Karnataka High Court Quashes CBIC Circular Imposing GST On Annuity Payments Awarded By Highway Authorities To concessionaires

The single bench of Justice M.I. Arun observed that a circular which clarifies the notification cannot have the effect of overruling the notification.

The petitioners are concessionaires who have been entrusted with the construction of the road by the Karnataka Road Development Corporation Limited. As a consideration for the construction and maintenance of the roads for the contract period, the petitioners are paid certain amounts termed as "annuity" by Karnataka Road Development Corporation Limited. In certain contracts where construction and maintenance of the roads have been outsourced to private individuals, consideration is paid by permitting the concessionaires to collect tolls from the vehicles plying on the roads.

By way of notification No.12/2017 dated 28.06.2017 issued by the Union of India, 100% exemption under GST was granted towards collection of toll charges. The toll charges consisted of the entire consideration going towards construction, operation, and maintenance of the road. It consisted of the charges collected towards construction as well as services provided by the concessionaires. Subsequently, it was proposed that the annuity, which was being paid by the highway authorities as a consideration to the concessionaires instead of permitting them to collect toll charges, be exempted from GST.

At the GST Council's 22nd meeting dated 6.10.2017, it was decided to grant exemption to the 'annuity' paid to concessionaires, holding that the annuity is at par with toll. Hence, it granted a similar exemption to the annuity paid by NHAI/State Highways Construction Authority to concessionaires during the construction of roads. As a result, Notification No. 32/2017-CT(R) dated October 13, 2017 was issued to insert a new entry via Sl.No. 23A for granting GST exemption for services via access to a road or bridge on payment of an annuity.

At the 43rd GST Council meeting held on May 28, 2021, it was clarified that annuity paid as deferred payment for construction of roads/highways was not exempted from GST. The benefit of exemption is for annuities which are paid for the service by way of access to a road or bridge.

Following that, CBIC issued circular No.150/06/2021-GST dated 17.06.2021, clarifying that Entry 23A of notification No.12/2017-CT(R) does not exempt GST on annuity (deferred payments) paid for road construction.

The petitioner contended that the annuity (deferred payments) paid for the construction of roads is exempt from GST as per notification dated 13.10.2017 and the clarification issued by Circular dated 17.06.2021, issuing clarification is contrary to the exemption notifications. It is liable to be set aside.

The respondent department contended that the clarification made by way of a Circular does not contravene the notifications and it only clarifies what is exempted by virtue of the notifications dated 13.10.2017. It is specifically contended that what is exempted is only service by way of access to a road or a bridge on payment of annuity and not annuity (deferred payments) paid for construction of roads.

The court noted that the GST Council's 22nd meeting explicitly exempts the entire annuity paid to the petitioners for road construction and maintenance. It cannot be construed to have exempted the annuity (deferred payments) towards the construction of roads. The circular has the effect of overriding the notifications bearing Nos.32 and 33/2017 dated 13.10.2017 and has to be held as bad in law.

"Nothing prevents respondents from imposing GST on the consideration paid to concessionaires like the petitioners on the payment received by them by way of annuity but that has to be done in the manner known to law," the court said.

The court held that the clarification issued was contrary to the notifications. If the respondent is desirous of altering, it has to issue fresh notifications amending its earlier notifications.

Case Title: M/s. D.P.J. Bidar-Chincholi (Annuity) Road Project Pvt Ltd.

Case No: W.P. No. 7233/2022

Dated: 11.07.2022

Counsel For Appellant: Advocate J.K.Mittal

Counsel For Respondent: Advocate Madan Pillai

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