Calling Road Restoration Compensation Does Not Defeat Reverse-Charge GST

Taxability Depends on the Purpose of the Payment, Not Its Description

A payment described as "road restoration charges" may appear to be compensation for damage to public property. However, its GST treatment depends on what the payment actually represents. Money paid merely to compensate for a wrongful act differs from a charge paid under an arrangement in which a government department undertakes specified restoration work. The name of the charge does not determine whether there is a taxable supply. The permission granted, obligations undertaken, method of calculating the charge and the service received must be examined together.

This distinction was central to Torrent Gas Limited Versus Commissioner, Commissioner, CGST & Central Excise Commissionerate, Kanpur. - 2026 (10) TMI 765 - GSTAT LUCKNOW. The taxpayer sought a refund of Rs. 7,264, comprising CGST and SGST of Rs. 3,632 each, paid under reverse charge on road-restoration charges. Although the amount in the lead appeal was modest, the dispute raised broader questions about consideration, government functions, exemptions, and the recipient's responsibility to pay GST.

A Refund Requires Establishing That the Tax Was Not Legally Payable

Torrent Gas Limited supplied natural gas through a pipeline network. It obtained permission from the Public Works Department, Uttar Pradesh, to lay pipelines, subject to paying charges to restore the affected roads. Torrent Gas Limited paid PWD in October 2020. The company discharged GST of Rs.7,264 under reverse charge through its Form GSTR-3B for that month. It subsequently applied for a refund under Section 54 of the CGST Act, 2017, through Form GST RFD-01 on 26.02.2024, arguing that the payment did not relate to a taxable service or was otherwise protected under the relevant notifications.

A notice in Form GST RFD-08 dated 12.04.2024 sought documents and clarification. The taxpayer submitted a point-wise reply on 30.04.2024, but the order dated 06.05.2024 rejected the refund. The first appeal, filed on 05.08.2024, was also unsuccessful. Order-in-Appeal No.438/GST/ADC/Alld/2025 dated 08.08.2025 upheld the rejection; its summary in Form GST APL-04 followed on 04.09.2025. The Tribunal therefore had to determine whether the original reverse-charge payment was legally due. A taxpayer's later description of a payment as mistaken does not establish a refund entitlement unless the underlying tax liability is displaced.

Planned Restoration Differs From Compensation for a Wrongful Act

Section 2(31) of the CGST Act, 2017 gives consideration a broad meaning, covering payments connected with the supply of goods or services. Section 7(1) of the CGST Act, 2017 supplies the relevant framework for determining whether the transaction constitutes a supply. The taxpayer argued that the charges merely compensated PWD for road damage and lacked the reciprocal obligations necessary for a service. The Tribunal rejected that characterisation. It viewed the arrangement as a planned transaction: the company sought permission to open an existing road for its pipeline, and PWD undertook restoration for charges calculated based on the physical work involved. The payment was connected with an identified restoration service, rather than merely making good an independently committed wrong.

The distinction is easier to see with a simple illustration. A vehicle accidentally damages a public road, and its owner pays compensation for the resulting loss. That payment does not automatically mean that the authority supplied a service to the vehicle owner. Contrast this with a utility company that obtains prior permission to excavate a specified stretch and, under the agreed arrangement, pays the authority to restore it. The second situation may involve a service for consideration. In the present case, the Tribunal placed the transaction in the latter category. Its reasoning rested on the reciprocal arrangement and restoration activity, not simply on the fact that money was paid to a government department.

The Compensation Principle Applies Only Where the Payment Has That Character

The taxpayer relied on Bai Mamubai Trust Versus Suchitra - 2019 (9) TMI 929 - BOMBAY HIGH COURT. The Bombay High Court's reasoning distinguished compensation for an infringement of rights from consideration for a supply. In that case, payments connected with alleged unlawful occupation lacked the necessary reciprocal relationship of a taxable supply. The principle remains important: an injured person does not necessarily supply a service merely by receiving compensation. However, the Lucknow Tribunal distinguished that situation from a prior arrangement involving permission and positive restoration work. It did not reject the distinction between compensation and consideration; it concluded that the disputed charges fell on the consideration side.

CBIC Circular No.178/10/2022-GST dated 03.08.2022 similarly explains that genuine compensation for injury, loss or breach does not become consideration merely because money changes hands. Equally, a payment that actually purchases a service does not escape GST merely because it is called compensation, damages or a penalty. The Tribunal found no contractual breach for which the road-restoration charges were being paid. Instead, the charges formed part of the planned service arrangement. For professionals, the lesson is to examine the obligation for which payment is made. A pre-agreed amount is not necessarily taxable, and a payment described as compensation is not necessarily outside GST. Its legal and factual character remains decisive.

A Government Activity Is Not Automatically Outside the Scope of Supply

The taxpayer next relied on Section 7(2)(b) of the CGST Act, 2017 and Notification No.14/2017-Central Tax (Rate) dated 28.06.2017, as amended. This notification addresses specified activities undertaken by government or local authorities acting as public authorities. It covers activities relating to functions entrusted to Panchayats under Article 243G of the Constitution and, following the amendment made by Notification No.16/2018-Central Tax (Rate) dated 26.07.2018, to Municipalities under Article 243W. The taxpayer pointed to the constitutional entries concerning roads and bridges and argued that restoration remained part of maintaining public roads.

The Tribunal distinguished ordinary public-road upkeep from the particular arrangement before it. In its assessment, the Tribunal found that PWD was undertaking request-driven restoration directly connected to the company's commercial pipeline project. It therefore rejected the claim that this transaction qualified as a notified public-authority activity. The distinction must be stated carefully. The judgment does not establish that every government activity requested by a business necessarily becomes taxable. Nor is "sovereign function" a substitute for examining the notification. The authority's capacity, the particular activity and the connection with the entrusted function must be considered. The Tribunal's conclusion concerned the fee-for-service arrangement established in this case.

A Connection With Public Roads Does Not Alone Establish Exemption

The taxpayer also invoked entries 4 and 5 of Services Exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which cover activities related to constitutionally entrusted functions, as applicable to the relevant period. It relied on DOYPACK SYSTEMS (PVT) LTD Versus UNION OF INDIA - 1988 (2) TMI 61 - Supreme Court for the broad meaning of "in relation to". The argument was that restoration is closely connected to road maintenance, even if it follows pipeline excavation. The Tribunal nevertheless found that this commercial arrangement did not qualify under the claimed entries. In its view, a broad connecting expression could not dispense with the exemption's requirements.

The Tribunal also relied on the exclusion for services supplied to business entities in entry 6(d) of Services Exemption Notification No. 12/2017-Central Tax (Rate). An important analytical qualification is that exclusion from this general exemption does not, by itself, defeat every separate exemption or notified non-supply provision. Each claimed provision must be examined independently. The decision therefore rejects the particular constitutional-function claims and then applies the business-service framework, rather than holding that business recipients can never receive exempt government services. Further, the dispute concerned October 2020: the relevant notification text must be examined for that period, not assumed from a later compilation.

The Nature of the Transaction Matters More Than Labels Such as Original Work or Public Purpose

The lower authorities had distinguished original construction of a public road from restoration following excavation by a business. The taxpayer disputed that approach, arguing that constitutional road functions were not confined to original construction. The Tribunal clarified that taxability did not turn simply on whether the engineering work was "original" or "restoration". It focused on the recipient and the transaction: a specified restoration activity undertaken for consideration in connection with a commercial pipeline project. Restoration is not taxable merely because it is restoration, just as original construction is not exempt merely because it creates a public asset.

The taxpayer also objected to the lower authority's use of the expression "noble cause". That expression is not an independent statutory condition for exemption. The Tribunal treated it as an attempt to distinguish general public upkeep from the commercial arrangement under examination. For professional analysis, the statutory explanation should remain central. A business motive does not independently create a GST charge, and a public benefit does not independently establish exemption. Both public utility and commercial benefit may coexist. The legal answer must follow the supply provisions and the exact notification conditions, rather than a moral assessment of the project.

Reverse Charge Applies After Taxability and Notification Coverage Are Established

Reverse charge determines who must discharge the tax; it does not independently establish that an otherwise non-taxable transaction is taxable. Section 9(3) of the CGST Act, 2017 authorises reverse charge for notified categories of supplies. Notification No.13/2017-Central Tax (Rate) dated 28.06.2017, including its relevant government-service entry, places responsibility on the business recipient for covered services, subject to the specified exclusions and the applicable amendments. The proper sequence is therefore to identify the supply, examine any exclusion or exemption, and then determine the mechanism for paying the tax.

Having found a taxable restoration service and rejected the exemptions claimed, the Tribunal concluded that Torrent Gas Limited was liable under reverse charge. The Tribunal consequently treated the Rs. 7,264 paid through Form GSTR-3B as a valid statutory payment. This conclusion should not be expanded into a statement that every service supplied by the government to a business falls under reverse charge. The relevant notification contains exclusions, and different services may be governed by different entries. In this case, the covered taxable service, the government supplier and the business recipient together supplied the basis for reverse-charge liability.

An Allegation of Double Taxation Requires Proof of Payment for the Same Supply

The taxpayer argued that a recipient should not pay tax twice when the supplier had already collected and deposited tax on the transaction. It cited authorities including M/s. Elkos Pens Limited Versus Commissioner of Service Tax, Kolkata-I - 2018 (8) TMI 1806 - CESTAT KOLKATA, and NAVYUG ALLOYS PVT. LTD. Versus CCE & C, VADODARA-II - 2008 (8) TMI 100 - CESTAT AHEMDABAD. Those submissions raised a question distinct from whether restoration was a taxable service: whether tax on the same supply had already reached the Government in a manner relevant to the recipient's liability.

The factual foundation was missing. The Tribunal found no clear proof that PWD had issued a forward-charge tax invoice or deposited GST specifically for the disputed permission and restoration arrangement. A general assertion that the Government has already received tax cannot establish duplicate taxation of a particular supply. The Tribunal would need to examine the relevant invoice, payment details, tax period, and connection with the disputed transaction. The Tribunal therefore rejected the argument. It did not conclusively determine how to resolve every case of proven payment under an incorrect mechanism.

Refunds Granted in Other States Do Not Bind the Tribunal

Torrent Gas Limited relied on favourable refund orders for its registrations in Rajasthan and Punjab, arguing that identical transactions should receive consistent treatment. However, those orders were not binding precedents. The Tribunal had to independently examine the applicable law and the transaction before it.

An incorrect refund granted elsewhere does not require the same result in another case. Such orders may support comparison, but cannot establish entitlement by themselves. The Tribunal declined to follow them; it did not set them aside.

Notice and DIN Objections Depend on the Record

The taxpayer alleged the notice was vague, the orders went beyond it, and the Tribunal did not properly consider its submissions. It relied on SACI ALLIED PRODUCTS LTD. Versus COMMISSIONER OF C. EX., MEERUT - 2005 (4) TMI 65 - Supreme Court, and Commissioner of Central Excise, Bangalore Versus Brindavan Beverages (P) Ltd. and Ors. - 2007 (6) TMI 4 - Supreme Court. The Tribunal rejected these objections because the notice identified the exemption issue and the detailed reply showed that the taxpayer understood the case it had to answer. This does not mean that submitting a reply cures every defective notice.

The DIN objection also failed because the proceedings were conducted through the authenticated GST portal, and the documents' source and authenticity were clear. This case-specific conclusion does not dispense with DIN requirements generally. The applicable instructions and the particular communication must still be examined.

A Taxable Restoration Service Did Not Qualify for Refund
The Tribunal dismissed the lead appeal and upheld the rejection of the Rs.7,264 refund. The road-restoration charges represented consideration for a taxable service; the claimed exclusions and exemptions did not apply, and GST was payable under reverse charge.

The practical lesson is to examine each charge separately. Its purpose, supporting documents and applicable notification determine its GST treatment, not its description alone. The decision should not be extended to every infrastructure-related payment or treated as a general ruling on refund limitation under Section 54 of the CGST Act, 2017

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