Reimbursement for Road Restoration is Statutory Compensation, Not a Taxable GST Supply.

Issue

Whether the recovery of road restoration costs by a Municipal Corporation (AMC) from an electricity licensee (who dug up the road) constitutes consideration for a taxable “supply of service”—specifically, “agreeing to tolerate an act”—liable to GST.

Facts

The petitioner, a GST-registered electricity distribution licensee, dug up roads belonging to the Ahmedabad Municipal Corporation (AMC) to lay and maintain power lines.
This work was done under the authority of the Electricity Act, 2003, which mandates that the licensee (the petitioner) must pay full compensation for any damage caused.
The AMC, performing its municipal function, restored the roads and recovered the actual restoration costs from the petitioner as a reimbursement.
The GST authority issued a Show Cause Notice (SCN) and an Order-in-Original, claiming this reimbursement was consideration for a “supply of service” under the reverse charge mechanism.
The department’s entire case was built on the premise that the AMC was “agreeing to tolerate an act” (the digging) under Schedule II, and the payment was for this “toleration.”

Decision

The High Court quashed and set aside the SCN and the demand order.
It held that the AMC did not “agree to tolerate” the digging; it was legally obligated to permit the work under the Electricity Act.
The payment was held to be a statutory compensation or reimbursement for the actual cost of restoration, which is a municipal function of the AMC under Article 243W of the Constitution.
The court ruled that this reimbursement does not constitute consideration for any “supply of service” and, therefore, is not liable to GST.

Key Takeaways

Reimbursement vs. Consideration: A payment made to compensate for damages or to reimburse the actual cost of a restorative action is not “consideration” for a supply.
“Tolerating an Act” Clarified: This clause implies a positive agreement or forbearance in exchange for a fee. It does not apply to a situation where a party is merely fulfilling its statutory municipal duty (road repair) and recovering the costs as mandated by another statute (the Electricity Act).
Statutory Obligation: Payments made to fulfill a statutory obligation to make good on damages are distinct from payments made for a commercial supply.
Municipal Functions: Activities performed by a municipality as part of its core public functions are generally not treated as commercial supplies subject to GST.

HIGH COURT OF GUJARAT

Torrent Power Ltd.

Union of India

BHARGAV D. KARIA and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 515 of 2023

SEPTEMBER 11, 2025

S.N. Soparkar, Sr. Counsel and Uchit N. Sheth for the Petitioner. Ms. Hetvi H. Sancheti for the Respondent.

JUDGMENT

Bhargav D. Karia, J.- Heard learned Senior Advocate Mr.S.N. Soparkar with learned advocate Mr. Uchit Sheth for the petitioner at length on 10.07.2025. Learned advocate Ms.Hetvi Sancheti for the respondents, sought for time to make submissions, and therefore, the matter was adjourned. Thereafter, learned advocate Ms.Hetvi Sancheti has made submissions from time to time on various dates and has completed her submissions today, and therefore, we are able to proceed with the judgement.

2. Having regard to the controversy arising in this petition in narrow compass, with the consent of the learned advocates for the respective parties, the same is taken up for hearing.

3. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for quashing and setting aside the show-cause notice dated 30.11.2022 issued under Sec.74 of the Central/Gujarat Goods & Services Tax Act, 2017 (for short ‘the GST Act’) on the ground that the same was issued without jurisdiction.

3.1 During the pendency of the petition, the respondent No.3 passed an Order-in-Original dated 25.01.2025 under Sec.74 of the GST Act. The petitioner has, therefore, preferred an amendment to place the Order-in-Original on record and has also challenged the same.

4. The factual matrix giving rise to filing of this petition can be summarized as under:

4.1 The petitioner is engaged in the business of transmission / distribution of electricity in the State of Gujarat, Maharashtra and Uttar Pradesh. Petitioner has been granted the electricity distribution license under the provisions of the Electricity Act, 2003 for distribution of electricity in Ahmedabad, Surat, Gandhinagar, Dahej SEZ and Dholera. The petitioner has franchisee for electricity distribution in different parts of Maharashtra and State of Uttar Pradesh.

4.2 The petitioner is registered under the provisions of the GST Act and is regularly filing its returns under the provisions of the said Act. During the course of routine maintenance and network enhancement so as to distribute the electricity, the petitioner is required to dig out tranches on the public road which are maintained by the municipal corporation. The dug out portion of the road and pavement is then repaired/restored by the municipal corporation.

4.3 It is the case of the petitioner that, the Ahmedabad Municipal Corporation (for short ‘the AMC’), recovers reimbursement of the repairing / restoration charges from the petitioner which are fixed per meter / area based on the type of the road.

4.4 It is the case of the petitioner that the petitioner is statutorily entitled to dig out the road for laying or repairs or maintenance of distribution lines under the provisions of Secs.42 and 67 of the Electricity Act,2003. The respondent No.2 issued a notice on 27.08.2021 calling upon the petitioner to provide the details of the Road Opening Permit charges paid by the petitioner to the AMC as well as the GST paid on reverse charge basis on such services received from the AMC. The petitioner has, therefore, challenged the said notice.

4.5 Petitioner filed reply on 05.10.2021 providing the details called for contending inter alia that transactions of payment of repairing / restoration charges to the AMC did not involve any taxable service, and therefore, the petitioner was not liable to pay any tax on such charges under the GST Act on reverse charge basis. The petitioner, thereafter, received another notice dated 13.12.2021, wherein, the GST authority alleged that the petitioner was liable to pay tax on reverse charge basis since road restoration work by the AMC was not part of its sovereign function. The petitioner, by reply dated 14.03.2022 again reiterated its contention and requested to drop the proceedings.

4.6 Respondent No.2 issued the notice / intimation in Form GST DRC-01A asking the petitioner to pay tax on reverse charge basis on the payment made to the AMC for repairing / restoration of the road dug out by the petitioner for maintenance or laying down distribution lines in Ahmedabad. The petitioner again filed a reply with all details to the said notice on 29.11.2022. However, the respondent No.2 issued the impugned notice dated 30.11.2022 under Sec.74 of the GST Act proposing to demand tax with interest and penalty on payments made by the petitioner to the AMC on reverse charge basis.

4.7 The petitioner, thereafter, challenged the show-cause notice before this Court by preferring this petition in which this Court (Coram : Hon’ble Ms.Justice Sonia Gokani [As her Ladyship was then] and Hon’ble Mr.Justice Sandeep N. Bhatt), issued the notice upon the respondents on 13.01.2023. Thereafter, a detailed order dated 16.02.2023 was passed to deny the interim relief in favour of the petitioner after hearing both the sides.

4.8 The respondent No.3, thereafter, passed the impugned Order-in-Original dated 25.01.2025 after taking into consideration the reply of the petitioner dated 05.04.2023.

5. Learned Senior Advocate Mr.S.N.Soparkar for the petitioner submitted that the impugned showcause notice issued under Sec.74 of the GST Act is without jurisdiction as the petitioner has not availed any service from the AMC by reimbursing for the roads which are dug out by the petitioner as required under the provisions of Sec.67 of the Electricity Act,2003.

5.1 It was submitted that reimbursement charges paid by the petitioner to the AMC cannot be considered as supply of service by the AMC to the petitioner for which the petitioner was required to pay the GST on reverse charge basis.

5.2 Learned Senior Counsel Mr.S.N.Soparkar referred to the provision of sec.7(1) of the GST Act and submitted that the petitioner has discharged its statutory obligation as prescribed under sub-section(3) of section 67 of the Electricity Act,2003. It was therefore pointed out that once there is a statutory obligation upon the petitioner to pay the compensation to the local authority for the damage caused by the petitioner to lay down the lines, it cannot be said that there is any supply of service by the local authority to the petitioner which requires payment of GST by the petitioner on reverse charge basis.

5.3 It was further submitted that restoration of road is primarily a function of the AMC under Article 243W of the Constitution of India, hence it is exempted from tax under Entry No.4 of Notification No.12 of 2017 of the Central Tax (Rate) dated 28.06.2017. It was submitted that the words “goods and service tax” are defined in Article 366(12A) of the Constitution of India so as to mean any tax on supply of goods or both except taxes on the supply of the alcoholic liquor for human consumption. Sec.9 of the GST Act imposes the tax on the supply of goods and services. It was therefore submitted that “supply” includes something made or agreed to be made for a consideration which requires a contract for an act to be done by one person at the behest of another in lieu of consideration.

5.4 It was, therefore, submitted that the petitioner has made the payment of repairing and restoration charges, by reimbursing the same to the AMC for repairing and restoring the roads which were dug out by the petitioner for laying down of distribution lines in fulfilment of its obligation as distribution licensee under the provisions of the Electricity Act,2003. It was, therefore, submitted that there is no element of supply involved in the transaction between the petitioner and the AMC as the petitioner never sought for or required any service of the AMC. Reference was made to the provisions of Sections 42 and 67 of the Electricity Act under which the petitioner is required to discharge the obligation of payment of compensation for the damages caused by the petitioner for digging out the roads. It was, therefore, submitted that the impugned show-cause notice and the consequent Order-in-Original are without jurisdiction and liable to be quashed and set aside.

5.5 Learned Senior Counsel Mr.Soparkar also relied upon the Notification No. 12 of 2017 – Central Tax (Rate) dated 28.06.2017, more particularly serial No.4 of the said notification which provides for nil rate of GST under Chapter 99 adopted under the GST wherein the description is provided for the services by 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 municipality under Article 243W of the Constitution. It was, therefore, submitted that restoration/repairing of the road by the AMC is in discharge of its constitutional obligation conferred as per Article 243W and Nil rate of GST is provided as per the said notification, and therefore, even otherwise assuming for a while that the petitioner is liable to pay the GST on reverse charge basis, there is a Nil rate of tax prescribed under the notification and it was, therefore, pointed out that no liability of GST can be fastened upon the said petitioner for reimbursement of the repairing / restoration charges to the AMC on reverse charge basis. Reliance was also placed on the Notification No.14 of 2017-Central Tax (Rate) dated 28.06.2017 issued by the Central Government in exercise of powers conferred under Sec.7(2) of the GST Act, which came to be amended with effect from 27.07.2018 on the recommendation of the GST Council that transactions undertaken by the Central Government, State Government or Union Territory or local authority in which they are engaged as public authority shall be treated neither as supply of goods nor supply of services. It was, therefore, submitted that as per the said notification, the repairing and restoration of the public road by the AMC would be covered by the functions entrusted under Sec.243W of the Constitution. Reference was made to the list of functions entrusted to the municipality contained in 12^th Schedule to the Constitution of India read with Article 243W of the Constitution which includes at item no.4 “roads and bridges”.

5.6 It was, therefore, submitted that the restoration of road dug out by the AMC and the reimbursement charges paid by the petitioner to the AMC is the function entrusted to it under Article 243W of the Constitution of India and as such, the same is exempted under Entry No.4 of the Exemption notification till 26.07.2018, and thereafter, as per the Notification No.14 of 2017 dated 28.06.2017, it would not be treated as supply of service. It was, therefore, submitted that the proposal and levy of GST on activity of reimbursement of restoration / repairing charges by the petitioner to the AMC on reverse charge basis is wholly without jurisdiction.

5.7 Learned Senior Counsel Mr.Soparkar also raised a contention with regard to the invocation of Sec.74 of the GST Act as necessary precondition of intention of fraud, wilful misstatement, suppression of facts or evasion which is not present in the facts of the case. It was submitted that the transaction between the petitioner and the AMC as per the statutory provisions of the Electricity Act, 2003, are duly recorded in the books of accounts of the petitioner and as such, the question of fraud, misstatement, suppression or evasion would not arise. It was, therefore, prayed that the impugned notice issued under Sec.74 of the GST Act is liable to be quashed and set aside as the same is without jurisdiction.

5.8 It was further submitted that the impugned Order-in-Original dated 25.01.2025 is also without jurisdiction, inasmuch as, this Court has already issued the notice in the year 2023, whereby, the respondent authority ought to have kept the matter in abeyance. It was submitted that the respondent No.3 has only reiterated the averments in the impugned show-cause notice and even the submissions made by the petitioner are not dealt with.

5.9 Learned Senior Counsel Mr.S.N.Soparkar, invited the attention of this Court to paragraphs No.11.1 to 11.19 of the impugned order to point out that till para No.11.18, the respondent No.3 has narrated the facts and the submissions made by the petitioner, and thereafter, it has been observed in para 11.19 without dealing with any of the submissions to pass the impugned Order-in-Original on the ground that the petitioner is liable to pay tax under reverse charge basis in view of Entry No.5 of Notification No.13 of 2017 dated 28.06.2017.

6. Per Contra, learned advocate Ms.Hetvi Sancheti for the respondent vehemently submitted that the petition is not maintainable and is not required to be entertained as alternative efficacious remedy is available to the petitioner to challenge the Order-in-Original before the Appellate Court.

6.1 It was submitted that under Sec.7(1) of the GST Act, supply includes services for consideration in the course of business and Entry No.5(e) of Schedule II of the GST Act, provides for deeming service for “tolerating an act”. It was submitted that permission granted by the AMC to the petitioner to dig out roads, and thereafter, repairing and restoration of the roads by the AMC, constitutes tolerating an act for consideration in form of restoration charges, compensation / damages paid by the petitioner which is taxable under the Heading 9997 at 18% rate of GST.

6.2 Learned advocate Ms.Hetvi Sancheti referred to and relied upon the Circular No. 178/10/2022-GST dated 03.08.2022 issued by the Central Board of Indirect Taxes & Customs (CBIC) clarifying the scope of supply as per Sec.7 of the Central GST Act and its applicability on liquidated damages compensation and penalty arising out of the breach of contract or other provisions of law. Referring to the said Circular, it was submitted that as per the Clauses 2 and 5 of the said Circular, which clearly clarifies that the charges for tolerating acts (for example damaging public property) are taxable supplies, would be covered by Sec.7(1) liable to GST.

6.3 It was further submitted that the Hon’ble Supreme Court has held in the case of Balmer Lawrie & Co. Ltd. v. Partha Sarathi Sen Roy SCL 143 (SC)/(2013) 8 SCC 345., that statutory authorities providing services for consideration engage in taxable activities unless exempted. It was submitted that the scope of foreign sovereign activities has been narrowed down by the Apex Court and restoration of road by the AMC is a service and not a sovereign function as it involves specific work for the benefit of the petitioner. It was submitted that but for the fact that the petitioner was permitted to dig out the road by the AMC, and thereafter, the damages for restoring and repairing of such road is reimbursed would amount to providing service by AMC to the petitioner which is a profit making entity and as such the petitioner has availed the service from the AMC for permitting the petitioner to dig out the road, and thereafter, recovering the charges for repairing and restoring of such road. It was, therefore, submitted that petitioner was liable to pay GST on reverse charge basis for the service availed from the AMC. Reliance was also placed by learned advocate Ms.Sancheti upon the decision of the Apex Court in the case of Punjab Urban Planning & Development Authority v. Vidya Chetal SCL 598 (SC)/(2019) 9 SCC 83., wherein, it is held that fees by the statutory bodies for activities that are quid pro quo (for example granting permissions) are taxable services. It was therefore submitted that restoration charges paid by the petitioner are for its commercial activities to dig out the roads and not merely statutory liability and as such the same payment made by the petitioner is nothing but consideration for the service availed by it from the AMC which granted permission to dig out the road and recovered the repairing / restoration charges of such road.

6.4 Learned advocate Ms.Sancheti also referred to and relied upon CBEC Circular No. 192/02/2016-Service Tax (pre-GST) dated 13.04.2016 issued under the provisions of the Finance Act 1994, to submit that as per the said Circular issued by the Central Board of Excise & Customs (CBEC), “any service” by a local authority to a business entity having turnover of more than Rs.10 lakhs after April 1,2016, was made taxable service under reverse charge mechanizm, including payments for permission or for licencees. It was therefore submitted that when the petitioner was liable to pay service tax under the relevant provision prior to coming into force of the GST, the authorization consideration received by the AMC granting permission to dig the roads would be covered by the said Circular as it was Circular which provided that such transaction between the petitioner and the AMC would be service as per the provision of Sec.66A(e) of the Finance Act, 1994.

6.5 Reference was also made to the CBEC Circular No.89/7/2006-Service Tax dated 18.12.2006 to point out that service tax was made applicable on fees collected by the public authorities while performing statutory functions / duties under the provisions of the law and such activity undertaken would fall within the ambit of a taxable service. It was, therefore, submitted that as per the said Circular, only statutory fees would not be considered as a taxable service. It was pointed out that in the facts of the case, the amount paid by the petitioner towards reimbursement of the repairing / restoration cannot be considered as a statutory fees and as such the same would be taxable as supply of service under the provision of Sec.7(1) read with Clause 5(e) of the Schedule II of the GST Act.

6.6 It was submitted by the learned advocate Ms.Sancheti that reliance placed by the petitioner on Entry No.6 of Exemption Notification No.12 of 2017, is also not applicable in the facts of the case as the said entry excludes the transactions and services by local authority provided to the business entity like the petitioner having turnover of more than Rs.20 lakhs. It was also submitted that Entry No.4 of the said notification, would also not apply as AMC is a local authority and services to business entity is not in relation to any activity or function under Article 243W of the Constitution. It was submitted that the AMC was required to repair / restore the road because it was required to be dug out by the petitioner for its business activity and hence it cannot be said to be a duty cast upon the AMC under Article 243W of the Constitution.

6.7 It was further submitted that reliance placed by the petitioner on Entry No.4 of the 12^th Schedule of the Constitution of India, which stipulates roads and bridges also would not be applicable as the Article 243W would be not applicable in the facts of the case, and therefore, the petitioner is liable to pay GST as per Entry No.5 of the Notification No.13 of 2017 which mandates reverse charge mechanism for services by the local authorities to business entities. It was further submitted that the respondent No.3 has, after considering the submissions made by the petitioner has given cogent and sufficient reasons for levy of the GST on reverse charge basis to be paid by the petitioner for availing the service from the AMC which granted permission to dig out the road and charging the reimbursement of the cost of restoring / repairing of such road.

6.8 Learned advocate Ms.Sancheti also referred to the provision of Sec.67(3) and similar provision in Sec.10(d) of the Indian Telegraph Act,1885. It was further submitted that the petitioner has paid the reimbursement of the charges to the AMC for restoration/ repairing of the road, which was dug out by the petitioner to lay down the distribution lines is in the course of its business activity and not under any statutory obligation as sought to be canvassed by the petitioner, and therefore, it is squarely covered within the scope of supply of services under Sec.71 read with Schedule II, Clause 5(e) of the GST Act.

6.9 It was further submitted that the contention raised on behalf of the petitioner that petitioner was required to pay the reimbursement charges to the AMC under the provisions of the Electricity Act is also not correct, inasmuch as, other service providers like telephone companies, internet service provider, gas line provider are also seeking permission from the AMC to dig out the roads and thereafter, reimbursing the cost of repairing / restoration of the road and all such corporations and companies and entities are paying GST. It was therefore submitted that the petitioner cannot be the only entity governed by the provisions of the Electricity Act, 2003, so as not to pay the GST on reverse charge mechanism for availing the service from AMC for carrying out its functions as distribution lincesee under the provisions of the Electricity Act, 2003.

6.10 The contention raised on behalf of the respondent that there is an alternative efficacious remedy available to the petitioner is also not tenable in view of the interim order passed by this Court dated 16.02.2023, whereby, after considering the submissions made by the revenue, reliance was placed on the decision of Malladi Drugs and Pharma Limited v. Union of India 12 SCC 808. It is held by this Court in the said order that the petition is required to be entertained, and therefore, the rule was issued and the petition was admitted. Therefore, the preliminary contention raised on behalf of the respondent at this stage is not considered.

7. Having heard the learned advocates appearing for the respective parties and considering the facts and the material placed on record, it would be germane to refer to the relevant statutory provisions as under:

(I)

Sec.7(1) of the GST Act:

“7. Scope of supply. (1) For the purposes of this Act, the expression “supply” includes–

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.–For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business, and

(II)

Schedule II, Clause 5:

“5) Supply of services:

The following shall be treated as supply of services, namely:—

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.—For the purposes of this clause

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of nonrequirement of such certificate from such authority, from any of the following, namely:—

(i)

an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii)

a chartered engineer registered with the Institution of Engineers (India); or

(iii)

a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2)

the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

(d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

(f) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.”

(III)

The Electricity Act, Sec.42(1) and 67.

“Section 42. (Duties of distribution licensee and open access):

(1) It shall be the duty of a distribution licensee to develop and maintain an efficient, coordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained in this Act.”

“Section 67. (Provisions as to opening up of streets, railways, etc): –(1) A licensee may, from time to time but subject always to the terms and conditions of his licence, within his area of supply or transmission or when permitted by the terms of his licence to lay down or place electric supply lines without the area of supply, without that area carry out works such as –

(a) to open and break up the soil and pavement of any street, railway or tramway,

(b) to open and break up any sewer, drain or tunnel in or under any street, railway or tramway;

(d) to lay down and place electric lines, electrical plant and other works;

(e) to repair, alter or remove the same,

(f) to do all other acts necessary for transmission or supply of electricity.

(2) The Appropriate Government may, by rules made by it in this behalf, specify, –

(a) the cases and circumstances in which the consent in writing of the Appropriate Government, local authority, owner or occupier, as the case may be, shall be required for carrying out works;

(b) the authority which may grant permission in the circumstances where the owner or occupier objects to the carrying out of works;

(d) the procedure and manner of consideration of objections and suggestion received in accordance with the notice referred to in clause (c);

(e) the determination and payment of compensation or rent to the persons affected by

works under this section;

(f) the repairs and works to be carried out when emergency exists;

(g) the right of the owner or occupier to carry out certain works under this section and the payment of expenses therefor;

(h) the procedure for carrying out other works near sewers, pipes or other electric lines or works;

(i) the procedure for alteration of the position of pipes, electric lines, electrical plant, telegraph lines, sewer lines, tunnels, drains, etc.;

(j) the procedure for fencing, guarding, lighting and other safety measures relating to works on streets, railways, tramways, sewers, drains or tunnels and immediate reinstatement thereof;

(k) the avoidance of public nuisance, environmental damage and unnecessary damage to the public and private property by such works;

(l) the procedure for undertaking works which are not repairable by the Appropriate Government, licensee or local authority;

(m) the manner of deposit of amount required for restoration of any railways, tramways, waterways, etc.;

(n) the manner of restoration of property affected by such works and maintenance thereof;

(o) the procedure for deposit of compensation payable by the licensee and furnishing of security; and

(p) such other matters as are incidental or consequential to the construction and maintenance of works under this section.

(3) A licensee shall, in exercise of any of the powers conferred by or under this section and the rules made thereunder, cause as little damage, detriment and inconvenience as may be, and shall make full compensation for any damage, detriment or inconvenience caused by him or by any one employed by him.

(4) Where any difference or dispute [including amount of compensation under sub-section (3)] arises under this section, the matter shall be determined by the Appropriate Commission.

(5) The Appropriate Commission, while determining any difference or dispute arising under this section in addition to any compensation under sub-section (3), may impose a penalty not exceeding the amount of compensation payable under that sub-section.”

(iv)

Article 243W of the Constitution of India

“243W. Powers, authority and responsibilities of Municipalities, etc.

Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow–

(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to—

(i) the preparation of plans for economic development and social justice;

(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;

(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.”

[TWELFTH SCHEDULE]

(Article 243W)

1. Urban planning including town planning.

2. Regulation of land-use and construction of buildings.

3. Planning for economic and social development.

4. Roads and bridges.

5. Water supply for domestic, industrial and commercial purposes.

6. Public health, sanitation conservancy and solid waste management.

7. Fire services.

8. Urban forestry, protection of the environment and promotion of ecological aspects.

9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.

10. Slum improvement and upgradation.

11. Urban poverty alleviation.

12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.

13. Promotion of cultural, educational and aesthetic aspects.

14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.

15. Cattle pounds; prevention of cruelty to animals.

16. Vital statistics including registration of births and deaths.

17. Public amenities including street lighting, parking lots, bus stops and public conveniences.

18. Regulation of slaughter houses and tanneries.]

(v)

Entry No.4 of Notification No.12/2017

SI No	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of service	Rate (percent)	Condition
4	Chapter 99	Services by Central Government, State Government, Union territory, local authority or governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution.	Nil	Nil

(vi)

Entry No.5 of Notification No.13 of 2017.

SI No	Category of supply of services	Supplier of services	Recipient of service
5	Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, (1) renting of immovable property, and (2) services specified below- (1) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.	Central Government, State Government, Union territory or local authority.	Any business entity located in the taxable territor.

7.1 Sec.42 of the Electricity Act,2003, falls in part VI for provision with respect to distribution licencees and provides for duties of distribution lines and open access. Sec.67 of the Electricity Act, 2003, deals with the works of licencees falling in part VIII of the Electricity Act, 2003. Sub-section (1) of Sec.67 provides for opening of streets, railways etc., whereas, sub-section(2) stipulates powers of the appropriate government to formulate rules to specify the various procedure to be adopted for granting permissions and prepare and works to be carried out when emergency exist etc. Sub-section(3) of sec.67 mandates the licensee to cause as little damage detrimental as may be and to make full compensation for any damage or detriment or inconvenience caused.

7.2 On harmonious and conjoint reading of both the provisions of Sections 42 and 67, and more particularly sub-section(3) of sec.67, it provides to make the full compensation for damage caused by it while opening or breaking up the road or to lay down the distribution lines.

7.3 Sec.7(1) of the GST Act provides for scope of supply of goods or services liable to levy of GST Tax

under Sec.9 of the GST Act. Schedule II, Clause 5 provides for the activities to be treated as supply of services and sub-clause (e) of Clause 5 of Schedule II of GST Act deals with agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act. The contention of the Revenue that agreeing to tolerate the digging up of road by the AMC would be covered by sub-clause(e) of Clause 5 of Schedule II, and therefore, such agreement to tolerate the digging of the road would be covered within the scope of supply of service.

7.4 The contention raised on behalf of the Revenue seems to be very attractive at the first blush. However, the AMC is not agreeing to tolerate the act of digging up of the road by the petitioner but under the provision of Sec.67 of the Electricity Act, the petitioner being a distribution licensee is required to lay down the distribution lines and for that purpose the rules are framed by the appropriate government to grant permission and as per sub-section (3) of sec.67, it is mandatory for the distribution licensee to make the compensation for damage caused while laying down the distribution lines by digging up of the road.

7.5 In the facts of the case, the AMC has recovered reimbursement for repairing / restoration of the road. Therefore, the contention of the Revenue that such restoration or repairing of the road is not within the scope of the function of the AMC under Article 243W of the Constitution, cannot be accepted because for any damaged road it is the function of the municipality to repair and restore any damaged road for whatever may be the reason and the same would also be a sovereign function as per Article 243W of the Constitution.

7.6 Therefore, looking from any point of view, the reimbursement of the repairing and restoration charges of the damaged road for laying down the distribution lines by the petitioner – distribution licensee as per the provision of Sec.67(3) of the Electricity Act, would not be covered by the scope of supply as per Sec.7(1) of the GST Act read with Schedule II, Clause 5(e) in any manner whatsoever by any stretch of imagination.

7.7 Reliance placed by the learned advocate for the respondent on the decision of the Hon’ble Apex Court in the case of Balmer Lawrie & Co. (supra), would not be applicable to the facts of the same as the said decision deals with Article 12 of the Constitution of India, wherein, the scope of the State is prescribed.

7.8 Similarly, the reference to the Circular No.178/2022 is also misplaced in the facts of the case as the said circular is applicable to liquidated damages, compensation and penalty arising out of the breach of contract or other provision of law, whereas, in the facts of the case, the petitioner is liable to reimburse the repairing / restoration cost to the AMC as a compensation to the damage caused by it for digging up for breaking or digging the road to lay the distribution lines. In such circumstances, it cannot be said that the reimbursement of the cost by the petitioner to the AMC is for breach of contract or other provision of law.

7.9 Reliance placed on the Circulars No.182 of 2016 and 89 of 2006 which are under the service tax regime, would also not be applicable in the facts of the case as the scope of supply under the GST Act is different than the service tax as covered within the provision of Finance Act, 1994.

8. In view of the foregoing reasons, the reimbursement of the service of the cost of repairing and restoration of the roads to AMC by the petitioner cannot be considered as a supply of service by the AMC so as to fasten the liability of the GST on reverse charge basis upon the petitioner under the provisions and circulars and notifications issued under the GST Act.

9. The impugned show-cause notice dated 30.11.2022 as well as the Order-in-Original dated 25.01.2025 are hereby quashed and set aside. Rule is made absolute to the aforesaid extent.