Supreme Court issues notice on Revenue’s SLP against High Court ruling that road restoration reimbursements are not taxable supplies.
Issue
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Whether the reimbursement of road restoration charges paid by a GST-registered electricity distribution licensee to a Municipal Corporation for digging roads to lay distribution lines constitutes a taxable supply of “agreeing to tolerate an act” under Heading 9997 (Schedule II) of the CGST/GGST Act, making the licensee liable to pay GST under the Reverse Charge Mechanism (RCM).
Facts
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The Assessee, a registered electricity distribution licensee, opened and dug roads belonging to the Ahmedabad Municipal Corporation (AMC) to lay and maintain underground power distribution lines.
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AMC subsequently restored the damaged roads and recovered the exact cost of restoration from the Assessee as a reimbursement, calculated based on the specific area or type of road repaired.
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The GST authorities issued a Show Cause Notice (SCN) and a subsequent Order-in-Original confirming a tax demand under RCM. The department argued that AMC’s permission to dig and its subsequent restoration work amounted to “agreeing to tolerate an act” under Heading 9997.
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The Assessee challenged this, asserting that under the Electricity Act, 2003, they are legally mandated to pay statutory compensation for damages caused during licensed works. They further argued that road restoration is a sovereign municipal function protected under Article 243W of the Constitution of India, not a commercial service.
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The High Court ruled in favour of the Assessee and quashed the SCN and demand order, prompting the Revenue Department to file a Special Leave Petition (SLP) before the Supreme Court.
Decision
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Condonation of Delay and Notice Issued: The Supreme Court condoned the delay in filing the Special Leave Petition by the Revenue Department and formally issued a notice to the respondent (Assessee) to hear the matter on merits.
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Status of High Court Findings: While the Supreme Court has agreed to examine the case (issuing notice), the underlying legal findings of the High Court stand for now:
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The statutory framework mandates that licensees cause minimal detriment and pay full compensation for road opening; hence, the municipality does not “agree to tolerate” an illegal or voluntary act.
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Recovering actual restoration costs falls squarely within municipal functions under Article 243W and constitutes a pure reimbursement of expenses rather than a taxable “supply” of services.
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Final Verdict: The Supreme Court has admitted the matter for further adjudication, keeping the final legal position open, though the initial High Court round was decided in favour of the assessee.
Key Takeaways
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Reimbursement vs. Consideration: Pure cost-to-cost reimbursements for statutory obligations or damages (like road restoration) do not automatically morph into a commercial “consideration” for a taxable supply under GST.
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The “Tolerance” Clause Clarified: To fall within the Schedule II clause of “agreeing to tolerate an act,” there must be a mutual agreement or understanding to allow an act in exchange for a fee. Executing a statutory right (like laying utility lines) coupled with a legal obligation to pay for damages does not meet the threshold of tolerating an act.
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Supreme Court Scrutiny: Because this involves the intersection of sovereign municipal functions (Article 243W), statutory utility rights (Electricity Act), and the definition of “supply” under GST, the Supreme Court’s eventual ruling will establish a critical national precedent for all public utility companies.