Services For Private Railway Sidings Are Exempt From Tax: Karnataka High Court

The Karnataka High Court on 8 January held that services rendered for the construction of private railway sidings are eligible for service tax exemption.

A Division Bench comprising Justice S.G. Pandit and Justice K.V. Aravind was hearing an appeal filed by the Commissioner of Central Tax, Bengaluru East Commissionerate, challenging an order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

The Bench held:

“There is no indication in the notification, nor any exception carved out, disqualifying services rendered in relation to railways constructed for commercial purposes from the benefit of exemption. In the absence of any such specific intention expressed in the notification, it is neither permissible nor possible to interpret the same as being confined only to works relating to public railways,”.

The dispute arose from site formation, excavation and allied works carried out by the respondent for M/s JSW Steel Limited and Karnataka Power Corporation Limited at Bellary, in connection with the laying of railway lines and sidings within industrial premises.

The respondent classified the activities as works contract services and claimed service tax exemption under Notification No. 17/2005 dated 7 June 2005, on the ground that the services were rendered in relation to the construction of railways.

The Department issued a show cause notice proposing to levy service tax, contending that the railway lines were constructed on private land, at the cost of private entities, and were not railways meant for public use. It was argued that the exemption could not be extended to private or industrial railway sidings.

While the adjudicating authority confirmed the demand, the CESTAT set aside the order, holding that the exemption applies even to private railway sidings. Aggrieved by this decision, the revenue approached the High Court, arguing that the definition of “railways” under the Railways Act, 1989, covers only government railways meant for public carriage of passengers or goods.

Dismissing the appeal, the Bench held that the exemption provision, on a plain reading, does not distinguish between government railways and private railways, nor does it exclude railways constructed for commercial purposes.

The Court further held that once services are rendered in relation to the construction of railway infrastructure, the ownership or end-use of the railway line becomes immaterial.

The Bench stated:

“Once the services are rendered in relation to the infrastructure specified in the notification, it becomes immaterial whether the railway is private or Government owned, or whether it is intended for public use or commercial usage. In the absence of any express exclusion, such a distinction cannot be introduced by interpretation.”

It also noted that private sidings contribute to the expansion of railway infrastructure and indirectly benefit the railways themselves.

The judges added:

“So long as the services are provided in relation to the construction of railways, the notification exempts such services from the whole of service tax leviable thereon. The interpretation adopted by the Commissioner amounts to reading words into the notification, which is impermissible in law,”

Accordingly, the High Court upheld the CESTAT's order and dismissed the Department's appeal.

For Petitioner: Akash B Shetty

For Respondent: M.S. Nagaraja