2018 (5) TMI 904 - AAR - GST

Railway cleaning services to government not exempt from GST under Notification 9/2017 despite minimal consumables involved

The Delhi AAR ruled that cleaning services provided to Northern Railways are not exempt from GST under Notification No. 9/2017. While the authority ... Exemption for pure services to Government in relation to functions entrusted to a Municipality under Article 243W - pure services versus works contract / composite supply - classification of Northern Railway as part of the Central Government - scope of Article 243W and the Twelfth Schedule - public health, sanitation, conservancy and solid waste management - taxability of cleaning activity when not related to municipal functionsPure services versus works contract / composite supply - cleaning contracts with Northern Railway are 'pure service' contracts and do not amount to works contract/composite supply involving transfer of goods - HELD THAT: - The Authority examined whether consumables (soaps, detergents, chemicals) and use of machines in the cleaning contracts convert the supply into a works contract or composite supply. The applicant's position, supported by the Delhi High Court decision in Writ Petition (C) No. 7843/2014, was that consumables were of minimal quantity, fully consumed in the process and not transferred to the Railways. The Authority relied on the FAQ clarification that 'pure services' are supplies without involving any supply of goods and concluded that the contracts, notwithstanding incidental use of consumables, are contracts for provision of services only. [Paras 33, 34, 35, 36, 37]The cleaning contracts are 'pure service' contractsClassification of Northern Railway as part of the Central Government - Northern Railway for the purposes of the notification is covered as 'Central Government' - HELD THAT: - Applying Section 3(8) of the General Clauses Act, 1897, the Authority noted that contracts were awarded in the name of the President of India and that officers exercising executive powers of the Union in the name of the President fall within 'Central Government'. On that basis Northern Railway was held to be within the class of recipients covered by the exemption notification. [Paras 38]Northern Railway is covered as 'Central Government' under the notificationScope of Article 243W and the Twelfth Schedule - public health, sanitation, conservancy and solid waste management - exemption for services in relation to municipal functions - cleaning services supplied to Railway premises are not services in relation to functions entrusted to a Municipality under Article 243W / Twelfth Schedule - HELD THAT: - The Authority analysed constitutional provisions and materials showing that Municipalities exercise functions in relation to urban areas as constituted under Articles 243P-243Q and the Twelfth Schedule. Railways are a Union subject (List I, Entry 22) and not a Municipality; the municipal functions under the Twelfth Schedule (including public health and sanitation) do not extend to Railway properties which remain the responsibility of the Central Government. Consequently, sanitation and cleaning of Railway stations, trains and colonies cannot be treated as functions entrusted to a Municipality. [Paras 26, 27, 28, 29, 43]The cleaning services are not in relation to functions entrusted to a Municipality under Article 243WExemption for pure services to Government in relation to functions entrusted to a Municipality under Article 243W - taxability of cleaning activity when not related to municipal functions - the cleaning services supplied by the applicant to Northern Railway are not exempt under Sl. No. 3 of Notification No. 09/2017 (as amended) and are taxable - HELD THAT: - The notification grants nil rate only where (i) the supply is a pure service (no supply of goods) and (ii) it is in relation to a function entrusted to a Municipality under Article 243W. Although the contracts were held to be pure services and Northern Railway was held to be a Government recipient, the services were not in relation to municipal functions as Railways are not a Municipality and municipal functions do not extend to Railway properties. Therefore the conditions of the exemption are not satisfied and the services fall outside the nil-rated entry; the jurisdictional officers' view that the services are taxable under Chapter heading 9994 was upheld. [Paras 31, 37, 39, 43, 45]The cleaning services are not exempt under Sl. No. 3 and are taxableFinal Conclusion: The Authority ruled that, although the contracts are 'pure services' and Northern Railway is a Government recipient, the cleaning and sanitation services to Railway premises are not in relation to functions entrusted to a Municipality under Article 243W; consequently the services do not fall under the exemption at Sl. No. 3 of the notification and are taxable. The ruling is binding on the applicant and the jurisdictional officers; the applicant is required to deposit GST as per this Ruling. Issues Involved:1. Classification of the services provided by the applicant.2. Applicability of GST exemption under S. No. 3 of Notification No. 9/2017 - Integrated Tax (Rate) dated 28.06.2017.3. Determination of whether the services provided are 'pure services' or works contract services/composite supplies.4. Examination of whether Northern Railways qualifies as 'Central Government' under the relevant notification.5. Analysis of whether the services provided relate to functions entrusted to a Municipality under Article 243W of the Constitution.Issue-wise Detailed Analysis:1. Classification of the Services Provided by the Applicant:The applicant is engaged in providing various cleaning and sanitation services, including mechanized cleaning at railway stations, on-board housekeeping services in trains, and comprehensive cleaning of railway colonies. These services are classified under the service category of 'cleaning activity,' which is defined under the Finance Act as services related to cleaning commercial or industrial buildings and premises.2. Applicability of GST Exemption:The core issue is whether the services provided by the applicant to Northern Railways are exempt from GST under S. No. 3 of Notification No. 9/2017 - Integrated Tax (Rate) dated 28.06.2017. This notification exempts pure services provided to the 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.3. Determination of 'Pure Services' vs. Works Contract Services:The judgment discusses whether the cleaning services provided by the applicant are 'pure services' or works contract services involving the supply of goods. The applicant contends that their services are pure services, as the chemicals and materials used are minimal and completely consumed in the process. The Delhi High Court in a previous ruling held that such consumables do not constitute a transfer of property and thus qualify as pure services. The FAQ issued by CBEC also supports this view, stating that services without the supply of goods are treated as pure services.4. Northern Railways as 'Central Government':The judgment confirms that Northern Railways qualifies as 'Central Government' under Section 3(8) of the General Clauses Act, 1897, as the contracts are awarded in the name of the President of India. Therefore, Northern Railways falls within the scope of the entities mentioned in the exemption notification.5. Functions Entrusted to a Municipality under Article 243W:The judgment analyzes whether the cleaning services provided to Northern Railways relate to functions entrusted to a Municipality under Article 243W of the Constitution. It is concluded that the primary function of Railways is the transportation of goods and passengers, which is not a function entrusted to Municipalities under Article 243W. The functions of Municipalities under Article 243W, such as public health, sanitation conservancy, and solid waste management, do not extend to railway properties. Therefore, the services provided by the applicant do not qualify for the GST exemption under the said notification.Conclusion:The cleaning services provided by the applicant to Northern Railways are not exempt from GST under S. No. 3 of Notification No. 9/2017 - Integrated Tax (Rate) dated 28.06.2017. The services are taxable and will attract GST at the rate of 18% under the service classification code Chapter heading 9994. The ruling is binding on the applicant and the jurisdictional officers, and Northern Railways is free to contest the same.