Supreme Court declines to intervene in GST show cause dispute on BOT annuity projects
Background of the controversy
The matter in GMR Pochanpalli Expreessways Limited Vs Additional Director arose from a GST show cause notice issued to a concessionaire involved in a highway project under the Build-Operate-Transfer (BOT) annuity model. The notice demanded GST, interest and penalty on annuity receipts for the period from September 2017 to September 2022.
The assessee, a concessionaire under a BOT arrangement, approached the High Court challenging:
- The very show cause notice issued under GST law, and
- Circular No. 150/06/2021-GST dated 17.06.2021
The central plank of the assessee’s argument was that annuity payments received from the Government under the BOT model were exempt from GST pursuant to Entry 23A of Notification No. 12/2017. According to the assessee, the impugned circular was contrary to:
- The statutory GST exemption notifications, and
- The recommendations of the GST Council, particularly relating to treatment of annuity vis-à-vis tolls.
Assessee’s contentions before the High Court
Project timeline and nature of receipts
The assessee submitted that:
- The highway construction under the BOT concession had been fully completed in 2009, i.e., long before the introduction of GST in July 2017.
- Post-completion, the assessee was receiving annuity payments from the Government, which were claimed to be consideration for providing access to the road, functionally similar to toll charges.
- The assessee argued that these annuity receipts were essentially in lieu of toll collection and thus fell within the exempt category.
Reliance on GST Council recommendations and exemptions
The assessee stressed that the 22nd GST Council had recommended equal treatment of annuity and tolls. On that basis:
- Entry 23A and Entry 24A were introduced in Notification No. 12/2017, providing exemption to services “by way of access to a road or a bridge on payment of annuity”.
- The assessee contended that, in line with these entries, the annuity received under its BOT contract was exempt.
Challenge to the impugned circular and reliance on precedent
The assessee further contended that:
- Circular No. 150/06/2021-GST was ultra vires the Act and contrary to the scheme of exemptions, as it effectively denied exemption to certain annuity-based arrangements.
- It relied upon a Karnataka High Court decision which had quashed the same circular, asserting that the circular could not override the clear text of the exemption notification.
Accordingly, the assessee requested quashing of both:
- The show cause notice, and
- The impugned circular, on the ground that the GST demand itself was illegal in view of the exemption.
Department’s stand before the High Court
The Department opposed the writ petition on multiple fronts, both on classification and on maintainability.
Classification under SAC – 9954 vs 9967
The Department took the position that:
- Entry 23 and Entry 23A under Notification No. 12/2017 applied only to services falling under SAC 9967, which deals with “supporting services in transport”, including services of granting access to roads or bridges on toll/annuity basis.
- The concessionaire’s core activity in the instant case was construction of the highway, which is classifiable under SAC 9954 (construction services) and not under SAC 9967.
On that basis, the Department contended that:
- Construction services under SAC 9954 do not become exempt merely because payment is structured as deferred annuity instalments instead of an upfront construction fee.
- The annuity, in this factual arrangement, was only the mode of payment for taxable construction services, and not consideration for exempt access services.
Objection to writ at show cause notice stage
The Department also argued that:
- The writ petition was premature as it sought to nullify a show cause notice even before the assessee had submitted a reply or faced adjudication.