture of M/s. Stroytechservice LLC (Russia) and KEC International Limited, undertook a railway infrastructure project pursuant to a Letter of Acceptance dated 11.10.2018 issued by Rail Vikas Nigam Limited (RVNL). The contract involved doubling of tracks between Vanchi Maniyachchi and Nagercoil, construction of platforms, buildings, bridges, installation of electrical and signalling infrastructure, and related works within the Madurai and Thiruvananthapuram divisions of the Southern Railway. The contract was valued at ₹712.48 crores.
During the financial years 2018–19 to 2022–23, the petitioner discharged Goods and Services Tax (GST) at a concessional rate of 12% on the ground that the work constituted “original works pertaining to railways” under Serial No.3(v)(a) of Notification No.11/2017 – Central Tax (Rate), Notification No.8/2017 – Integrated Tax (Rate), and G.O.Ms.No.94, dated 22.08.2017. These notifications collectively governed composite supply of works contracts related to construction, erection, or installation of original railway works.
However, on 21.12.2022, the petitioner was issued an intimation in Form GST DRC-01A alleging that the correct applicable rate was 18%, not 12%. The demand was based on the premise that RVNL was a public sector undertaking and not directly under the control of Indian Railways. The notice also asserted that RVNL’s employees were not recognised as government servants and that the entity operated independently of the Indian Railways as defined under the Railways Act, 1989.
A formal show cause notice was issued on 30.01.2023 under Form GST DRC-01, reiterating that the petitioner had incorrectly availed the 12% rate. The petitioner submitted a detailed reply on 01.03.2023, asserting that the works executed were in line with the qualifying conditions under the GST notifications, and that the scope of “railways” within the notification extended to works performed for RVNL.
On 12.12.2023, the first respondent State Tax Officer passed five assessment orders in Form GST DRC-07 for the five respective assessment years, confirming the demand and rejecting the petitioner’s classification of services. The orders also referenced an advance ruling by AAR Gujarat in M/s. SKG-JK-NMC Associates (JV), 2021 (1) TMI 425, which had held similar contracts taxable at 18%.
Challenging the assessment orders, the petitioner filed five writ petitions before the Madurai Bench of the Madras High Court. It was contended that RVNL functioned as an arm of the Ministry of Railways, and that the term “railways” in the notification must be interpreted based on common usage and not with strict reference to the Railways Act, 1989. The petitioner further submitted that various advance rulings across different states had confirmed eligibility for the 12% rate in similar contracts.
The respondents argued that RVNL was not Indian Railways and that, as a listed company under the Companies Act, it could not qualify under the concessional entry. It was further contended that the GST notifications must be strictly construed and that the petitioner failed to maintain statutory records such as the Input Tax Credit register during inspection.
Justice Mohammed Shaffiq began by recording that the petitioner’s services were not disputed to be original works of construction, erection, and commissioning related to railways. The Court noted that “the services supplied by the petitioner constitute works contract services of construction, erection, commissioning, or installation; that the works contract services are of original works; and that the works contract services pertain to railways.”
Examining the GST notifications, the Court observed that the use of the term “railways” was not defined under the GST Act, and that importing definitions from the Railways Act, 1989 was unwarranted. The Court stated, “There is no definition for 'railways' under the GST Act. It is trite law that legislature must be imputed with wisdom of the legislations in force at the time of its enactment. If the legislature intended to incorporate or refer to the definition of 'railways' as contained under the Railways Act, 1989, it would have done so expressly.”
On the nature of RVNL, the Court recorded that, “RVNL functions as an extended arm of the Ministry of Railways and works for and on behalf of MoR. The Central Government presently holds 78.20% equity share capital of RVNL.” It further observed, “The functions of RVNL and Indian Railways are inseparable from each other and both work in tandem to develop the rail transport infrastructure of the country.”
The Court then examined the definition of “railway” under Section 2(31) of the Indian Railways Act and concluded that even under that definition, the contract in question would qualify as pertaining to railway infrastructure. The Court stated, “On applying the definition of Railway as defined under IRA it appears that the contract between the petitioner and RVNL… would constitute 'Railway' even under the definition of Indian Railways Act.”
Critically, the Court clarified that the term “railways” in the notification was not entity-specific. It recorded, “The expression ‘Railway’ is not employed with reference to an entity viz., Indian Railway, but rather to an industry or utility.” This was further supported by the inclusion of Metro Rail and Mono Rail in the same entry, which are often operated by private or joint entities.
Addressing the scope of the term “pertaining to,” the Court quoted the Supreme Court’s ruling in Doypack Systems Pvt. Ltd. v. Union of India (1988) 2 SCC 299, stating: “The expressions ‘pertaining to’, ‘in relation to’, and ‘arising out of’ are used in an expansive sense… and must be interpreted in a broad and liberal manner.”
With respect to the respondent’s reliance on a Gujarat AAR, the Court recorded that the said ruling had been overruled by the Appellate AAR and noted: “The impugned order being contrary to Appellate Advance Ruling and Advance Ruling Authorities referred above would lead to uncertainty and inconsistency which ought to be avoided.”
The Court concluded its reasoning by stating, “The attempt to suggest that the expression ‘railway’ employed in the subject notification would only cover ‘Indian Railways’ would fall foul of the settled principle that exemptions cannot be curtailed by artificially narrowing down the width of the exemption or by importing conditions.”
The High Court quashed the impugned orders passed by the State Tax Officer. The Court held: “The contract… between the petitioner and RVNL would be covered by Notification 11 of 2017 CGST (RATE) dated 28.06.2017 as amended… and liable to tax at 12%.”
The Court further stated: “The impugned orders are set aside and the writ petitions stand disposed of. No costs. Consequently, connected miscellaneous petitions are closed.”
Advocates Representing the Parties
For the Petitioners: Mr. Abishek A. Rastogi
For the Respondents: Mr. R. Sureshkumar, Additional Government Pleader, Mr. V. Malaiyendran, Central Government Standing Counsel
Case Title: STS-KEC (JV) v. The State Tax Officer & Anr.
Case Number: W.P.(MD).Nos.3938 to 3942 of 2024
Bench: Justice Mohammed Shaffiq
[Read/Download order]
