Railway exclusion for metro construction: service tax demand on Delhi Metro works was held unsustainable.

Construction of viaducts and stations for the Delhi Metro Rail Project was treated as falling outside commercial or industrial construction service because the exclusion for "works relating to railways" in section 65(25b) was held broad enough to cover metro rail and monorail as forms of rail systems. The Revenue's reliance on internal notings and a later statutory definition effective from 01.07.2012 was rejected as irrelevant to the disputed period. The later exemption notification for original works pertaining to railways also supported that approach. The service tax demand, together with interest and penalties, was therefore unsustainable and the appeals were allowed.

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Issues: Whether construction of viaducts and stations for the Delhi Metro Railway Project was excluded from the taxable category of commercial or industrial construction service as works relating to railways, and whether the service tax demand with interest and penalties could survive.

Analysis: The expression "railways" in the exclusion carved out in section 65(25b) of the Finance Act, 1994 was held to be wide enough to cover all forms of rail systems, including metro rail and monorail, and no distinction could be drawn between different kinds of rail lines for the purpose of levy. The reliance placed by the Revenue on alleged governmental internal notings and on a later statutory definition effective from 01.07.2012 was rejected as irrelevant to the period in dispute. The construction activity pertaining to Delhi Metro Rail was therefore treated as falling outside the taxable service, and the exclusion was reinforced by the legislative approach reflected in the later exemption notification for original works pertaining to railways.

Conclusion: The demand of service tax, along with the consequential interest and penalties, was unsustainable. The appeals were allowed.

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