Railway Contractor’s GST Burden: Court Directs Representation Before Relief

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Case Name

V. Ramakrishnan vs. Union of India & Others

Court Name: High Court of Judicature at Madras

Case No.: WP No. 14798 of 2018

Decided on: 11.07.2018

Coram: The Honourable Mr. Justice T.S. Sivagnanam

Key Takeaways

1. GST Transition Problem for Contractors: When GST was introduced, contractors who had signed work orders before GST but completed work after GST faced a sudden tax rate jump — from 2% (old service tax regime) to 12% (GST regime). This created a financial burden.

2. Railway Board Had Already Issued a Circular: The Railway Board had proactively issued Circular No. 2017/CE-I/CT/7/GST dated 27.10.2017, which directed that a Supplementary Agreement be entered into with contractors to deal with the GST impact on individual contracts, in consultation with the Financial Advisor under Para 1265 of the Engineering Code.

3. Courts Won’t Act Without Prior Representation: The court made it clear that a petitioner cannot directly approach the High Court seeking a writ of mandamus without first submitting a representation to the concerned authorities. This is a fundamental procedural principle.

4. The Issue is Larger Than One Contractor: The court noted that this GST transition problem is not unique to V. Ramakrishnan — it affects many contractors, making it a systemic issue rather than an individual grievance.

5. GST Commissioner is a Relevant Party: The court rejected the argument that the Principal Commissioner, GST and Central Excise (5th Respondent) was not a necessary party, noting that the Railway Administration may need GST clarifications from them while implementing the circular.

Issue

The Central Legal Question:

Should the court direct Southern Railways to implement the Railway Board’s Circular dated 27.10.2017 — which mandates entering into Supplementary Agreements with contractors to address the GST rate differential — for works contracts entered into before GST but completed after GST implementation?

More specifically: Is the contractor entitled to be compensated for the 10% difference between the GST rate he paid (12%) and the rate Railways reimbursed him (2%)?

Facts

• Who is the Petitioner? V. Ramakrishnan is a registered contractor with Southern Railways, Chennai Division. He takes up works contracts for the Railways.

• What’s the Background? He had entered into work orders with Southern Railways before GST was introduced (i.e., before July 1, 2017). However, the actual work was completed after GST came into effect.

• What’s the Problem? Under the old tax regime, the applicable tax rate was around 2%. But after GST kicked in, the rate applicable to works contract services became 12%. The Railways, however, continued to pay him at the old rate of 2%, leaving him to absorb the remaining 10% GST from his own pocket.

• Was There a Circular? Yes! The Railway Board itself had issued Circular No. 2017/CE-I/CT/7/GST dated 27.10.2017, which acknowledged this problem and directed that a Supplementary Agreement be entered into with contractors (in consultation with the Financial Advisor, as per Para 1265 of the Engineering Code) to handle the GST impact on individual contracts.

• What Did the Contractor Do? Instead of first submitting a representation to the Railways, he directly filed a Writ Petition before the Madras High Court, asking the court to direct the Railways to implement the circular.

• What Did the Railways Say? The Railways’ Standing Counsel pointed out that the petitioner had not submitted any prior representation to the authorities before rushing to court.

Arguments

Petitioner’s Arguments (V. Ramakrishnan):

1. The Railway Board’s own Circular dated 27.10.2017 (specifically Para 3.1) mandates that a Supplementary Agreement must be entered into with contractors to deal with the GST impact on individual contracts.

2. The petitioner is paying 12% GST on his works contract services, but the Railways are only reimbursing him at 2% (the old rate). The remaining 10% is being borne by the contractor, which is unfair and contrary to the circular.

3. Therefore, the court should issue a writ of mandamus directing Respondents 3 and 4 (Financial Advisor & Chief Accounts Officer, and Divisional Railway Manager) to implement the circular.

4. The 5th Respondent (Principal Commissioner, GST and Central Excise) should also be a party since GST matters are involved.

Respondents’ Arguments (Railways & GST Commissioner):

Railways (R1 to R4):

1. The petitioner has not submitted any representation to the Railway authorities before approaching the court. He cannot bypass the administrative process and directly seek court intervention.

GST Commissioner (R5):

1. The 5th Respondent is neither a proper nor a necessary party to this writ petition, as the dispute is essentially between the contractor and the Railways.

Key Legal Precedents & Provisions

The judgment is relatively brief and does not cite extensive case law precedents. However, the following legal provisions and documents were referenced:

Article 226 of the Constitution of India

The writ petition was filed under this Article, which empowers High Courts to issue writs including mandamus

Railway Board Circular No. 2017/CE-I/CT/7/GST dated 27.10.2017

The key circular directing supplementary agreements for GST impact on contracts

Para 3.1 of the above Circular

Specifically mandates entering into supplementary agreements with contractors in consultation with the Financial Advisor

Para 1265 of the Engineering Code

The provision under which supplementary agreements are to be entered into with contractors

Note: The court did not cite any judicial precedents (case laws) in this judgment. The decision was based on procedural grounds (failure to submit prior representation) and the court’s reading of the Railway Board’s own circular.

Judgment

Who Won?

Technically, neither party fully won or lost — the case was disposed of on procedural grounds without going into the merits.

What Did the Court Decide?

The court did not grant the writ of mandamus that the petitioner sought. Here’s the reasoning and the orders:

Reasoning:

1. The petitioner directly approached the High Court without first submitting a representation to the Railway authorities. Courts generally don’t entertain such petitions when the administrative remedy hasn’t been tried first.

2. The issue is not limited to this one contractor — it’s a larger, systemic problem affecting multiple contractors, which makes it even more important that the proper administrative process is followed.

3. The court rejected the Railways’ argument that the 5th Respondent (GST Commissioner) was not a necessary party, noting that the Railway Administration may need GST clarifications while implementing the circular.

Orders Made by the Court:

• The petitioner is directed to submit a representation to the 4th Respondent (Divisional Railway Manager) along with a copy of this court order, within 2 weeks from the date of receipt of the order.

• Upon receiving the representation, the 4th Respondent must consider it, and if any GST-related clarification is needed, obtain it from the 5th Respondent (GST Commissioner).

• The 4th Respondent must then pass orders on merits and in accordance with law within 2 weeks from the date of receiving clarification from the 5th Respondent.

• No costs were awarded to either party.

FAQs

Q1: Why didn’t the court just order the Railways to implement the circular directly?

Because the petitioner skipped a crucial step — he never submitted a formal representation to the Railway authorities before running to court. Courts expect parties to exhaust administrative remedies first. The court essentially said, “Go knock on the right door first.”

Q2: What is the Railway Board Circular about, and why does it matter?

The Circular No. 2017/CE-I/CT/7/GST dated 27.10.2017 was issued by the Railway Board to address a real problem: contractors who signed work orders before GST but completed work after GST were suddenly facing higher tax rates. The circular directed that Supplementary Agreements be entered into with such contractors to fairly distribute the GST burden, as per Para 1265 of the Engineering Code.

Q3: What is the 10% GST gap the contractor is talking about?

Under the old tax regime, the applicable rate was around 2%. After GST, works contract services attracted 12% GST. The Railways were still paying at 2%, so the contractor was effectively absorbing 10% extra tax from his own earnings — which is a significant financial hit.

Q4: Why was the GST Commissioner (5th Respondent) kept in the case?

The court reasoned that when the Railway Administration tries to implement the circular and assess the GST impact on individual contracts, they may need clarifications or guidelines from the GST Commissioner. So keeping the 5th Respondent in the loop makes practical sense.

Q5: What should the petitioner do next?

He must submit a detailed representation to the Divisional Railway Manager (Works) within 2 weeks, attaching a copy of this court order. The Railways must then process it and pass orders within 2 weeks of getting any required GST clarification.

Q6: Does this judgment set any major legal precedent?

Not really — this is a procedural disposal. The court didn’t go into the merits of whether the contractor is entitled to the GST differential. However, it does implicitly validate the contractor’s grievance by keeping the case alive through the representation route and acknowledging that the Railway Board’s circular does mandate supplementary agreements.

Q7: Is this a common problem for contractors?

Yes! The court itself noted that “the issue which is now pointed out by the petitioner is a larger issue and it is not a single contractor centric.” This means many contractors across India who had pre-GST work orders but post-GST work completion likely faced the same problem.

Heard Mr. N. Murali, the learned counsel for the petitioner and Mr. P.T. Ramkumar, learned counsel, who accepts notice on behalf of R1 to R4 and Mr. V. Sundaraswaran, learned counsel, who accepts notice on behalf of R5.

2.The petitioner, who is a registered contractor with

the Southern Railways, at Chennai Division, is before this Court

seeking a writ of mandamus to direct the respondents 3 and 4 to

implement the instructions issued by the Second Respondent on

28.10.2007, in respect of the works contract services done by

the petitioner for the work orders entered into prior to

introduction of GST and works completed after implementation of

GST.

3.In this regard, the learned counsel for the

petitioner has drawn the attention of this Court to paragraph

No.3.1 of the Circular dated 27.10.2017, issued by the second

respondent, which reads as follows:

“3.1 For dealing with impact of GST in

individual contracts, a supplementary agreement

is to be entered into with the contractor in

consultation with financial advisor in terms of

Para 1265 of the Engineering Code.”

by referring to the above condition, it is submitted that a

Supplementary Agreement has to be necessarily entered into with

the contractor, as the percentage of GST paid by the petitioner

is 12%; whereas, the Railways have been paying them only at 2%

at the old rate and the balance 10% to be borne by the

contractor. Therefore, it is submitted that necessary direction

should be issued.

4.As rightly pointed out by the learned Standing

Counsel for the Respondents/Railways, the petitioner, without

submitting any representation to the respondents, has straight

away approached this Court and seeks for a direction. Under

such circumstances, this Court will not entertain the prayer to

direct the respondents to do a particular thing, when the

petitioner has not approached the respondents by way of

representation or a request. Further, I find that the issue

which is now pointed out by the petitioner is a larger issue and

it is not a single contractor centric.

5.The learned Standing Counsel for the fifth

respondent submitted that the fifth respondent is neither a

proper nor necessary party to the writ petition.

6.The said contention is not acceptable for the reason

that the Circular issued by the Railway Board dated 27.10.2017

states that for dealing with the impact of GST in individual

contracts, a supplementary contract has to be entered into.

Therefore, to study the impact of GST in individual contracts,

occasion may arise for the Railway Administration to consult the

5th respondent and in such an event, the 5th respondent would be

in a position to issue necessary clarification or guidelines to

the Railway Administration.

7.As pointed out earlier, since the petitioner has not

given a representation to the authorities, the Court directs him

to do so within a time frame. Accordingly, the writ petition

stands disposed of by directing the petitioner to submit a

representation to the fourth respondent along with a copy of

this order within a period of two weeks from the date of receipt

of copy of this order and on receipt of the representation, the

fourth respondent shall consider the same and if any

clarification is required, obtain the same from the fifth

respondent and pass orders on merits and in accordance with law,

within a period of 2 weeks from the date on which the

clarification is received from the fifth respondent. No costs.