Reimbursement of Road Restoration Charges Under Electricity Act Is Not 'Supply of Service' Liable for GST on Reverse Charge Basis: Gujarat High Court - 2025-09-11

Reimbursement for Road Restoration Under Electricity Act Not a Taxable 'Supply' Under GST: Gujarat HC

Gandhinagar: In a significant ruling clarifying the scope of 'supply' under the Goods and Services Tax (GST) Act, the Gujarat High Court has held that reimbursement of road restoration charges by an electricity distribution company to a municipal corporation is not a taxable service. The court quashed a GST demand imposed on Torrent Power Ltd. under the reverse charge mechanism (RCM).

A division bench of Justice Bhargav D. Karia and Justice Pranav Trivedi set aside the show-cause notice and the subsequent Order-in-Original, ruling that the payment made by Torrent Power was a statutory obligation under the Electricity Act, 2003, and not consideration for any service supplied by the Ahmedabad Municipal Corporation (AMC).

Case Background

The petitioner, Torrent Power Ltd., is engaged in electricity distribution and is required to dig up public roads maintained by the AMC for laying and maintaining its network. As per statutory requirements, the AMC restores these roads and recovers the associated charges from Torrent Power.

The GST department issued a show-cause notice alleging that this transaction constituted a supply of service from the AMC (a local authority) to Torrent Power (a business entity). The department contended that by allowing the digging and then restoring the road for a charge, the AMC was "tolerating an act" for a consideration, making it a taxable service under GST. Consequently, it demanded that Torrent Power pay GST on these charges on a reverse charge basis.

Arguments from Both Sides

Petitioner's Stance (Torrent Power Ltd.): Represented by Senior Advocate Mr. S.N. Soparkar, the petitioner argued that the payment was not for a service but was a reimbursement made to fulfill a statutory obligation under Section 67(3) of the Electricity Act, 2003. This section mandates that a licensee (Torrent Power) must pay "full compensation for any damage" caused during its work.

It was further contended that road maintenance is a sovereign function of a municipality under Article 243W of the Constitution. Therefore, such activities are exempt from GST under Entry 4 of Notification No. 12/2017-Central Tax (Rate). The petitioner asserted that there was no element of "supply" as it never sought any service from the AMC; it merely compensated for the damage as required by law.

Respondent's Stance (GST Department): The revenue, represented by advocate Ms. Hetvi H Sancheti, argued that the act of the AMC permitting Torrent Power to dig the road and subsequently restoring it constituted a service of "tolerating an act" for a consideration. This, they claimed, falls under the definition of supply as per Section 7(1) of the GST Act read with Schedule II.

The department cited circulars clarifying that charges for tolerating acts like damaging public property are taxable supplies. They maintained that the activity was not a sovereign function because it was performed for the specific commercial benefit of Torrent Power, a business entity.

Court's Analysis and Ruling

The High Court meticulously analyzed the interplay between the Electricity Act, 2003, and the GST Act, 2017. The bench found that the payments made by Torrent Power were not for a service but were in the nature of compensation mandated by statute.

The judgment stated:

"On harmonious and conjoint reading of both the provisions of Sections 42 and 67, and more particularly sub-section(3) of sec.67, it provides to make the full compensation for damage caused by it while opening or breaking up the road or to lay down the distribution lines... the petitioner being a distribution licensee is required to lay down the distribution lines and for that purpose the rules are framed by the appropriate government to grant permission and as per sub-section (3) of sec.67, it is mandatory for the distribution licensee to make the compensation for damage caused."

The court rejected the revenue's argument that the AMC was "tolerating an act." It clarified that the AMC wasn't agreeing to tolerate the digging; rather, Torrent Power had a statutory right to perform its duties, coupled with a statutory obligation to compensate for the resultant damage.

Furthermore, the court affirmed that repairing a damaged road is a core function of the municipality under Article 243W of the Constitution, regardless of the reason for the damage.

"For any damaged road it is the function of the municipality to repair and restore any damaged road for whatever may be the reason and the same would also be a sovereign function as per Article 243W of the Constitution," the Court observed.

Final Decision and Implications

Concluding that the transaction did not fall within the scope of supply under the GST Act, the High Court quashed the show-cause notice dated 30.11.2022 and the Order-in-Original dated 25.01.2025.

The ruling provides crucial clarity for utility companies and other entities that are statutorily required to make compensatory payments to government bodies. It establishes a clear distinction between payments for services rendered and payments made to fulfill a statutory obligation to compensate for damages, holding that the latter does not attract GST.