Design and estimate services for government building works not automatically GST-exempt without direct nexus under Articles 243G/243W

AAR held that services of preparing plans, estimates and DTP for building works under a government contract do not automatically qualify as activities "in relation to" Panchayat/Municipality functions under Articles 243G/243W and so are not prima facie GST-exempt. The phrase "in relation to" requires a direct and proximate nexus with functions in the relevant schedules; it cannot be stretched broadly. Exemption notifications are to be strictly construed and the taxpayer bears the burden of proving applicability. Several specified government buildings and facilities were found not to qualify under the exemption.

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ISSUES PRESENTED AND CONSIDERED

1. Whether services of preparing/providing plans, estimates and Draft Tender Papers (DTP) for building works provided to a State R&B Department qualify as "an activity in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W" of the Constitution (i.e., satisfy condition (iii) of Entry No. 3 of Notification No. 12/2017-CT(R) dated 28.06.2017)?

2. If issue 1 is answered affirmatively, whether such services constitute "pure services (excluding works contract or composite supplies involving supply of any goods)" provided to a State/Local authority and thereby are eligible for exemption under Entry No. 3 of Notification No.12/2017-CT(R) (i.e., satisfy conditions (i) and (ii) in conjunction with (iii))?

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Whether the consultancy services are "in relation to any function" entrusted to Panchayats/Municipalities

Legal framework: Entry No. 3 of Notification No.12/2017-CT(R) grants GST exemption to "pure services ... provided to ... State Government ... by way of any activity in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W." The Court examined the lists of functions in the 11th Schedule (Article 243G) and 12th Schedule (Article 243W) to determine whether specific building-related services bear a direct and proximate relationship to those functions.

Precedent treatment: The Authority considered earlier AAR/AAAR rulings cited by the applicant where "in relation to" was interpreted in contexts involving dredging, river/reservoir works, health/ambulance services, PMAY-related urban development, and municipal medical college works. The Authority also referenced higher court guidance that "in relation to" is generally broad but must be read so as to give a direct and proximate relationship in context (Supreme Court precedents referenced in the judgment). Prior AARs where services to generic government buildings (e.g., sub-registrar office) were held not to relate to schedule functions were relied on to limit application.

Interpretation and reasoning: (a) The expression "in relation to any function" was held to be expansive but not unlimited - it requires a direct and proximate nexus to a listed function; exemptions are construed strictly and the taxpayer bears the burden of proof. (b) R&B Department's role as a State entity was accepted; the question is whether the work allotted (plans/estimates/DTP) for particular government buildings/structures is directly connected to specific 11th/12th Schedule functions. (c) The Authority examined the factual list of projects and assessed each building/structure against relevant schedule entries. It distinguished between buildings/works that are intrinsic to schedule functions (e.g., ITIs - technical training; schools and hostels - primary/secondary education; bird sanctuary reception - urban forestry/environment; storm water drain - water management; fish farms - fisheries; ICDP/animal husbandry centres; rehabilitation home - welfare of weaker sections; seed godowns - agriculture) and those that are generic administrative or non-public-service buildings (e.g., higher education colleges, staff residential quarters, rest houses/circuit houses, Gujarat Informatics Ltd. building, office complexes, sub-registrar, collector offices, Gujarat Bhavan, malls, courts, PWD stores) which do not directly further a scheduled Panchayat/Municipal function. (d) For toilets, the Authority held public toilets (standalone public amenities) can relate to sanitation functions, but toilets attached to general government buildings (not public walk-in facilities) do not per se qualify unless the host building itself falls within a schedule function.

Ratio vs. Obiter: Ratio - The operative principle that "in relation to" must denote a direct and proximate relationship to a schedule function, and the application of that principle to identify qualifying and non-qualifying buildings/works. Obiter - Observations distinguishing higher education from municipal cultural/educational functions (while persuasive, applied contextually to the facts before the Authority).

Conclusions: The Authority concluded that the consultancy services qualify as "an activity in relation to any function" only for services provided for a specified list of buildings/structures: (i) Industrial Training Institutes (ITIs); (ii) Nalsarovar Bird Sanctuary (reception centre); (iii) Government school buildings, boys/girls hostels and district libraries; (iv) Female dormitory at New Beggars Receiving Centre; (v) Storm water drain; (vi) Centres under Intensive Cattle Development Program, Intensive Poultry Development Project and Animal Husbandry EPI Centre; (vii) New Rehabilitation Home for women and persons cured after mental illness; (viii) Fish farm (pond steps/shed and office); and (ix) Beej Nigam seed godown. Services for other listed government buildings/works did not establish the requisite direct nexus and therefore do not qualify under Entry No.3.

Issue 1 - Cross-references and evidentiary findings

Legal framework: Burden of proof on taxpayer; strict interpretation of exemption notifications.

Reasoning: The Appellate Authority remanded the matter because earlier ruling lacked project-specific factual material; on remand the applicant supplied project documents and the Authority verified factual details (project nature, purpose, and public function) and relevant website extracts. The Authority applied prior AAR reasoning where similar projects were either accepted (e.g., dredging for fisheries; PMAY slum upgradation) or rejected (e.g., construction of generic administrative offices) to align factual nexus with schedule functions.

Conclusion: The remand and consideration of project-specific facts led to a granular, building-by-building determination rather than a blanket exemption.

Issue 2 - Whether qualifying services are "pure services" and thus exempt under Notification No.12/2017-CT(R)

Legal framework: Three cumulative conditions for exemption under Entry No.3 - (i) pure service (not works contract or composite supply involving goods), (ii) provided to Central/State/UT/Local authority, and (iii) in relation to a schedule function.

Precedent treatment: The Authority had earlier (first round) determined the services are "pure services" and that the recipient (R&B Department) is a State entity. Those findings were not disturbed on remand and were expressly relied upon in the present decision.

Interpretation and reasoning: Because conditions (i) and (ii) were previously accepted and remain satisfied, the only remaining condition was (iii) - which the Authority has now satisfied for the specific list of buildings/structures identified in Issue 1. For those qualifying projects, the services therefore meet all three conditions.

Ratio vs. Obiter: Ratio - For the subset of projects where a direct/proximate nexus to schedule functions exists, the services meet the notification's three cumulative conditions and are eligible for exemption. Obiter - The general observation that the exemption must be strictly construed and that "in relation to" cannot be stretched to capture all government works.

Conclusions: The services are "pure services" and are provided to a State authority; accordingly, for the buildings/structures identified in Issue 1 the services are exempt under Entry No.3 of Notification No.12/2017-CT(R). For services provided to other government buildings/structures identified in the order as not related to schedule functions, the exemption does not apply.

Overall Disposition / Practical Rule

1. A project-specific factual nexus test is required to determine if consultancy/engineering services for government buildings are "in relation to" Panchayat/Municipality functions; generic attribution to a State department is insufficient. (Cross-reference: Issue 1 findings and Issue 2 application.)

2. Where the direct/proximate nexus is established (as in the nine categories listed), the three conditions of Entry No.3 are satisfied and GST exemption applies. Where the nexus is not established, exemption is denied.

3. Taxpayers bear the evidentiary burden to demonstrate that the subject services directly and proximately relate to a schedule function; exemption notifications must be strictly construed.

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