2018 (5) TMI 647 - AAR - GST

GST applies at 18% on Municipal reinstatement and access charges under Notification 11/2017, not exempt under Article 243W

The AAR, Maharashtra held that reinstatement charges paid to Municipal Authorities for excavation and restoration of roads by utility service providers ... Services by local authority in relation to functions entrusted under Article 243W - Exemption under Notification No. 12/2017-services by local authority in relation to functions entrusted under Article 243W - Exclusion of services provided to business entities from Entry 4 exemption - Reverse charge liability for services supplied by local authority to business entity - Composite supply and principal supply - Residuary taxable entry for services 'nowhere else classified'Services by local authority in relation to functions entrusted under Article 243W - Exemption under Notification No. 12/2017-services by local authority in relation to functions entrusted under Article 243W - Exclusion of services provided to business entities from Entry 4 exemption - Residuary taxable entry for services 'nowhere else classified' - Liability to GST of reinstatement charges collected by Municipal Authorities - HELD THAT: - The Authority considered whether reinstatement charges recovered by Municipal Authorities for restoring road patches excavated by a private distribution licensee fall within the Entry 4 exemption of Notification No.12/2017 (services by local authority in relation to functions entrusted under Article 243W). While roads are a matter in the Twelfth Schedule, the Authority held that the constitutional function relates to construction/maintenance of roads for public use as a sovereign municipal function. Recovery of charges for restoration of specific patches dug up by business entities in furtherance of their commercial activities does not equate to the sovereign function envisaged under Article 243W. Moreover, Notification No.12/2017 expressly excludes services provided to business entities from the Entry 4 exemption. No other exemption entry covers the impugned transaction; accordingly the Authority applied the residuary taxable entry for services 'nowhere else classified' and concluded that reinstatement charges are exigible to GST.Reinstatement charges paid to Municipal Authorities are liable to GST.Composite supply and principal supply - Reverse charge liability for services supplied by local authority to business entity - Exclusion of services provided to business entities from Entry 4 exemption - Residuary taxable entry for services 'nowhere else classified' - Liability to GST of access (right-of-way) charges collected by Municipal Authorities - HELD THAT: - The Authority examined whether access charges (right of way charges) collected by Municipal Authorities are taxable. The applicant argued that access charges are naturally bundled with reinstatement (restoration) services and thus form a composite supply whose principal supply (reinstatement) is exempt, making access charges exempt. The Authority noted lack of sufficient information to determine composite-supply character for Municipal Authorities generally, and observed that access charges were indicated as exigible (and even noted as exigible to CST in the record). Having found that services by local authorities to business entities are excluded from the Entry 4 exemption and that no specific exemption covers the impugned transaction, the Authority applied the residuary taxable entry and answered the question in the affirmative. The Authority's reasoning therefore treats access charges as liable to GST; the mechanism of tax payment may attract reverse charge where notification for reverse charge applies to services from local authorities to business entities.Access charges paid to Municipal Authorities are liable to GST.Final Conclusion: The Authority rules that both reinstatement charges and access (right of way) charges recovered by Municipal Authorities in the facts before it are exigible to GST, the Entry 4 exemption in Notification No.12/2017 not applying to services provided to business entities and no other exemption being applicable. ISSUES: Whether reinstatement charges paid to Municipal Authorities for restoration of roads damaged due to excavation work are liable to Goods and Services Tax (GST)?Whether access charges paid to Municipal Authorities for right of way to carry out excavation work are liable to GST? RULINGS / HOLDINGS: Reinstatement charges paid to Municipal Authorities are liable to GST. The service of restoration of roads in the context of excavation by a business entity does not constitute an activity in relation to any function entrusted to a municipality under Article 243W of the Constitution when performed for commercial purposes, and therefore does not qualify for exemption under Entry 4 of Notification No. 12/2017 - Central Tax (Rate) dated 28.06.2017.Access charges paid to Municipal Authorities for right of way are also liable to GST. Due to insufficient information regarding the nature of these charges across different Municipal Authorities, and considering the commercial nature of the service, GST liability arises under the reverse charge mechanism. RATIONALE: The legal framework applied includes Section 97 and 98 of the Central Goods and Services Tax Act, 2017, Notification No. 12/2017 - Central Tax (Rate), Notification No. 13/2017 - Central Tax (Rate), and relevant provisions of the Constitution of India, specifically Articles 243P, 243Q, and 243W along with the Twelfth Schedule.Entry 4 of Notification No. 12/2017 exempts from GST 'services by Central Government, State Government, Union territory, local authority or governmental authority by way of any activity in relation to any function entrusted to a municipality under Article 243W of the Constitution.' The functions listed in the Twelfth Schedule include 'Roads and Bridges.'The Court interpreted the term 'function entrusted to a municipality' as sovereign functions performed for the community at large, such as construction and maintenance of roads, which are not commercial in nature.The activity of restoring road patches damaged due to excavation by private business entities is not considered a sovereign function but a commercial service provided to the entity, thus falling outside the exemption.The Court distinguished between the sovereign function of constructing and maintaining roads and the restoration work done specifically for private entities, holding that the latter is taxable.Notification No. 13/2017 provides that services supplied by local authorities to business entities are subject to GST on a reverse charge basis, making the recipient liable to pay tax.The concept of 'composite supply' under Section 2(30) and Section 8 of the CGST Act was considered but found inapplicable to exempt access charges due to the commercial nature of the supply.The Court noted that exemption notifications must be strictly construed and that the exemption under Entry 4 of Notification No. 12/2017 excludes services provided to business entities, as clarified by an exclusionary clause in the same notification.The Court rejected the applicant's reliance on judicial precedents and broad interpretations of 'in relation to' and 'functions entrusted,' emphasizing the specific wording and legislative intent behind the exemption.No dissenting or concurring opinions were recorded.