A judgment pronounced on January 28, with the detailed order copy issued today, highlights that the petitioner, STS-KEC(JV), a joint venture engaged in railway infrastructure projects, had provided services for Rail Vikas Nigam Limited (RVNL) and should be taxed at the concessional 12% GST rate rather than the 18% rate imposed by tax authorities.
The judgment, delivered by Justice Mohammed Shaffiq, quashed as many as five GST orders issued by the State Tax Officer and reaffirmed that the works executed for RVNL qualify for the lower tax rate under the relevant GST notifications. The tax demanded by the Tamil Nadu GST authorities was ₹100 crore, including interest and penalties, for the period between April 2018 and March 2023.
Background of the case
The petitioner, STS-KEC(JV), challenged five tax orders in Form GST DRC-07 issued by the State Tax Officer, Nanguneri, in February 2024 by filing five separate writ petitions for each financial year.
These orders levied an 18% GST on the company’s works contract services related to railway infrastructure projects executed for RVNL. The petitioner contended that its projects should be subject to a 12% GST rate, in accordance with Notification No. 11/2017 (CGST Rate), which provides a concessional rate for “original works pertaining to railways, including monorail and metro.”
The company had undertaken significant railway development works, including track doubling, bridge construction, and installation of signaling and electrical infrastructure, under a contract with RVNL. It had consistently paid GST at 12% on these services, but tax authorities later demanded an additional 6%, arguing that the standard 18% rate applied.
The Dispute: Is RVNL part of the railway system for GST purposes?
The crux of the dispute revolved around whether RVNL, a government-owned entity, could be considered part of the “railways” under GST law.
The petitioner argued that RVNL operates as an extended arm of the Ministry of Railways, executing critical railway projects on behalf of the Indian government. Given its function and ownership, the projects it oversees should qualify for the concessional 12% GST rate.
However, the State Tax Officer contended that RVNL, being a public sector undertaking (PSU) incorporated under the Companies Act, does not function directly as part of Indian Railways. The tax authorities claimed that only projects directly undertaken by Indian Railways should qualify for the lower tax rate, making the petitioner’s works taxable at 18%.
Court findings
After a detailed examination of the GST framework, contractual obligations, and the legal definition of railways, the Madras High Court ruled in favor of STS-KEC(JV) and set aside the tax demands.
The court order clarified that the Indian Railways Act definition is not binding on GST interpretation. The court rejected the tax department’s reliance on the definition of “railways” under the Indian Railways Act, 1989, emphasising that GST law does not incorporate this definition. Instead, the term “railways” should be interpreted in a broader commercial and functional sense to include key infrastructure projects managed by RVNL.
Apart from this, the court acknowledged that RVNL’s role in railway development is indispensable and stated that RVNL functions as an essential extension of Indian Railways, implementing major projects to expand and modernise railway infrastructure. Given this direct link to railway development, the services executed under RVNL projects clearly qualify for the 12% concessional GST rate.
The ruling also cited various advance rulings where similar works contracts for railway infrastructure were granted the 12% tax rate. Importantly, the judgment highlighted that an earlier Gujarat AAR ruling, which the tax authorities relied upon, had been overturned by the Appellate Authority, a fact that the tax officer ignored while issuing the contested orders.
The court also stated that there is no justification for retrospective tax demands. It further ruled that the petitioner’s long-standing classification of its services under the 12% GST rate was in accordance with applicable notifications. Retrospective demands to impose a higher rate were deemed unjustified and lacking legal merit.
Thus, the court quashed the tax demand orders issued against STS-KEC(JV), declared that works contract services executed under RVNL are taxable at 12%, and affirmed that RVNL qualifies as part of the railway system for GST purposes.
Experts see the judgment as having far-reaching implications for railway contractors and infrastructure developers working on government railway projects. By clarifying GST applicability, the ruling provides greater certainty for businesses engaged in railway infrastructure development across India.
“The most crucial aspect of the classification heading under GST law is that the concessional rate is specifically linked to the nature of the works executed, namely those pertaining to railways. It is not dependent on the identity of the recipient entity, whether it is Indian Railways, a PSU like Rail Vikas Nigam Limited (RVNL), or any other organisfation involved in railway infrastructure development.
The fundamental question before the High Court was whether a restrictive and narrow interpretation could be applied to limit the benefit of the concessional rate, despite the clear legislative intent to extend it to all qualifying railway works. Any attempt to impose such an artificial restriction would not only go against the statutory framework but also create unnecessary uncertainty for businesses engaged in railway infrastructure projects.
The court, in its wisdom, recognized that it is the nature of the work, and not the identity of the contracting party, that determines the applicable GST rate. This ruling provides much-needed clarity and reinforces the principle that tax concessions should be interpreted in line with their intended purpose rather than being subjected to arbitrary limitations,” explained Abhishek A Rastogi, Founder of Rastogi Chambers, who was the tax counsel for the petitioner in the matter before the Madras High Court.
