Madras HC: 12% GST Applies to Works Contracts for Track Doubling & Infrastructure Under RVNL

In a recent ruling, the Madras High Court held that a works contract involving track doubling and associated infrastructure development under the purview of Rail Vikas Nigam Limited (RVNL) is subject to 12% GST, not 18% as claimed by the tax authorities.

Justice Mohammed Shaffiq, delivering the judgment, emphasized that while exemption notifications should be interpreted strictly, they must not be unduly limited by introducing conditions not stated in the notification or by assigning overly narrow meanings to its language. He clarified that the intended scope of such notifications must not be artificially restricted.

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The case concerned a joint venture between M/s. Stroytech Service LLC, Russia, and KEC International Limited, formed specifically to execute railway infrastructure projects in India. The consortium was awarded a works contract by RVNL, covering the track doubling project between Vanchi Maniyachchi and Nagercoil, along with infrastructure-related works in the Madurai and Thiruvananthapuram Divisions under the Southern Railway.

In compliance with what it deemed to be the applicable tax rate, the petitioner paid GST at 12% on the contract. However, they were later issued a notice in Form GST DRC-01A, asserting that the contract should attract an 18% tax rate. The department’s position was based on the belief that the contract did not qualify for the concessional rate.

The petitioner argued that their services fall squarely under Serial No. 3(v)(a) of Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017, as amended by Notification No. 20/2017, and corresponding provisions under Integrated Tax (Rate) and the relevant state government orders.

According to this notification, a composite supply of original works, as defined in Section 2(119) of the CGST Act, involving construction, erection, commissioning, or installation related to railways (including metro and monorail) is chargeable at a concessional 12% GST, except for certain specific exclusions.

The tax department countered this by asserting that RVNL does not function directly under the administrative control of the Indian Railways, and therefore, the reduced tax rate should not apply. They maintained that exemption notifications must be interpreted strictly, and in their view, the assessee was not entitled to the concessional treatment.

However, the Court rejected the department’s argument, observing that the scope of the exemption under the GST notification cannot be diminished through narrow interpretation or by adding limitations that the law does not prescribe.

The bench stated that “…… the expression ‘Railway’ employed in the notification does not incorporate the definition under the Indian Railway Act nor is it concerning or limited in its operation to Indian Railway. In any view, assuming that the definition of “Railways” as defined under the Indian Railways Act, 1989 does apply to the subject notification, the definition of Railway under IRA extracted above does not appear to limit its operation to any particular entity or in particular Indian Railways instead covers the entire industry/utility viz., Railway…….”

Thus, any 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, added the bench.

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The bench opined that in any view, even applying the definition of Railway as defined under the Indian Railway Act, 1989, to the contract between the assessee and M/s. RVNL, it would still constitute original work about the Railway for the subject notification and thus covered under Sl.No.3(v)(a) of the said notification.

Given the above, the bench allowed the petition.