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 determined that Northern Railways constitutes Central Government and the cleaning contracts are pure service contracts involving minimal consumables, the services do not qualify for exemption as they are not municipal functions under Article 243W of the Constitution. Railway cleaning services fall outside the constitutional functions of municipalities listed in Schedule XII. Despite Northern Railways' contrary advice to contractors, the applicant must pay GST on these services.

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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.

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