Statutory Reimbursement For Road Restoration Does Not Constitute A Supply Of Agreeing To Tolerate An Act.
Issue
Whether the reimbursement of road restoration charges paid by an electricity distribution licensee to a municipal corporation constitutes a “supply” (under the category of agreeing to tolerate an act) exigible to GST under the Reverse Charge Mechanism.
Facts
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The Assessee is a GST-registered electricity distribution licensee responsible for laying and maintaining power distribution lines.
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To perform these licensed works, the Assessee dug up roads belonging to the Ahmedabad Municipal Corporation (AMC).
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Under the statutory framework of the Electricity Act, the AMC restored these roads and recovered the actual restoration costs from the Assessee as reimbursement.
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GST authorities issued a Show Cause Notice (SCN) alleging that the AMC was providing a service of “agreeing to tolerate an act” (digging) under Heading 9997.
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The Department contended that the Assessee was liable to pay GST on these payments under the Reverse Charge Mechanism (RCM).
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The High Court quashed the demand, ruling that the payment was a statutory compensation/reimbursement for municipal functions and not a commercial “agreement to tolerate.”
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The Revenue filed a Special Leave Petition (SLP) before the Supreme Court challenging the High Court’s decision.
Decision
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The Supreme Court condoned the delay in filing the petition.
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The Court issued a formal notice in the Special Leave Petition to further examine the legal merits of the High Court’s ruling.
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The matter remains pending for final adjudication, though the current standing (based on the High Court’s quashed order) remains in favor of the assessee.
Key Takeaways
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Statutory Obligation vs. Contractual Service: Payments made to fulfill a statutory mandate (like Section 67 of the Electricity Act) to compensate for damages are fundamentally different from “consideration” for a service.
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Municipal Functions: Restoration of public roads by a local authority is a discharge of a municipal function under Article 243W, which strengthens the argument against it being treated as a taxable business supply.
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Toleration of Act: For an activity to fall under “agreeing to tolerate an act” (Schedule II), there must be a consensus or a contractual agreement to allow something in exchange for a fee, rather than a legal requirement to compensate for unavoidable detriment.
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Judicial Scrutiny: The Supreme Court’s issuance of notice indicates that the distinction between “reimbursement of cost” and “consideration for service” in the context of government authorities is a significant point of law requiring finality.