Road Builders Win Court Strikes Down GST on Construction Annuity Payments

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Case Name

M/s DPJ Bidar-Chincholi (Annuity) Road Project Private Limited & Anr. v. Union of India & Ors.

Court Name: High Court of Karnataka at Bengaluru

Case No.: W.P. No. 22250 of 2021 C/W W.P. No. 7233 of 2022

Decided on: 11th July 2022

Before: Hon’ble Mr. Justice M.I. Arun

Key Takeaways

1. A Circular cannot override a Notification. This is a well-settled legal principle reaffirmed here — a clarificatory circular cannot have the effect of overruling or narrowing down an exemption granted by a formal notification.

2. Annuity Toll (for GST purposes). The GST Council itself, in its 22nd meeting on 06.10.2017, had consciously decided to treat annuity at par with toll charges and exempt both from GST.

3. The original notifications (No. 32/2017 and 33/2017 dated 13.10.2017) granted a full exemption on annuity paid to concessionaires — covering both construction AND maintenance components.

4. The 2021 Circular was struck down as it was found to be contrary to the original exemption notifications.

5. The government is not powerless — if it wants to change the exemption, it must do so by issuing fresh notifications amending the earlier ones, not through a circular.

6. Both petitioners won — M/s DPJ Bidar-Chincholi Road Project Pvt. Ltd. and M/s SEW Bellary Highways Limited.

Issue

The Central Legal Question:

Is the annuity paid by highway authorities to road concessionaires for construction of roads exempt from GST under Entry 23A of Notification No. 12/2017-CT (as amended by Notification Nos. 32/2017 and 33/2017 dated 13.10.2017)?

And more specifically:

Was the Circular No. 150/06/2021-GST dated 17.06.2021 — which said the exemption does NOT cover the construction component of annuity — legally valid, or did it impermissibly override the original exemption notifications?

Facts

The Background — How Road Projects Work

• Road construction projects are sometimes given to private companies (concessionaires) by government highway authorities like NHAI or Karnataka Road Development Corporation Limited (KRDCL).
• These concessionaires build and maintain roads for a contract period.
• As payment, they either:
• Collect tolls directly from road users, OR
• Receive periodic “annuity” payments from the highway authority (instead of collecting tolls).

July 2017 — Toll Charges Exempted from GST

• When GST was introduced on 01.07.2017, Notification No. 12/2017 dated 28.06.2017 was issued, granting 100% GST exemption on toll charges collected by concessionaires.
• This exemption covered the entire consideration for construction, operation, and maintenance of roads — because that’s what toll charges represent.

October 2017 — GST Council Decides to Exempt Annuity Too

• The 22nd GST Council meeting on 06.10.2017 discussed the issue of annuity.
• The Joint Secretary (TRU-II), CBEC explained that annuity is essentially the same as toll — it’s the consideration paid to concessionaires for constructing roads, just paid by the highway authority instead of road users.
• The Council decided to treat annuity at par with toll and exempt it from GST.

13th October 2017 — Exemption Notifications Issued

• Notification No. 32/2017 and Notification No. 33/2017 were issued, inserting Entry 23A into the exemption list:

“Service by way of access to a road or a bridge on payment of annuity — NIL rate”

• From this point, the entire annuity paid to concessionaires (including for construction) was exempt from GST.

28th May 2021 — GST Council Does a U-Turn

• In its 43rd GST Council meeting on 28.05.2021, the Council clarified that:

“…the annuity paid as deferred payment for construction of roads/highways was NOT exempted from GST as the tolls or annuity in lieu of tolls are…”

• The Council recommended that Entry 23A only exempts access to road services, NOT construction of road services.

17th June 2021 — Circular Issued

• Circular No. 150/06/2021-GST dated 17.06.2021 was issued by the Central Board of Indirect Taxes and Customs (CBIC), clarifying that:
• Entry 23A covers Heading 9967 (supporting services in transport — i.e., access to road).
• Construction of roads falls under Heading 9954, which is NOT covered by Entry 23A.
• Therefore, annuity paid as deferred payment for construction is NOT exempt from GST.

Petitioners Go to Court

• The two road companies — M/s DPJ Bidar-Chincholi (Annuity) Road Project Pvt. Ltd. and M/s SEW Bellary Highways Limited — filed writ petitions challenging the GST Council’s decision and the Circular.

Arguments

🟢 Petitioners’ Arguments (Road Companies)

1. The annuity is fully exempt under Notification Nos. 32/2017 and 33/2017 dated 13.10.2017, which exempted the entire annuity paid to concessionaires — including the construction component.

2. The GST Council’s own 22nd meeting minutes clearly show the intent was to treat annuity at par with toll charges — and toll charges cover the entire consideration including construction.

3. A circular cannot override a notification. The 2021 Circular effectively narrows down the scope of the exemption granted by the 2017 notifications, which is not legally permissible.

4. The impugned Circular dated 17.06.2021 and the 43rd GST Council meeting decision are contrary to the exemption notifications and should be set aside.

Respondents’ Arguments (Government)

1. The Circular does not contravene the notifications — it merely clarifies what was always intended by the notifications.

2. What is exempted under Entry 23A is only “service by way of access to a road or a bridge on payment of annuity” — i.e., the access service, not the construction service.

3. Construction of roads falls under Heading 9954, while Entry 23A specifically covers Heading 9967 only. So the construction component of annuity was never meant to be exempt.

4. The writ petitions should be dismissed.

Key Legal Precedents & Provisions

The court referenced the following key legal provisions (note: the judgment does not cite prior case law precedents, but relies on statutory provisions and settled legal principles):

1. Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017

• The original GST exemption notification that exempted toll charges (Entry 23 — Heading 9967) from GST at NIL rate.

2. Notification No. 32/2017-Central Tax (Rate) dated 13.10.2017

• Inserted Entry 23A exempting “Service by way of access to a road or a bridge on payment of annuity” at NIL rate under Heading 9967.

3. Notification No. 33/2017 dated 13.10.2017

• The corresponding integrated tax notification, also inserting Entry 24A with the same exemption.

4. Section 11 of the Central Goods and Services Tax Act, 2017

• The provision under which respondent no.1 (Union of India) issued the exemption notifications.

5. Section 6 of the Integrated Goods and Services Tax Act, 2017

• The corresponding provision for IGST exemptions.

6. Circular No. 150/06/2021-GST dated 17.06.2021

• The impugned circular issued by CBIC that was challenged and ultimately struck down by the court.

7. Settled Legal Principle: A Circular cannot override a Notification

• The court applied this well-established proposition of law to hold that the 2021 Circular, by narrowing the scope of the 2017 exemption notifications, was bad in law.

8. Minutes of the 22nd GST Council Meeting dated 06.10.2017

• Used as interpretive material to understand the intent behind the exemption — which was to treat annuity at par with toll charges.

9. Minutes of the 43rd GST Council Meeting dated 28.05.2021

• The meeting where the GST Council reversed its position — this decision was challenged and the relevant portion was set aside.

Judgment

The Petitioners (Road Companies) WON

The Court’s Reasoning

The Hon’ble Justice M.I. Arun reasoned as follows:

Step 1: Toll charges collected by concessionaires were always fully exempt from GST under Notification No. 12/2017. These toll charges represent the entire consideration for construction, operation, and maintenance of roads.

Step 2: Annuity is paid in lieu of toll charges. The GST Council in its 22nd meeting consciously decided to treat annuity at par with toll and exempt it entirely. The meeting minutes make this crystal clear.

Step 3: Notifications No. 32/2017 and 33/2017 were issued pursuant to this decision, exempting the entire annuity — including the construction component.

Step 4: The 2021 Circular attempted to say that only the “access” part of annuity is exempt, not the “construction” part. But this effectively overrides the 2017 notifications, which is not legally permissible. It is a settled proposition of law that a circular clarifying a notification cannot have the effect of overruling it.

Step 5: If the government wants to change the exemption, it must issue fresh notifications amending the earlier ones — not a circular.

Orders Made by the Court

1. Circular No. 150/06/2021-GST dated 17.06.2021 (Annexure-N in W.P. No. 22250/2021 and Annexure-S in W.P. No. 7233/2022) is hereby SET ASIDE.

2. All actions taken pursuant to the said Circular are also set aside.

2. Both writ petitions are disposed of in favour of the petitioners.

3. Pending Interlocutory Applications (I.As.) are also disposed of.

FAQs

Q1: What exactly is “annuity” in this context?

Annuity here refers to periodic payments made by highway authorities (like NHAI or KRDCL) to road construction companies (concessionaires) as consideration for building and maintaining roads. It’s essentially the government paying the road builder instead of letting them collect tolls from road users.

Q2: Why was toll exempt from GST in the first place?

When GST was introduced in July 2017, the government decided that road access services should not be taxed. So toll charges — which represent the entire consideration for building and maintaining roads — were exempted at NIL rate under Notification No. 12/2017.

Q3: If the exemption notification says “access to road on payment of annuity,” how does it cover construction?

Great question! The court looked at the intent behind the notification. The GST Council’s own 22nd meeting minutes clearly show that the Council wanted to treat annuity exactly like toll — and toll covers the entire consideration including construction. So the exemption was always meant to cover the full annuity.

Q4: Can the government still impose GST on construction annuity in the future?

Yes, absolutely! The court specifically noted that the government is not powerless. If it wants to impose GST on the construction component of annuity, it can do so — but it must issue fresh notifications amending Notification Nos. 32/2017 and 33/2017 through the proper legal process. It cannot do so through a mere circular.

Q5: What happens to GST demands already raised on the basis of the struck-down Circular?

The court set aside not just the Circular but also all actions taken pursuant to it. This means any GST demands, notices, or proceedings initiated based on the 2021 Circular would also be invalid.

Q6: Does this judgment apply only to Karnataka-based road projects?

This is a High Court of Karnataka judgment, so it is directly binding within Karnataka’s jurisdiction. However, it carries strong persuasive value for similar cases in other High Courts and could influence how the issue is decided nationally.

Q7: What is the significance of the “Heading 9967 vs. Heading 9954” argument?

The government argued that Entry 23A only covers Heading 9967 (transport support services/access to road) and NOT Heading 9954 (construction services). The court effectively rejected this narrow reading by looking at the overall intent of the exemption — which was to treat annuity at par with toll, covering the full consideration.

Q8: What is the “Hybrid Annuity Model” mentioned in the GST Council minutes?The Hybrid Annuity Model (HAM) is a road construction model where the government pays 40% of the project cost upfront and the remaining 60% is paid as annuity over the concession period. The 43rd GST Council meeting specifically discussed GST on annuities under HAM projects.

Petitioners in both the writ petitions are concessionaires who have been entrusted with construction of road by respondent no.7-Karnataka Road Development Corporation Limited. As a consideration for construction

and maintenance of the roads for the contract period, the petitioners are paid certain amounts termed as ‘annuity’ by respondent no.7. In certain contracts where construction and maintenance of the roads has been out sourced to private persons consideration is paid by permitting the concessionaires/contractors to collect tolls from the vehicles plying on the road.

2. 100% exemption under Goods and Services Tax (for

short ‘GST’) was granted towards collection of toll charges

by way of notification No.12/2017 dated 28.06.2017 issued

by respondent no.1. The toll charges as already stated

above consisted of the entire consideration towards

construction, operation and maintenance of the road. In

other words, it consisted of the charges collected towards

construction as well as services provided by the

concessionaires. Subsequently, it was proposed that

annuity, which was being paid by the highway authorities as

a consideration to the concessionaires instead of permitting

them to collect toll charges be also exempted from GST. In

this regard, the minutes of 22nd GST Council meeting held

on 06.10.2017 reads as under:

“Agenda item 13(iv): Issue of Annuity being

given in Place of Toll Charges to Developers of

Public Infrastructure – exemption thereon

61. Introducing this Agenda item, the Joint

Secretary (TRU-II), CBEC stated that while toll is a

payment made by the users of road to

concessionaires for usage of roads, annuity is an

amount paid by the National Highways Authority of

India (NHAI) to concessionaires for construction of

roads in order that the concessionaire did not

charge toll for access to a road or a bridge. In

other words, annuity is a consideration for the

service provided by concessionaires to NHAI. He

stated that construction of roads was now subject

to tax at the rate of 12% and due to this, there

was free flow of input tax credit from EPC

(Engineering, Procurement and Construction)

contractor to the concessionaires and thereafter to

NHAI. He stated that as a result, tax at the rate of

12% leviable on the service of road construction

provided by concessionaire to NHAI would be paid

partly from the input tax credit available with

them. He stated that the Council may take a view

for grant of exemption to annuity paid by

NHAI/State Highways Construction Authority to

concessionaires during construction of roads. He

added that access to a road or bridge on payment

of toll was already exempt from tax. The Hon’ble

Minister from Haryana suggested to also cover

under this provision annuity paid by State-owned

Corporations. After discussion, the Council decided

to treat annuity at par with toll and to exempt from

tax, service by way of access to a road or bridge on

payment of annuity.”

3. In this regard, two notifications viz., notification

no.32/2017 and notification no.33/2017 were issued on

13.10.2017 and the service by way of access to a road or a

bridge on payment of annuity was also exempted. The

relevant portions of the notifications read as under:

“Notification No.32/2017

(d) after serial number 23 and the entries

relating thereto, the following serial number and

entries shall be inserted namely:-

4. Pursuant to the said notifications, the annuity being

paid by the highway authorities to the concessionaries like

the petitioners in the instant case towards construction as

well as maintenance of the road was exempted from GST.

Thereafter, a clarification was sought from the GST Council

by certain government authorities as to whether the entire

annuity paid to the concessionaries was exempt from GST

or not, for which the GST Council in its minutes of the 43rd

GST Council meeting held on 28.05.2021 clarified the same

as follows:

it was also being clarified that the annuity paid as

deferred payment for construction of

roads/highways was not exempted from GST as the

tolls or annuity in lieu of tolls are.......

6. GST on annuities paid under the Hybrid Annuity

Model Project for construction of roads: Committee

discussed the request of Ministry of Road Transport

and Highways regarding exemption on annuities

paid under the Hybrid Annuity Model Project and

has recommended that clarification may be issued

that entry 23A of notification No.12/2017-CT(R)

exempts services by way of providing access to

road or bridge on payment of annuity. It does not

exempt annuity paid for construction of roads.”

5. Based on the same, a Circular bearing

No.150/06/2021-GST dated 17.06.2021 was issued by

respondent no.5 clarifying the same as follows:

“2.1 GST is exempt on service, falling under

heading 9967 (service code), by way of access to a

road or a bridge on payment of annuity [entry 23 A

of notification No.12/2017-Central Tax]. Heading

9967 covers “supporting services in transport”

under which code 996742 covers “operation

services of National Highways, State Highways,

Expressways, Roads and streets; bridges and

tunnel operation services”. Entry 23 of said

notification exempts “service by way of access to a

road or a bridge on payment of toll”. Together the

entries 23 and 23 A exempt access to road or

bridge, whether the consideration are in the form

of toll or annuity [heading 9967].

2.2 Services by way of construction of road fall

under heading 9954. This heading inter alia covers

general construction services of highways, streets,

roads railways, airfield runways, bridges and

tunnels. Consideration for construction of road

service may be paid partially upfront and partially

in deferred annual payments (and may be called

annuities). Said entry 23A does not apply to

services falling under heading 9954 (it specifically

covers heading 9967 only). Therefore, plain

reading of entry 23 A makes it clear that it does

not cover construction of road services (falling

under heading 9954), even if deferred payment is

made by way of instalments (annuities).

3. Accordingly, as recommended by the GST

Council, it is hereby clarified that Entry 23A of

notification No.12/2017-CT(R) does not exempt

GST on the annuity (deferred payments) paid for

construction of roads.”

Aggrieved by the same, the petitioners have preferred the

instant writ petitions.

6. The case of the petitioners is that the annuity

(deferred payments) paid for construction of roads is

exempt from GST as per notification nos.32 and 33/2017

dated 13.10.2017 and the clarification issued by the GST

Council in this regard in its meeting held on 28.05.2021 and

the subsequent Circular dated 17.06.2021 issuing

clarification regarding the same is contrary to the

exemption notifications and are liable to be set aside.

7. Per contra, the learned counsel appearing for

respondent nos.1 to 5, 8 and 9 submit that the clarification

made by way of a Circular does not contravene the

notifications and it only clarifies what is exempted by virtue

of the notifications dated 13.10.2017. It is specifically

contended that what is exempted is only service by way of

access to a road or a bridge on payment of annuity and not

annuity (deferred payments) paid for construction of roads.

For the said reasons, they pray for dismissal of the writ

petitions.

8. Admittedly, the toll charges collected by the

concessionaries for construction, maintenance, operation

and providing road access to the vehicle which ply on the

road are exempted from GST by notification no.12/2017

dated 28.06.2017. The said exemption reads as follows:

9. Though what is exempted is mentioned as service by

way of access to a road or a bridge on payment of toll

charges, the said toll charges is collected as consideration

by the concessionaires towards construction and

maintenance of the road. In short, the entire consideration

for construction and maintenance of the road by

concessionaires which is collected as toll charges is exempt

from GST from 01.07.2017 and onwards.

10. Annuity is paid to the concessionaires in lieu of toll

charges. GST Council, in its 22nd meeting held on

06.10.2017 took note of the same and as entire toll charges

were being exempted from GST has decided to recommend

exemption of annuity also, which include the consideration

received by concessionaires which is clear from the

recordings in the minute book which is mentioned at

paragraph 4 supra. The said recording makes it clear that it

recommended treating annuity on par with the toll charges.

11. Pursuant to the said meeting, the notifications

no.32/2017 and 33/2017 dated 13.10.2017 have been

issued by respondent no.1 wherein service by way of access

to a road or a bridge on payment of annuity has been

exempted from GST and no GST was being collected on the

entire annuity being paid to the concessionaires which

included the consideration towards construction as well as

the service that they provide towards maintenance of the

said road. The reading of recommendation of the GST

Council as well as the notifications issued make it clear that

respondent no.1 has treated the annuity being paid to the

concessionaires on par with toll charges which the

concessionaires are permitted to collect from road users and

both were exempted from GST.

12. Thereafter, for reasons best known to it, GST Council

has clarified that the annuity paid as deferred payment for

construction of roads/highways was not exempted from GST

as the tolls or annuity in lieu of tolls are. Accordingly, the

impugned Circular dated 17.06.2021 vide Annexure-N to

the petition in W.P.No.22250/2021 and Annexure-S to the

petition in W.P.No.7233/2022 has been issued.

13. It is a settled proposition of law that a Circular which

clarifies the notification cannot have the effect of overruling

the notification. In the instant case, what has to be

considered is whether the impugned Circular is in violation

of notification nos.32 and 33/2017 dated 13.10.2017 or

clarifies the said notifications.

14. As stated above, the deliberation of GST Council in its

meeting held on 06.10.2017 and the notifications issued

pursuant thereto clearly exempts the entire annuity being

paid to the petitioners towards construction and

maintenance of roads. It cannot be construed to have not

exempted the annuity (deferred payments) towards

construction of roads. The impugned circular has the effect

of overriding the notifications bearing Nos.32 and 33/2017

dated 13.10.2017 and has to be held as bad in law.

Nothing prevents respondent no.1 from imposing GST on

the consideration paid to concessionaires like the petitioners

on the payment received by them by way of annuity but

that has to be done in the manner known to law. In the

instant case, respondent no.1 has issued the notifications

under Section 11 of the Central Goods and Services Tax Act,

2017 and Section 6 of the Integrated Goods and Services

Tax Act, 2017 exempting the consideration received by

concessionaires from highway authorities as annuity from

GST. The clarification issued is contrary to the said

notifications for the reasons recorded above. If respondent

no.1 is desirous of altering the same, it has to issue fresh

notifications amending its earlier notifications.

15. For the aforementioned reasons, the impugned

Circular dated 17.06.2021 vide Annexure-N to the petition

in W.P.No.22250/2021 and Annexure-S to the petition in

W.P.No.7233/2022 is hereby set aside. Consequently, all

actions pursuant to the said Circular is hereby set aside.

The writ petitions stand disposed of accordingly.

Pending I.As. stand disposed of.

Sd/-

JUDGE