Chargeability of service tax on private railway sidings: whether ‘liable’ or ‘not’?

Picture Courtesy: http://www.livemint.com/rf/Image-621×414/LiveMint/Period1/2015/06/01/Photos/ railway.jpg

This article was written by Mansi Khurana, a student of Vivekananda Institute of Professional Studies.

Introduction

In the growing economy, railways as the part of infrastructural development play an important role. Today, big private Industries in lieu of taking advantage of railway procure land nearby the railway stations and construct sidings known as private railway sidings for the purpose of smooth transportation of raw materials, fuels, final products, etc. and to facilitate the local haulage among the place of production, railway station and place of consumption.

Now, these private railway sidings are in question that whether the activities related to construction of private railway sidings are liable for levy of service tax or not?

Law with respect to railway sidings

In 2012 Mega Exemption Notification 25/2012-Service Tax dated 20.06.2012[1] was issued which resulted in the confusion regarding the activities related to private railway sidings that whether the activity related to private railway sidings are liable for service tax or not. Following the law relating to railway sidings is discussed that what the law is prior to the above said notification & what is after the above said notification.

Law prior to 01.07.2012

Prior to the Mega Exemption Notification 25/2012-Service Tax dated 20.06.2012 the activity relating to railways was specifically excluded from the definition of ‘works contract service’. Section 65(105) (zzzza) of Finance Act-1994, which defined the taxable services by way of works contract, which reads as follows:

“65(105)’taxable service’ means any service provided or to be provided:

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Law W.E.F 01.07.2012

When the works contract services were put under the head of declared services under Section 66E(h) of the Finance Act,1994 , the activities related to railways got covered under the Mega Exemption Notification 25/2012-Service Tax dated vide Sr. No. 14 (a), which reads as follows:

“(14) Services by way of construction, erection, commissioning, or installation of original works pertaining to, –

• An airport, port or Railways, including monorail or metro;

After considering the position of law prior and after the Mega Exemption Notification, it can be said that the works contract related to railway was never liable for the payment of service tax.

Interpreting the Expression ‘Railway’

For finding the solution to the query that whether the activities related to private railway sidings are liable for service tax or not, it is necessary to interpret the word ‘Railway’.

For the interpretation of a word in a statute/exemption notification, reference to an alien statute is not permissible

The expression ‘railway’ is not defined under Finance Act-1994, whereas it has been clearly defined under sec-2(31) of Indian Railways Act-1989 (Herein after referred to as IRA-1989). But taking reference of IRA-1989 which is an alien statute for the purpose of interpreting the meaning of particular word in the Finance Act-1994 is not permissible. Reliance is placed on the case of Maheshwari Fish Seed Farm v. T. N. Electricity Board[2], wherein the Court observed as follows:

“6. It is settled rule of interpretation that the words not defined in a statute are to be understood in their natural, ordinary or popular sense.

9. …The definition of the term in one statute does not afford a guide to the construction of the same term in another statute and the sense in which the term has been understood in the several statutes does not necessarily throw any light on the manner in which the term should be understood generally”

Further reliance is placed on the case MSCO Pvt. Ltd. v. Union of India[3], wherein the Court observed as follows:

“5. When the word to be construed is used in a taxing statute or a notification issued thereunder, it should be understood in its commercial sense….”

In the aforementioned judgment, the Apex Court, while addressing to the issue of reference, by the appellant, to the definition of the word “industries” under the Industrial Disputes Act, 1947 made the following observation –

“6. The above definition is given in the context of the subject matter with which the Industrial Disputes Act, 1947 is concerned. The pith and substance of that Act is to make provision for settlement of disputes between employers and employees in institutions, establishments, industrial or business houses or factories of various kinds……But that definition cannot be used for interpreting the word ‘industry’ in a notification granting exemption from customs duty under the Customs Act, 1962……It shows that the meaning given to the expression ‘industry’ in the Industrial Disputes Act, 1947 cannot be depended upon while construing other statutes or statutory instruments and it should be confined to the Industrial Disputes Act, 1947.”

From the above, it is crystal clear that for defining the expression ‘railway’, IRA-1989 cannot be referred because it is an alien statute for the interpretation of word which is used in Finance Act-1994.

Also, it is the general principal of statutory interpretation that no words can be added to a taxing statute, that too, by reading the definition of an expression from an alien statute and using the same for explaining an undefined word.

Interpreting ‘Railway’ in ordinary sense

Since, ‘railway’ is not defined in Finance Act-1994, therefore, the expression ‘railway’ has to be interpreted in ordinary sense as is understood in common parlance. Reliance is placed upon the case of Ramavatar Budhaiprasad v. Assistant Sales Tax Officer, Akola[4], wherein the Court while observing the meaning of the word “vegetables” held as follows:

“But this word must be construed not in any technical sense nor from the botanical point of view but as understood in common parlance. It has not been defined in the Act and being a word of everyday use it must be construed in its popular sense meaning “that sense which people conversant with the subject-matter with which the statute is dealing would attribute to it.” It is to be construed as understood in common language”

For this purpose, it is important to have a reference to the meaning of the word ‘railways’ as has been defined across various dictionaries and law lexicons, the relevant extracts of which reads as follows:

Wharton’s Law Lexicon, Fifteenth Edition, 2011: A road owned by a private person or public company on which carriages run over iron rails;

Collins Cobuild Advanced Illustrated Dictionary, 2010: A railway is a route between two places along which trains travel on steel rails.

Cambridge Advanced Learner’s Dictionary, Third Edition, 2008: The metal tracks on which trains run; the system of tracks, stations, trains, etc.

So, from above definitions, it is clear that in common parlance the word ‘railway’ has nothing to do with whether it is used for public purposes or private/commercial purposes.

Interpreting the Exemption provided in Mega Exemption Notification

Law in the case of Commissioner of Wealth Tax v. Officer-in-charge (Court of Wards) Paigah[5], is settled that if a word of exemption is not defined it must be given its widest meaning and the correct rule in construing other words is to find out the sense of words of exemption as in construing other words to find out the sense of the words in their context by reading the statute as a whole and by bearing in mind the purposes of statute and the consequences flowing from rival interpretations.

In the definition of ‘works contract service’, exclusions are provided for the works contract related to roads, airports, railways, transport terminals, bridges, tunnels, and dams and in Sr.14 of Mega Exemption Notification 25/2012-Service Tax dated 20.06.2012 exclusions are provided for the Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways, including monorail or metro;……….

On reading carefully the above said exclusions, it can be maintained that the legislative intent behind the provision of the above said exclusions is in respect of infrastructural facilities and are provided so as to promote the infrastructural development of the country and as such, should be liberally construed towards the accomplishment of the objective of attaining public good as maximum as possible. Reliance is placed upon the findings of Apex court in the case Gujarat Industrial Development Corporation v. Commissioner of Income Tax[6], wherein the Court observed as follows:

“One of the reasons for incorporating a specific provision of exemption from income tax such as Section 10(20A) is to protect public bodies created under law for achieving the purpose of developing urban or rural areas for public good.

When the object is such, an interpretation which would preserve it should be accepted even if the provision is capable of more than one interpretation. The principle of interpretation is very much applicable to fiscal statutes also, vide State of Tamil Nadu v. M. K. Kandaswami, [1976] 1 SCR 38. This Court has reiterated the said principle in Calcutta Jute Manufacturing Co. v. Commercial Tax Officer, 1997 (93) ELT 657 (SC).”

Further reliance is placed upon the case Commissioner of Customs (Preventive), Mumbai v. Favourite Industries[7], wherein the Apex court observed that:

“10. ..The synthesis of the views is quite clearly that the general rule is strict interpretation while special rule in the case of beneficial and promotional exemption is liberal interpretation…”

Hence, it can be said that the exclusions provided in the definition of ‘works contract service’ and in Sr.14 of Mega Exemption Notification are for Infrastructural development with the intent of maximizing public good and so should be liberally interpreted.

The word ‘railways’ used under the service tax laws does not distinguish between public and private railways. The word ‘railway’ is used in general sense and for promoting infrastructural development. Therefore, it must be given full effect.

Even the Definition of ‘Railway’ under IRA-1989 includes ‘Sidings’

Suppose the definition of ‘railway’ under IRA-1989 for interpreting ‘railways’ under Finance Act-1994 is accepted. Even otherwise the definition under sec-2(31) includes ‘sidings’ which signifies that sidings are covered under railway and are not liable for service tax. Relevant portion reads as follows:

“S. 2(31) “railway” means a railway, or any portion of a railway, for the public carriage of passengers or goods, and includes –

• …
• All lines of rails, sidings, or yards, or branches used for the purpose of, or in connection with, a railway;
• …
• …
• …
• …

But does not include –

1. A tramway wholly within a municipal area; and
2. Lines of rails built in any exhibition ground, fair, park or any other place solely for the purpose of recreation;”

On closely examining the above definition, it can be seen that the definition is divided into three parts i.e. means part, inclusive part and exclusive part.

In the inclusive part all the lines of rails, sidings, or yards, or branches are specifically included in the sub clause (b) which is not qualified with the requirement mentioned in the means part i.e. ‘for the public carriage of passengers or goods’. Also, the includes part starts after the ending of means part with the comma and the comma used therein serves as disjunctive of the two parts namely the means and the includes parts.

It is a well settled law that the word ‘includes’ enlarges or expands the scope of definition and so in the case of definition of word ‘railway’. Reliance is placed upon the case of Bharat Co-Operative Bank (Mumbai) Ltd. v Co-Operative Bank Employees Union[8] wherein while defining the scope of section 2(bb) i.e. ‘banking company’ under Industrial Disputes Act, 1947 with section 5 of Banking Regulation Act,1949 observes that:

“22. ……It is trite to say that when in the definition clause given in any statute the word “means” is used, what follows is intended to speak exhaustively. When the phrase “means” is used in the definition, to borrow the words of Lord Esher M.R. in Gough vs. Gough, it is a “hard and fast” definition and no meaning other than that which is put in the definition can be assigned to the same… On the other hand, when the word “includes” is used in the definition, the legislature does not intend to restrict the definition; makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word “means” followed by the word “includes” in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other.”

Further reliance is placed upon the case of M/s. Black Diamond Beverages and another v. Commercial Tax Officer, Central Section Assessment Wing, Calcutta and others [9]wherein the Apex court observed that:

7. It is clear that the definition of ‘sale price’ in Section 2(d) uses the words ‘means’ and ‘includes’. The first part of the definition defines the meaning of the word ‘sale price’ and must, in our view, be given its ordinary, popular or natural meaning. The interpretation thereof is in no way controlled or affected by the second part which ‘includes’ certain other things in the definition. This is a well-settled principle of construction. Craies on Statute Law (7th Edn, 1.214) says:

An interpretation clause which extends the meaning of a word does not take away its ordinary meaning…. Lord Selborne said in Robinson v. Barton Eccles Local Board (1883) 8 App. Case 798 (801) : “An interpretation clause of this kind is not meant to prevent the word receiving its ordinary, popular, and natural sense whenever that would be properly applicable, but to enable the word as used in the Act…to be applied to something to which it would not ordinarily be applicable Therefore, the inclusive part of the definition cannot prevent the main provision from receiving its natural meaning.

 

Further, while interpreting the word ‘plant’ used under the Income Tax Act, the Court in the case of CIT, AP v. Taj Mahal Hotel, Secunderabad, AIR 1972 SC 168 observed as follows:

“The very fact that even books have been included shows that the meaning intended to be given to ‘plant’ is wide. The word “includes” is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import but also those things which the interpretation clause declare that they shall include”

From the above, it is clear that the sidings are included in ‘railway’ even under section 2(31) of IRA-1989 whether or not it is used for public carriage of goods or passengers.

Railway administration’s control on construction, operation and maintenance of sidings

According to IRA-1989, the construction, operation and maintenance of all the railway sidings are under the control of Railway administration. For Example, the wagons which are used on the private railway sidings are the wagons of Indian Railways and are run after procuring appropriate permissions from the Indian Railways department which are required at various levels of operation and maintenance of sidings.

Also, the construction of new private railway sidings is fully governed by the Indian Railways which requires lots of permissions in the procedure. This procedure is mentioned in various reports, board circulars, notifications etc. The procedure for obtaining the permission for undertaking the activity of private railway siding as provided in Report No. 24 of 2015 of (Railways) Volume I, is as follows:

“Firstly, the private party who is interested in setting up private siding has to approach formally to the Chief Transport Planning Manager (CTPM)/Divl. Rly. The applicant is required to submit some amount for the preliminary expenses. As per Railway Board guidelines (December 2004), before submission of a proposal, the party must obtain Rail Transport Clearance (RTC). In case more than one zonal railway is involved, it is forwarded to railway board for approval. After obtaining RTC, party submits the proposal along with feasibility report containing projected traffic and estimated cost of the siding to CTPM. After submission, the examination of the pre-feasibility report in Division and CTPM office in Zonal Railways takes place. After the principle approval given by CTPM and survey undertaken, the party is required to submit the detailed project report (DPR) which will be circulated by the Additional Divisional Railway Manager (ADRM) to the concerned branches for finalizing consultants within one month and forward DPR to CTPM duly approved by DRM. Then, CTPM will initiate approval of DPR and ESP (Engineering Scale Plan) and send it to Principal Chief Engineer (PCE) for pucca No. Thereafter PCE will return the same to CTPM for circulation to all concerned. Based on the ESP prepared by the division and approved by the Zonal Headquarters, Signal Interlocking Plan (SIP) is prepared by the Division. After the approval of SIP, detailed cost estimate is prepared by the division and communicated to the siding owner for construction of siding under the supervision of the approved consultants. After the completion of construction the concerned department will issue the certificate like of safety, fitness for operation etc. After this, a siding agreement is executed by Chief Commercial Manager/Freight Marketing (CCM/FM) at Headquarters. After the sanction from commissioner for railway safety (CRS), sidings are handed over to commercial Deptt. & a notification for commissioning/opening of siding is issued.”

Further, As per extant orders [Railway Board’s Letter No. 2012/CE-1/CT/SP/10 Dated 16-10-2012] the siding owner should first approach the Railway for siding maintenance at the cost of the party. In case the necessary manpower is not available with the Railways, siding owners may get the maintenance done by a private consultant/ contractor, borne on the approved list of a Railway for siding works. In such cases, Railway Engineers are required to conduct inspections of the private sidings at regular intervals so as to ensure the quality of work done by the consultants.

In Indian Railways Engineering Code, Chapter XVIII, Para 1828 under dedicated heading for ‘Assisted Sidings’ states that:

“All works relating to construction of private and assisted sidings should be normally done by the Railway. If the party concerned desire to carry out portion of such works themselves, they may be permitted to do so provided the Railway administration is satisfied that the party concerned is capable of doing the work satisfactorily according to Railway specifications and the work is carried out under Railway’s supervision. The parties can also be allowed to supply stone ballast, permanent way and building materials provided the Railway Administration is satisfied that the material supplied are according to Railway’s specification after proper inspection.

…..”

From the above mentioned procedure for the construction of new sidings it can be said that the construction is fully governed by the railway department as the party has to take so many permissions at each and every stage of construction, operation and maintenance of the private sidings.

Meaning of word ‘Siding’ in the Revised Standard Form of Agreement for Private Sidings

Now, considering the word ‘siding’ which is defined in the Revised Standard Form of Agreement for Private Sidings provided by the Railway Board vide its circular No. 2002/CE.I/SP/1 dated July 12, 2005. The definition of the word ‘sidings’ in the aforesaid agreement reads as follows:

“’siding’ includes the Railway track connecting the Applicant’s works with the ____________ Railway system as hereinafter agreed to be constructed by the Railway Administration and all branches and extensions thereof which may hereafter be constructed by the Applicant or by the Railway Administration at the Applicant’s request and all sleepers, ballast, embankments, bridges, tunnels, signals interlocking and tele-communication equipment gates, buildings and other construction, erections, works and movable property constructed / erected / made / provided or used in connection with the said tract and also all land whereon or, on part whereof the said track and connected things aforesaid are constructed / erected / made / provided or used including land acquired for the purpose thereof as hereinafter provided and land belonging to the Railway Administration and land belonging to or occupied or used by the Applicant.”

Rights of Railway Administration regarding use of the siding

Under article 19 of the above said revised standard form of agreement for private sidings, the railway administration have various rights regarding private sidings which are as follows:

“Railway Administration’s Rights regarding use of the siding:-

In addition to any other rights, powers and liberties herein provided for the Railway Administration shall have the following rights, powers and liberties over and in connection with the siding or any extension or part thereof, namely –

• To use the siding or any extension or part thereof for any purposes of the Railway Administration free of charge or any remuneration to the Applicant in respect of such use.
• To connect or allow to be connected with the siding or any extension or part thereof any other siding or sidings branching or extending there from which may have been constructed or which may hereinafter be constructed by or under the authority of the Railway Administration for any other person or persons whomsoever of for the purpose of the Railway Administration and to make or allow such alterations as may be necessary to effect such connection.
• To use or to permit the use of the siding or any extension or part thereof for the traffic if any person or persons other than the Applicant and to work traffic over the siding or any extension or part thereof to any from any other siding or sidings or branches or extensions there from which may be constructed as aforesaid jointly with the traffic of the Applicant upon payment by such person or persons to the Applicant of either such portion of the cost originally paid by the Applicant to the Railway Administration in respect of the land and sub-grade work or such tollage for such use as aforesaid as shall be decided by the General Manager for the time being of the Railway Administration or such other officer as may be nominated by him…

…

• To refuse supplies of wagons or other rolling stock for the Applicant to any siding or sidings constructed for any other person or any branches of extensions or parts thereof over which the Applicant may be allowed to work traffic jointly with such other person or otherwise in the event of non-payment by the Applicant of any sum or tollage which the Railway Administration may decide shall be payable by the Applicant… ”

After considering the definition of sidings and various powers of the railway administration regarding private sidings in the revised standard form of agreement for private siding, it can be maintained that sidings are covered under railways for the purpose of IRA-1989.

Now, at last the whole position is covered by the judgment of CESTAT Mumbai in the case of Afcons Infrastructure Ltd. v. Commissioner of Central Excise, Mumbai – II, 2015 (38) STR 194 wherein the court observed that:

“The definition of ‘Commercial and Industrial Construction Service’ as provided in Section 65 (25b) excludes such activities relating to roads, ports, railways, dams, bridges, tunnels etc. There is no distinction between a monorail or metro rail or any other kind of rail and therefore, the term ‘railway’ used therein has to be given its widest meaning to include all types of railways and all types of railway lines…”

Further, in the above mentioned case the court while observing the exemption provided for activities relating to railway under the Mega Exemption Notification, observes that:

“This exemption also clearly indicates the legislative intent of not taxing construction work pertaining to Railways.”

Conclusion

From the above discussion, it can be concluded that the ‘private railway sidings’ are covered under the umbrella of the Expression “Railway” which further leads to the result that the activities related to the private railway sidings are not liable for service tax.

[1] Available on: http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2012/st25-2012

[2] (2004) 4 SCC 705

[3] (1985) 1 SCC 51

[4] AIR 1961 SC 1325

[5] (1976) 3 SCC 864

[6] (1997) 7 SCC 17

[7] (2011) 2 SCC 74

[8] Appeal (civil) 1542 of 2007

[9] AIR 1997 SC 3550