GST Exemption on Annuity Payments Upheld by Karnataka High Court – DPJ Bidar-Chincholi Road Project Case (2022)

GST Exemption on Annuity Payments Upheld by Karnataka High Court: Infrastructure projects under Public-Private Partnership (PPP) models often involve the Government paying annuity to concessionaires instead of permitting toll collection. A key issue in such models is whether annuity payments for road construction and maintenance qualify for GST exemption.

In DPJ Bidar-Chincholi (Annuity) Road Project Pvt. Ltd. vs. Union of India & Ors. [MANU/KA/3223/2022], the Karnataka High Court examined whether annuity payments received by concessionaires for construction and maintenance of roads are exempt from GST under Notification No. 32/2017-CT(R) and Notification No. 33/2017-IT(R), both dated 13 October 2017.

Facts of the Case

• The GST Exemption on Annuity Payments Upheld by Karnataka High Court petitioner, DPJ Bidar-Chincholi (Annuity) Road Project Pvt. Ltd., executed a road construction project under a concession agreement with the Government.
• Instead of collecting toll from road users, the petitioner received annuity payments from the Government for construction and maintenance of the road.
• The relevant exemption notifications were:
  • Entry No. 23A of Notification No. 12/2017-CT(R) dated 28.06.2017 (inserted via NN 32/2017-CT(R) dated 13.10.2017)
  • Entry No. 24A of Notification No. 9/2017-IT(R) dated 28.06.2017 (inserted via NN 33/2017-IT(R) dated 13.10.2017)

These provided exemption for “services by way of access to a road or a bridge on payment of annuity.”

• This meant that annuity received by concessionaires was treated at par with tolls, which were already exempt under GST.
• In May 2021, the GST Council in its 43rd meeting clarified that annuity paid as deferred payment for road construction was not exempt from GST.
• Based on this, Circular No. 150/06/2021-GST dated 17.06.2021 was issued, stating that Entry 23A does not exempt annuity (deferred payments) for road construction.
• The circular was challenged by the petitioner as ultra vires the exemption notifications.

Point of Dispute

Whether Circular No. 150/06/2021-GST dated 17.06.2021, clarifying that annuity for road construction is not exempt, goes beyond the scope of Notification No. 32/2017-CT(R) and Notification No. 33/2017-IT(R), and is therefore invalid in law.

Submissions by the Assessee

• The petitioner argued that annuity (deferred payments) received for road construction was expressly exempted under the notifications dated 13.10.2017.
• The GST Council’s clarification in its 43rd meeting and the circular were contrary to the notifications and ultra vires the statutory provisions.
• The intention of the GST Council in its 22nd meeting (06.10.2017) was to treat annuity payments at par with toll charges, both of which were exempted to avoid double taxation and ensure parity across PPP projects.
• The circular narrowed the exemption, amounting to judicial overreach by the executive, contrary to the language of the notifications.

Submissions by the Revenue

• The Revenue contended that the circular merely clarified the scope of existing notifications.
• It argued that annuity paid for construction was consideration for works contract services, which are taxable, and only annuity paid for access or usage of roads qualified for exemption.
• Exemption notifications must be strictly construed and any ambiguity should be interpreted in favour of the Revenue.

Legal Principles and Court’s Analysis

1. Parity Between Toll and Annuity

The Court observed that toll charges collected by concessionaires for providing access to roads are exempted under Entry 23 of NN 12/2017-CT(R). Annuity paid to concessionaires is in lieu of toll charges.

2. Intent of the GST Council (22nd Meeting, 06.10.2017)

The Court referred to the minutes of the 22nd GST Council meeting, which clearly recommended that annuity payments should be treated at par with tolls for exemption purposes.

3. Statutory Interpretation of Notifications

Notifications must be interpreted as per their plain language and cannot be altered through circulars. The exemption clearly covered “services by way of access to a road on payment of annuity,” making the executive clarification invalid.

4. Legislative vs. Executive Power

Notifications issued under Section 11 of the CGST Act have statutory force, whereas circulars are administrative instructions. Therefore, circulars cannot override or amend statutory notifications.

5. Doctrine of Ultra Vires

The Court held that the impugned circular was ultra vires the parent notifications, introducing a restriction not contemplated or supported by the exemption entries.

Judgment

The Karnataka High Court ruled in favour of the petitioner and held that:

• Annuity payments, whether as deferred consideration for construction or maintenance of roads, are exempt from GST under NN 32/2017-CT(R) and NN 33/2017-IT(R).
• Circular No. 150/06/2021-GST dated 17.06.2021 is contrary to the exemption notifications and hence invalid and unenforceable.
• The Court reaffirmed that the Union of India has treated annuity at par with toll charges, both being exempt from GST.

Practical Impact

• PPP concessionaires will continue to enjoy GST exemption on annuity payments for road construction and maintenance.
• The ruling provides legal certainty to infrastructure developers and removes unnecessary compliance burdens.
• Government authorities must avoid issuing clarifications that alter the scope of statutory notifications.

Key Takeaways

1. Annuity and toll payments are treated equally under GST law.
2. Circulars cannot override statutory notifications issued under legislative authority.
3. Construction annuity is exempt from GST, reaffirming the intent of the 22nd GST Council Meeting.
4. The judgment reinforces judicial oversight over executive actions in tax matters.

Why This Case Matters

This landmark judgment in DPJ Bidar-Chincholi Road Project Pvt. Ltd. ensures consistency in interpreting infrastructure exemptions under GST. By clarifying that annuity payments are exempt, the Court safeguarded the financial viability of PPP road projects and ensured that administrative circulars do not erode statutory tax benefits.

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