Delhi High Court Sets Aside ₹533.79 Crore Sales Tax Demands Against Railways Over Rolling Stock Transactions

The Delhi High Court has set aside assessment orders and revisional orders involving aggregate sales tax demands of ₹533,79,21,617. The demands concerned rolling stock financed through the Indian Railway Finance Corporation (IRFC).

The court held that the authorities had wrongly treated the entire rolling stock financed through IRFC as having first belonged to the Railways. They had then treated it as having been sold by the Railways to IRFC.

The division bench of Justices Anil Khetarpal and Shail Jain held that while the Railways can fall within the definition of a “dealer” under the Delhi Sales Tax Act, 1975, that by itself does not establish that every transaction involving railway property constitutes a sale.

The Court was dealing with a batch of ten petitions filed by the Ministry of Railways concerning sales tax assessments for the assessment years 1987-88 to 1996-97. The dispute concerned rolling stock financed through IRFC.

The tax authorities had proceeded on the basis that the Railways had manufactured or purchased the rolling stock, acquired ownership over it and subsequently transferred it to IRFC against funds advanced by IRFC. IRFC would then lease the rolling stock back to the Railways.

Railways disputed this characterisation, arguing that IRFC was created to raise funds for acquisition of rolling stock required by the Railways and that the Railways merely undertook the manufacture or procurement, inspection, delivery and commissioning of the assets.

The High Court observed that the crucial question was whether the rolling stock had actually belonged to the Railways in its own right before being transferred to IRFC for consideration.

It held that possession, responsibility for specifications, inspection, insurance, maintenance, transportation or commissioning of the rolling stock were relevant circumstances, but none of these factors was by itself conclusive of ownership.

“Similarly, the fact that IRFC provided finance before particular rolling stock was manufactured or identified does not determine whether such funds represented financing for acquisition of the assets or advance consideration for their subsequent purchase from the Railways,” it said.

The Court further noted that some rolling stock was obtained from private manufacturers, and some rolling stock was manufactured in production units belonging to the Railways. Thus it held that the same conclusion cannot necessarily be applied to both.

The Court said, “Where a private manufacturer supplied rolling stock to IRFC and the Railways acted on behalf of IRFC in procuring, inspecting, taking delivery or commissioning it, property passed from the manufacturer to IRFC. The intervention of the Railways in that process did not give rise to an intermediate sale by the Railways.”

“The position would be different if the Railways purchased rolling stock from a private manufacturer in its own right, acquired title to it and thereafter transferred that title to IRFC against the funds supplied by IRFC. In that event, the transaction between the Railways and IRFC would answer the definition of a sale. Private manufacture, alone, is therefore not conclusive. The capacity in which the Railways made the purchase is important,” it added.

Rolling stock manufactured in Railway production units stands on a clearer position, the Court held. It clarified that where Railways manufactured and owned identified rolling stock, adjusted its cost against the funds supplied by IRFC, and thereafter vested ownership in IRFC, the transaction contained the essential elements of a sale.

“The absence of a separately executed sale agreement or an invoice raised by the Railways would not alter its legal character…What matters is that the Railways transferred property which belonged to it, and did so for consideration.”

The governing distinction is therefore not merely between private manufacture and Railway's own manufacture. It is whether the Railways held the title in its own right immediately before IRFC became the owner.

As such, the Court set aside the impugned orders and remitted the matters to the Commissioner (Trade and Taxes) under Delhi Government.

The Court directed senior representatives of the Ministry of Railways, the Delhi Government and IRFC to jointly prepare an assessment-year-wise statement identifying the rolling stock manufactured in Railway production units and transferred to IRFC, rolling stock purchased from private manufacturers by the Railways in its own right and thereafter transferred to IRFC, and rolling stock procured by the Railways on behalf of IRFC.

The fresh exercise is limited to identifying the transactions falling within these categories and computing the liability arising from transactions found to constitute sales.

For Petitioner: Chetan Sharma, ASG with Rukhmini Bobde, Archana Gour, CGSC with Ridhima Gour, Vinayak Aren, Deepu Kumar and Aishwarya Nigam

For Respondents: Senior Advocate Balbir Singh with Sumit K. Batra and Priyanka Jindal