GST Liability on Pure Services provided in connection with Development of Roads

[Mith Moh]

ABC is a statutory body constituted under an Act by the legislature for Management of Transport Facility Projects involving Development of Roads and Bridges. ABC provides service to the State government by undertaking activities such as preparation of Detailed Project Reports (DPRs), technical scrutiny and sanction, tendering, project supervision and project management. centage charges are payable to ABC towards activities such as planning, designing, tendering, supervision and handing over of projects. ABC is providing such services for the development of State Highways. The Government selected ABC as Special Purpose Vehicle for implementing the projects.

As per Notification 12/2017, Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution are exempt.

So are the services provided by ABC covered by this exemption or does the exemption apply only to Panchayat and Municipal Roads. Further, what is the SAC for the services and the applicable rate of tax for services where the exemption doesn't apply ?

Kindly help

[YAGAY and SUN]

Based on the facts provided, the key issue is whether the exemption under Entry 3 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 applies to the services rendered by ABC to the State Government for development of State Highways.

1. Whether the exemption applies?

Entry 3 exempts:

"Pure services (excluding works contract service or other composite supplies involving supply of goods) 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 Panchayat under Article 243G or a Municipality under Article 243W."

The services provided by ABC-DPR preparation, technical scrutiny, tendering, project management, supervision, quality control, and handing over of projects-appear to be pure services, provided no goods are supplied.

The critical question is whether the activity is in relation to a function entrusted to a Panchayat or Municipality.

The Twelfth Schedule to the Constitution (Article 243W) includes:

• "Roads and bridges"
• "Urban planning"
• "Public amenities"

Similarly, the Eleventh Schedule (Article 243G) includes roads, culverts, bridges, ferries, waterways, and other means of communication.

Neither the Constitution nor the exemption restricts the benefit only to municipal roads or panchayat roads. The wording is "in relation to any function entrusted to a Panchayat or Municipality", not "services provided to a Panchayat or Municipality."

Accordingly, several Advance Rulings and GST clarifications have taken the view that where the service is provided to the Government and relates to the constitutional function of development of roads and bridges, the exemption may apply even if the project pertains to State Highways, provided:

1. The recipient is the State Government (or eligible governmental authority); and
2. The supply is a pure service without transfer of goods.

Therefore, a strong view exists that ABC's project management, DPR, supervision, and related consultancy services for State Highway projects qualify for exemption under Entry 3, subject to the pure-service condition.

[YAGAY and SUN]

2. If exemption is not available

If any contract involves supply of goods or otherwise fails the conditions of Entry 3, the service would generally fall under:

SAC 9983 - Other professional, technical and business services

More specifically:

• 998341- Engineering services
• 998349- Other technical and scientific services

The exact SAC depends on the nature of the engagement, but engineering/project management consultancy generally falls within SAC 9983.

3. Applicable GST Rate

Where the exemption is unavailable:

Service	SAC	GST Rate
Engineering consultancy, DPR preparation, project management, supervision services	9983	18% (9% CGST + 9% SGST)

Conclusion

• Yes, there is a strong legal basis that ABC's pure services relating to development of State Highways are covered by Entry 3 of Notification 12/2017, because "roads and bridges" are constitutional functions under Articles 243G and 243W.
• The exemption is not necessarily restricted to municipal roads or panchayat roads.
• If the supply ceases to be a pure service or otherwise fails the exemption conditions, the services would generally fall under SAC 9983 (engineering/project management consultancy) and attract GST at 18%.

For a litigation-grade opinion, it would also be necessary to examine whether ABC qualifies as a Government Entity/Governmental Authority and review the exact terms of the percentage-charge agreement and funding structure.

[Mith Moh]

Suppose ABC is a board constituted under as below, in light of these, will exemptions 4) and 5) of Notification 12/2017 apply?

(2) The Board shall be a body corporate by the name aforesaid, having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable and to contract and shall by the said name sue and be sued.

(3) The Board shall consist of the following members, namely:-

(a) the Chief Minister-ex-officio; who shall be the Chairman of the Board;

(b) the Minister in charge of Public Works-ex-officio; who shall be the Vice- Chairman of the Board;

(c) the Minister in charge of Finance-ex-officio;

(d) the Minister in charge of Transport-ex-officio;

(e) the Principal Secretary to Government in charge of Public Works Department-ex-officio; who shall be the Member Secretary of the Board;

(f) the Law Secretary-ex-officio;

(g) the Chief Engineer, Roads and Bridges-ex-officio;

(h) three persons nominated by the Government from among the heads of financial institutions engaged in the business of infrastructure, Scheduled Banks or technical or engineering personnel working in National level institutions.

(4) Nominated members of the Board shall hold office during the pleasure of the Government.

(5) Any nominated member may, at any time, resign his office by letter addressed to the Chairman of the Board.

[Mith Moh]

Wouldn't the exact classification be 998339 - Project management services for construction projects or would it come under 998399 - Other professional, technical and business services n.e.c.

[Ryan Vaz]

The services provided by ABC to the State Government for the development of State Highways are likely to qualify for exemption under Entry No. 3 of Notification No. 12/2017-Central Tax (Rate). The exemption covers pure services (excluding works contracts or composite supplies involving goods) provided to the Central Government, State Government, Union Territory or local authority by way of any activity in relation to a function entrusted to a Panchayat under Article 243G or a Municipality under Article 243W of the Constitution.

ABC provides services such as preparation of Detailed Project Reports (DPRs), planning, designing, technical scrutiny, tendering, project management, supervision and handing over of projects. These are professional and technical services that do not involve the supply of goods or execution of works contracts. Accordingly, they qualify as pure services, satisfying the first condition of the exemption.

The recipient is the State Government, which is specifically covered under Entry No. 3. Hence, the second condition is also fulfilled.

The issue is whether services relating to State Highways are "in relation to" functions entrusted to Panchayats or Municipalities. Entry 13 of the Eleventh Schedule entrusts Panchayats with functions relating to roads and bridges, while Entry 4 of the Twelfth Schedule entrusts Municipalities with roads and bridges. The expression "in relation to" is of wide import and requires only a direct nexus with the constitutional function. Although State Highways are executed by the State Government, the activity remains the development of roads and bridges. Therefore, consultancy and project management services for such projects are directly related to these constitutional functions.

This view is supported by the Maharashtra AAR in MSRDC (2018), which held that pure services provided to the State Government for road and bridge projects, including State Highways, qualify for exemption.

Accordingly, ABC's services are likely to be exempt from GST. If the exemption is held inapplicable, the services would generally fall under SAC 9983 (Engineering/Project Management Services) and attract GST at 18% (9% CGST + 9% SGST) under Notification No. 11/2017-Central Tax (Rate).

[Shilpi Jain]

Prima facie the services would be exempt as roads and bridges are included in Article 243W and if these are pure services provided to Government.

[Sadanand Bulbule]

Article 243W covers functions entrusted to Municipalities such as "roads and bridges" within municipal or urban local governance functions. However, development of State Highways by ABC as an SPV for the State Government is generally viewed as a sovereign infrastructure function of the State and not a municipal function under Article 243W. Therefore, the exemption may not automatically apply merely because the activity relates to roads and bridges.

This is my personal opinion.

[Kashish Gupta]

From above we understand that ABC is involved in providing pure services relating to development of roads and bridges. Interpreting entry 3 of Notification No. 12/2017-Central Tax (Rate), exempting services classifiable under chapter 99 being "Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution", it is reckoned that it is important to take note of functions entrusted to a Panchayat or Municipality under Article 243G or 243W of Constitution of India.

As per Article 243G, the functions of panchayat are listed in 11th schedule. The relevant functions as per the facts provided can be entry 13 which reads as "13. Roads, culverts, bridges, ferries, waterways and other means of communication." And as per Article 243W, the function entrusted to municipality is under 12th schedule. The relevant function as per facts stated can be entry 11 which states that "11. Construction of roads and bridges".

For this exemption to apply, three conditions must be cumulatively satisfied: first, the supply must be a pure service excluding works contract or composite supply involving goods; second, the recipient must be the Central or State Government Union Territory, or Local Authority; and third, there must be a direct nexus between the activity performed and function enumerated in the Eleventh or Twelfth Schedule of the Constitution. In the case of ABC, the first two conditions are met without difficulty, i.e., DPR preparation, technical scrutiny, tendering, project supervision, and project management involve no supply of goods whatsoever and thus qualify as pure services, and the recipient is the State Government itself. The entire controversy, therefore, turns on the third condition.

[Kashish Gupta]

Before proceeding to analyse third condition, it is important to note the following. In our view, the exemption granted vide entry 3 (Supra) is very wide as the expression “in relation to” is used. Therefore, all activities performed “in relation to” the development of State Highways i.e., a function of panchayat or municipality which the legislature of a state endows upon them to enable them to function as institutions of self-government are absolutely and unconditionally exempt from GST.

The Hon'ble Supreme Court of India in the case of Doypack Systems Pvt. Ltd. vs. Union of India (UOI) and Ors. 1988 (2) TMI 61 - Supreme Court clarified the meaning of the expression “in relation to” as follows:

“In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 521 where it is stated that the term 'relate” is also defined as meaning to bring into association or connection with. It has been clearly mentioned that “relating to” has been held to be equivalent to or synonymous with as to “concerning with” and “pertaining to”.

Similarly, the Hon'ble Supreme Court of India in the case of Madhav Rao Jivaji Rao Scindia Vs Union of India 1970 (12) TMI 87 - Supreme Court observed that the expression “relating to” means to bring into relation or establish a relation. It was further clarified that there should be a direct and immediate link with a covenant and that there cannot be any independent existence outside such covenant.

Hon'ble Supreme Court in the matter of Govt of Kerala and Anr Vs Mother Superior Adoration Convent 2021 (3) TMI 93 - Supreme Court has held the beneficial exemptions are to be purposively interpreted. In the present case, looking at the verbatim of exemption notification granted at Serial No. 3, it is less of doubt that exemption is very wide and is beneficial in nature.

In In Re: Sheladia Associates, Inc. USA reported as 2019 (3) TMI 1703 - AAR, Mizoram, the applicant provided project management, planning, and construction supervision services to the Public Works Department of Mizoram for the upgradation of 81 km of State Highways and Major District Roads. The AAR held that while the services were pure services and the recipient was the State Government, the third condition was not satisfied because State Highways and District Roads traverse beyond the territorial limits of Panchayats and Municipalities, making their development a State responsibility rather than a local body function. GST was accordingly held chargeable.

[Kashish Gupta]

The AAR, Haryana reached the same conclusion in In Re: MSV International Inc. reported as 2019 (10) TMI 1389, where engineering consultancy services for inter-city roads lying beyond Panchayat and Municipal boundaries were denied the exemption on identical reasoning, with the Authority adding that qualifying as pure services to a Government Entity is a necessary, however to be eligible for exemption all three condition must be satisfied.

The Gujarat AAR rulings in In Re: M/s. Devendra K Patel reported as 2025 (10) TMI 1318, though arising in the context of building observed that, the phrase "in relation to" cannot be read loosely. It requires a direct and proximate relationship between the service rendered and the specific constitutional function listed in the Eleventh or Twelfth Schedule. For this, Hon'ble AAR relied on the judgement of Navin Chemicals Mfg. and Trading Co. Ltd. v. Collector of Customs 1993 (9) TMI 107 - Supreme Court(Supreme Court).

Going by above reasonings, it appears that the question of interpretation (purposive or restrictive) qua entry 3 of Notification no. 12/2017-Central Tax (supra) lies in intention of State Legislature. Since the activites in relation to functions entrusted to Panchyats or Municipality under Articles 243G and 243W of Constitution are sought to be exempted, the wide interpretation shall apply only qua said functions. It appears that state Highways are not one of such functions. Further, in erstwhile tax regime, when governments granted exemption from Service Tax, the expression used was "road, ... for use by general public" (refer entry no. 13 of Notification no. 12/2012-Service Tax dated 20.06.2012).

Therefore, it appears that the exemption under Sl. No. 3 of Notification No. 12/2017-CT(R) is not available, the services are taxable at the standard rate, and ABC is both entitled and obligated to charge and collect GST from the State Government. The appropriate SAC classification for the services is SAC 998334 - Engineering services for transportation projects, which is the most specific and accurate code covering DPR preparation, design, technical scrutiny, and supervision rendered for road and bridge infrastructure. The applicable rate is 18% GST.

AI Summary

Pure services for road projects may qualify for GST exemption when linked to constitutional functions and supplied to Government.
Pure services by a statutory body for road and bridge projects were considered under Entry 3 of Notification No. 12/2017-Central Tax (Rate), which exempts pure services supplied to Government when rendered in relation to functions entrusted to a Panchayat or Municipality under Articles 243G and 243W. The discussion focused on whether planning, DPR preparation, tendering, supervision, and project management for State Highways have a sufficient nexus with the constitutional functions concerning roads and bridges, and whether the exemption is limited to Panchayat or municipal roads. Where exemption is unavailable, the services were discussed as engineering or project management services under SAC 9983, taxable at the standard GST rate.