Ruling of AAR on Cleaning Services provided to Indian Railways by Contractor-Whether Exempt or not
The article tries to Analyse the impact of decision of Delhi AAR in Case No. 06/DAAR/2018 dated 23.04.2018 of M/S VPSSR Facilities wherein it was held that
“The cleaning services supplied to Railways i.e. cleaning of locomotives, railway stations, railway lines provided by the applicant cannot be said to be covered in Clause (6) of Schedule XII of the Constitution which covers ‘public health, sanitation conservancy and solid waste management’ functions of the Municipalities. The Municipalities are constitutionally entrusted with such functions in relation to urban areas but they are not entrusted with such functions in relation to Railway properties.”
The key question herein which had to be decided by AAR was whether cleaning services provided to railways fall under e Article 243W of the Constitution. The relevant entry which was sought to be covered is “Public health, sanitation conservancy and solid waste management.”Therefore whether cleaning services provided to Railways would fall within the activity of “Public Services.
The issue needs a deeper understanding the detailed discussion is as follows:
- Article 285 of Constitution of India
Article 285(1) of the Constitution of India provides exemption of property of the Union from State taxation as follows:
- The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.
Therefore, as per the provisions of Article 285 of the Constitution of India, any property which belongs to Union of India would be exempt from levy of all taxes imposed by the a State. However, Parliament may be law provide otherwise than the provisions of article 285.
- Supreme Court Judgement in case of Rajkot Municipal Corporation & Ors. Versus Union Of India dated November 19, 2009
The issue before Hon’ble Apex Court was
“The issue in these appeals relates to payment of service charges relating to supply of water, conservancy/sewerage disposal and other indirect services like approach roads with street lighting, drainage etc. provided by the said Municipal Corporations to properties owned by Union of India and its departments.”
The Hon’ble Apex Court referred to the decision In Union of India & Ors. v. State of Uttar Pradesh & Ors.- 2007 (11) SCC 324, wherein it was that charges for supply of water or for other services rendered under any statutory obligation, is a fee and not tax. It was held that the Union of India was liable to pay such charges and should honour the bills served in that behalf. Referring to Section 52 of the UP Water Supply and Sewerage Act,1975, it was held that the charges were loosely termed as “tax”, that the nomenclature was not important and what was charged is a fee for the supply of water as well as maintenance of the sewerage system, and such service charges are to be considered as a fee and were not hit by Article 285 of the Constitution. It was further made clear that what was exempted by Article 285 was a tax on the property of Union of India but not a charge for service which were being rendered in the nature of water supply or for maintenance of sewerage system.
The Hon’ble Apex Court then subsequently referred to in Para 6 of the Judgement that
When these appeals were earlier listed for hearing, both sides agreed that they will attempt a broad consensus on several pending issues and narrow down the areas of controversy and agree for a dispute resolution mechanism. We are told that in pursuance of it, discussions were held among various departments of the Government of India with the Department of Urban Development. In pursuance of it, an affidavit dated 9.4.2009 has been filed on behalf of Union of India crystallizing its stand on various issues. Union of India has now agreed in principle for the following:
- It is liable to pay service charges to the municipal corporations for providing services like supply of water, conservancy/sewerage disposal, apart from general services like approach roads with street lights, drains etc.
- Having regard to the fact that only service like supply of water could be metered and other services like drainage, solid waste management, approach roads, street lighting etc., could not be metered, the percentage of property tax will be worked out as service charges, on the basis of instructions issued by the Ministry of Finance.
Para 7 of the Judgement provided that
The Union of India has also stated that taking note of the relevant circumstances, it has decided to pay service charges at the following rates:
(a) 75% of the property tax levied on private owners, where the properties of the Union are provided by the municipal corporations with all services/facilities as were provided to other areas within the municipal corporation;
(b) 50% of the property tax levied on private owners, in regard to properties of the Union, where only some of the services/facilities were availed; and
(c) upto a maximum of one-third (33 and 1/3%) of the property tax levied on private owners in regard to properties which did not avail any of the services provided by the municipal corporation, as they were self-sufficient on account of all services being provided by the Union itself.
Para 9 of the Judgement then referred as follows:
Learned counsel for the appellants submitted that the appellant municipal corporations submitted that they were broadly in agreement with what has been stated and agreed by Union of India in the said affidavit. The appellant-Municipal Corporations also confirmed and agreed:
- that they will not levy or demand any “property tax” in respect of the properties belonging to Union of India and used for the purposes of the government;
- that the demands will relate only to service charges for direct services like supply of water and conservancy/sewerage disposal services, and other general services such as approach roads with street lighting, drainage etc.;
Para 10 of the Judgment provided that
The appellants however expressed reservations only in regard to the stand of the Railways that it will only pay nominal service charges at 5% of the property tax. They point out that there can be no property of Railways which can be termed as 100% self sufficient in regard to services, as common indirect services provided by the Municipal Corporation (like approach roads with street lighting etc.)will be enjoyed by them. They also drew our attention to the fact that Ministry of Railways (Railway Board)had also issued a circular dated 24.7.1954, similar to the circulars issued by the Government of India, Ministry of Finance, providing for payment of part of the property tax, as services charges for water, scavenging etc. The learned Solicitor General however stated that she was not sure whether the said circular continues in force or was superseded by other circulars. Be that as it may.
Para 11 of the Judgement then finally concluded that
- In view of the above, there is no need to consider the appeals on merits. We dispose of appeals and
pending applications by recording the following broad agreement between the parties:
(i) The Union of India and its departments will pay service charges for the services provided by the appellant municipal corporations. They will not pay any property tax. The service charges will be paid at 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilising the full services, or partial services or nil services. The Union of India represented by its concerned department will enter into agreements/understandings in regard to service charges for each of its properties, with the respective municipal corporation
It would be apt to highlight that this judgement of Hon’ble Apex Court was followed by the Hon’ble Allahabad High Court since the dispute between Union of India and Nagar Nigam Varanasi was for the period 2011-12 i.e. year falling subsequent to the date of Judgment of Hon’ble Apex Court in the Matter of Rajkot Municipal Corporation.
However in earlier Judgments wherein such agreement between the Union of India and States was not reached and issue regarding recovery of service charges are not similar to recovery of tax on property, Hon’ble Apex Court in the matter of Union of India Vs. Ranchi Municipal Council and later of followed on by various High Courts had held that
“4. The controversy is no longer res integra. This Court in Union of India v. Purna, Municipal Council had held that Section 135 of the Railways Act is subject to the provisions of Article 285 of the Constitution. Therefore, the respondent-Municipality was restrained from demanding any payment by way of service charges from the Railways.”
- Engineering code of the Indian Railway Department
Indian Railways Department has prescribed an Engineering Code for its Civil Engineering Department for maintenance and renewal of Civil Engineering assets of the Railways. Para 1920 to 1922 is significant for understanding the impact of Article 285 of Constitution of India and services of Local Bodies availed by the Indian Railways.
a) Para 1920 of the Engineering code of the Indian Railway Department
Para 1920 provides that Railways would with effect from 1st April 1954 pay the local bodies in States except in the State of Jammu and Kashmir, for “Service Charges” in respect of Central Government properties. The Railway will make payment in respect of their properties for “Specific Charges” rendered by local authorities but payment of such “Service Charges” shall be treated not as payment of taxes but of compensation payable in quasi contract. “Specific Charges” will include not only direct services such as water and electric supplies, scavenging etc., but also general services such as street lighting, town drainage, approach roads connecting the Railway properties etc. But such items as educational, medical or, public health facilities will be excluded. Para 1920 is being reproduced herewith:
1920: Under clause (i) of Article 285 of the constitution the properties of the Government of India are exempt from all taxes imposed by local authorities in the States. Without prejudice to the legal rights conferred under the appropriate laws on any property held by the Central Government within the jurisdiction of local bodies, payment should be made with effect from 1st April 1954 to local bodies in States except in the State of Jammu and Kashmir, for “Service Charges” in respect of Central Government properties on the following basis :-
(i) The Railway will make payment in respect of their properties for “Specific Charges” rendered by local authorities but payment of such “Service Charges” shall be treated not as payment of taxes but of compensation payable in quasi contract. “Specific Charges” will include not only direct services such as water and electric supplies, scavenging etc., but also general services such as street lighting, town drainage, approach roads connecting the Railway properties etc. But such items as educational, medical or, public health facilities will be excluded.
(ii) For large and compact blocks of these properties the Railway will not pay for such Specific services as they themselves arrange.
(iii) The assessment of “Service Charges” should be on actual basis in case of metered water or electricity etc. or where services like drainage and scavenging etc. are charged for separately. But where some or all such specific services are not charged for separately but are part of a consolidated property tax, the quantum of `Service charges” payable to the local bodies should be calculated in terms of paras 1922, 1923 and 1924.
(iv) Railway Administration may also enter into separate contract with any local authority for the supply of water and electricity or scavenging or any other services.
b) Para 1922 of the Engineering code of the Indian Railway Department
Para 1922 provides for calculation of quantum of Service Charges. The important issue to be observed herein that the quantum of service charges have been divided into two parts i.e.
- In respect of isolated Railway properties where all services are availed of by the Railway in the same manner as in respect of private properties.
- In the case of colonies which do not directly avail of civic services within the area and are self-sufficient in all respects
- In respect of colonies where only who partially avail civic services within the area
- The Quantum of “Service Charges” payable to local bodies should be calculated on the following basis with effect from 1st April, 1967 if they are levied as consolidated tax as distinct from separate taxes for each item of service :–
(i) In respect of isolated Railway properties where all services are availed of by the Railway in the same manner as in respect of private properties, the Railway will pay service charges equipment to 75 per cent of the properly tax realised from individuals.
(ii) In the case of large and compact colonies which are self-sufficient with regard to services or where some of the services are being provided by the Railways themselves the service charges will be calculated in the following manner
(a) In the case of colonies which do not directly avail of civic services within the area and are self-sufficient in all respects, the payment of service charges will be restricted to 33-1/3 per cent of the normal rate of property tax applicable to private, properties.
(b) In respect of colonies where only a partial use of the services is made service charges will be paid as 50 per cent of the normal property tax rate.
(c) In respect of colonies where all the services normally provided by the municipal body to the residents of other areas within its limits are being availed of, service changes will be paid as 75 per cent of the property tax rate realised from private individuals.
Note:- If in a property tax assessment, elements of charges for individual services which are not availed of, are identifiable, the quantum of general tax for the application of para 1922, should be excluding such elements.
c) Para 1924 of the Engineering code of the Indian Railway Department
Para 1924 provides that for taxes being levied separately for each item of service, share of general services rendered by a local body to be borne by the Railway will be calculated separately. For example, in case of scavenging tax, service charges payable have been divided into two parts i.e.
- Where a Railway Administration has made efficient arrangements of its own for the daily removal and disposal of rubbish, filth etc. from its premises
- Where the Railway Administration has made arrangements for removal of fifth etc., but where the local authority is responsible for its final disposal.
The detailed division is as follows:
- In the case of taxes being levied separately for each item of service the share of general services rendered by a local body to be borne by the Railway will be on the following basis with effect from 1st April, 1954.
Water and Drainage Tax :
(a) Where a Railway Administration derives no direct benefit. 1/3 of the tax
(b) Where a Railway Administration derives only partial benefit. 1/2 of the tax
(c) Where a Railway Administration derives full benefit. Full tax
Scavenging Tax :
|(a) Where a Railway Administration has made efficient arrangements of its own for the daily removal and disposal of rubbish, filth etc. from its premises.||No tax|
|(b) Where the Railway Administration has made arrangements for removal of fifth etc., but where the local authority is responsible for its final disposal.||1/2 of the tax|
Lighting Tax :
|(a) Where the Railway Administration does not take power from the local authority for lighting its premises and where the roads leading to be Railway station are also not lit by the local authority.||No tax|
|(b) Where the Railway Administration does not take power from the local authority for lighting its premises but the roads leading to the Railway Station are lit by the local authority.||1/2 of the tax|
|(c) Where the Railway Administration takes power from the local authority for lighting its premises||Full tax in addition to the charges for energy consumed|
- Responsibility of Municipal Committee for areas falling within their Jurisdiction: I have taken for reference purposes, an example of Madhya Pradesh Municipal Corporation Act which is as follows:
- Matters to be provided for by Corporation.-
(1)The Corporation shall make adequate provision, by any means or measures which it may lawfully use or take, for each of the following matters, namely:-
(a) lighting public streets, places and buildings.
(b) cleaning public streets, places and sewers and all spaces not being private property, which are open to the enjoyment of the public, whether such spaces are vested in the corporation or not; removing noxious vegetation, and abating all public nuisances;
(f) removing obstructions and projections in public streets and places, and in spaces not being private property, which are open to the enjoyment of the public whether such spaces are vested in the Corporation or the Government;
(j) constructing, altering and maintaining public streets, culverts and Corporation boundary markets, latrines, urinals, drains, sewers and providing public facilities for drinking water; watering public streets and places;
(k) the management and maintenance of all municipal water works and construction and maintenance of new work and means for providing a sufficient supply of suitable water for public and purposes;
(m) the construction and the maintenance of public market and slaughterhouses and the regulation of all markets and slaughter houses;
(s) establishing and maintaining primary schools;
(u) the maintenance of municipal office and of all public monuments and other property vested the Corporation;
(x) the maintenance of public park, gardens, recreation grounds, public places and open spaces in existence and vested in the Corporation.
- Definition of Public and Private Property under the Madhya Pradesh Municipal Corporation Act, 1956 is as follows:
(47) ―public place‖ means a space, not being private property, which is open to the use or enjoyment of the public, whether such space is vested in the Corporation or not;
(45) ―private street‖ means a street which is not a public street;
(55) ―street‖ means any road, foot-way, square, court alley or passage, accessible, whether permanently or temporarily to the public, whether a through fare or not;
shall not include every vacant space, notwithstanding that it may be private property and partly or wholly obstructed by any gate, post chain or other barrier, if houses, shops or other buildings abut thereon, and if it is used by any persons as means of access to or from any public place or thoroughfare, whether such persons be occupiers of such buildings or not;
but shall not include any part of such space which the occupier of any such building has a right at all hours to prevent all other persons from using as aforesaid;
and shall include also the drains on either side and the land whether covered or not by any pavement, verandah or other erection, which lies on either side of the roadway up to the boundaries of the adjacent property, whether that property be private property or property reserved by Government or by the Corporation for any purpose other than a street;
(49) ―public street‖ means any street-
(a) over which the public have a sight of way; or
(b) which have been heretofore leveled, paved, metalled, asphalted, channeled, sewered or repaired out of municipal or other public funds; or
(c) which under the provisions of the Act becomes a public street, and includes-
- the roadway over any public bridge or causeway;
- the footway attached to any such street;
- public bridge or causeway, and the drains attached to any such street, public bridge or causeway;
If we refer to the above provisions only for a reference basis, albeit individual provisions of the other Municipal Corporation may differ but not as much, such provisions can be broadly for our reference purposes for this issue can be divided into two parts:
Part I:- Entrustment of responsibility to Municipality for cleaning of public streets, places and sewers which are not private property. Therefore cleaning of public street and public place is responsibility of Municipality even though its property may or may not vest in it. Public place has been defined as the space, not being private property, which is open to the use or enjoyment of the public, whether such space is vested in the Corporation or not. Whilst Public place shall not include any part of such space which the occupier of any such building has a right at all hours to prevent all other persons from using as aforesaid.
Part II:- Entrustment of responsibility to Municipality for maintenance of buildings, which includes limited set of buildings i.e. public market and slaughterhouses, municipal office and of all public monuments and other property vested the Corporation and public park, gardens, recreation grounds, public places and open spaces in existence and vested in the Corporation.
- Conclusion in respect of Properties belonging to Railways vis-a-vis Article 285 of the Constitution of India and Respective Municipal Corporations Act
At the outset, below conclusion is on a broader basis and with the limited facts available in the Judgement:-
Issue 1: Housekeeping Services and Cleaning of Trains: Scope of activities before AAR were as follows:
(c) Providing On-Board Housekeeping Services in Trains
Cleaning of toilets, compartments, seats etc.
(e) Mechanized Cleaning of Trains
Coaches of Trains, and Housekeeping of depot premises etc.
For this issue, cleaning of Trains in my view is not a Municipal Function vesting with the Municipality and therefore it should not be exempt vide notification No. 12/2017 dated 28th June 2017.
Issue 2: Comprehensive Mechanized Cleaning of Railway Colonies and Removal and disposal of garbage from Railway Stations: The scope of the activities was
(f) Comprehensive Mechanized cleaning of railway colonies.
Cleaning of road and desilting of surface drains, manhole, gully trap and latrine system of various size and depth and maintenance of the same in the running condition of colony area, and removal of accumulated garbage silt muck etc. to the nominated railway dustbin.
(g) Removal and disposal Garbage etc. from railway colonies.
Conservancy contract for daily removal of solid waste/ rubbish/ refuse / hedge cuttings etc. from the dustbins/ heaps or nominated sites of Railway Colony and other Railway premises.
(h) Removal and disposal of Garbage etc from railway stations.
Conservancy contract for daily removal of solid waste/ rubbish/ refuse / hedge cuttings etc. from the dustbins/ heaps or nominated sites of Railway Station.
The broad conclusion on the above activities is as follows:
- For cleaning of Roads, services relate to cleaning of public streets over which public has a right of way without any restrictions and charges. The issue whether property of such streets vests in Municipality is not relevant at all for performing the function.
- Removal and Disposal of Garbage are functions entrusted to municipality under Article 243W of the Constitution of India.
- In pursuance of the judgement of Hon’ble Apex Court in the matter of Rajkot Municipal Corporation, Guidelines have been issued by the Government of India, Ministry of Urban Development on dated 15th December 2009 with a specific Instruction that arrangement mentioned in point (2) of para 1 is specific to the State of Gujarat and State Governments have been requested to consider appropriate dispute resolution mechanism in respect of their States.
- The Judgement specifically provides that demands of Municipality would only relate to service charges for direct services like supply of water and conservancy/sewerage disposal services, and other general services such as approach roads with street lighting, drainage etc. The Municipal Corporation also highlighted that there can be no property of Railways which can be termed as 100% self sufficient in regard to services, as common indirect services provided by the Municipal Corporation (like approach roads with street lighting etc.)will be enjoyed by them.
The Hon’ble Apex Court held that service charges will be paid at 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilizing the full services, or partial services or nil services.
- The activities like cleaning, water, light supply to such properties comes within the scope of the Municipal Activities although there property is not vested with Municipal Corporation.
- Railway Colonies cannot be termed as private properties because if that had been the case then Railways would not have the option to avail the services of Municipal Corporation and they would have had to make their own arrangements for such services.
- Provisions of services like water, drainage, cleaning, lighting are prima facie responsibility of Municipal Corporation and it’s at the option of the Railways to avail such facilities or not. If they decide to avail such facilities, then two scenarios are possible which are as follows:
- Specific Services: In case of specific services like water, lighting and Scavenging services, they have to pay services charges if they avail such services and in case they do not want to avail such services they have to pay no service charges.
- Common Services: In case of common services, as Municipal Corporation of Rajkot had pleaded before the Hon’ble Apex Court, there cannot be any scenario wherein Railways are not availing their services. Therefore, 75%, 50% and 33 1/3% respectively of the property tax levied on private owners, depending upon whether Union of India or its department is utilizing the full services, or partial services or nil services.
Therefore, if we analyse specific and common services, it’s the responsibility of the Municipal Corporation to provide services and it’s at the option of the Railways to avail such facilities or not. If the Railways had opted for such services then Municipality would have been bound to provide such services but the fact that Railways are not availing such services, would not make such services out of the scope of the function of the Municipality. Thus, to hold that these are responsibilities of the Railways is not correct. It’s the primary responsibility of the Municipal Corporation falling within the scope of the Municipal Corporation under Article 243W but availed by the Railways from other contractors.
Even if Railways had opted to get these services from a private contractor then also such services fall within the scope of the responsibilities entrusted to Municipal Corporation under Article 243W of the Constitution of India.. Mere availing of such services would not make these outside the scope of Article 243W of the Constitution of India. In fact Entry No. 3 of Notification No. 12/2017 dated 28th June 2017 clearly covers only such instances and is reproduced herein for further clarity:
Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.
On this point would like to differ from the decision of Hon’ble AAR Delhi. In my opinion, any services which are in relation to functions entrusted to Municipality under Article 243W of the Constitution of India but for which services are provided by the supplier to the Central Government are exempt from levy of Tax. Therefore:-
- Whether supplies of cleaning services in relation to Railway Stations and Railway Colonies are functions falling within the purview of Municipality under Article 243W: Yes
- Whether the fact that Railways do not want to opt for such services from Municipalities as they are self sufficient would make such services outside the purview of Municipality under Article 243W of the Constitution: No
- In case wherein Railways opt for services of private Contractor in respect of cleaning services, whether then such services would be outside the purview functions entrusted to Municipality under Article 243W of the Constitution: No
- If such pure services of the contractor which are provided to Railways fall within the purview of responsibilities entrusted to Municipality under Article 243W of the Constitution of India, then whether such services should be exempted from the levy of tax by virtue of above entry of Notification No. 12/2017 dated 28th June 2017: Yes
Issue 3: Services provided to Railways for Properties vested with Railways and not open to enjoyment of public: Scope of the activities before AAR Delhi were as follows:
(a) Mechanized/ Comprehensive cleaning at Railway Stations.
Station Building Cleaning, Platform Cleaning, Track Cleaning, Office & Waiting hall cleaning, Toilet cleaning, Circulating area cleaning etc.
(b) Mechanized cleaning of sheds
Shed floor, pits, urinals, desilting of manholes, underground drains and open drains, disposal of Industrial waste to Dumping ground, Loading of Ferrous Scrap, Cutting of grass and shrubs and removal of cobwebs etc.
(d) Railway Building & Office cleaning.
Cleaning and upkeep of Office Chambers, rooms, cabins, corridors, Halls, roofing, circulating areas, toilets, metalled road and lawns etc.
This is a contentious issue. However, in my view and the on the basis of facts available as these are not public streets or places but buildings. These buildings vest with Railways and therefore in my view municipality is not entrusted with the responsibility for cleaning and maintenance of properties which are regulated and managed by any other entity, property of which is vested with any other person unless clearly specified. Municipality is entrusted with cleaning of public streets or places and not buildings whose property vests in others.
These are properties which are vested with Railways and regulated both in terms of entrance and management. In a similar matter a very interesting observation I found in Hindustan Times for cleanliness of Railway tracks and when posted for query both before BMC and Railways, the answer was as follows:
“The railways said the Brihanmumbai Municipal Corporation (BMC) should take away the garbage but the civic body said it was the railway’s responsibility to keep the tracks clean,” said Dharmesh Birai of the group. “The garbage is thrown by commuters and by residents of slums and buildings in areas that the BMC cleans. Why do the station masters need to be told about something the railways should be doing on a regular basis?”
There is a very thin difference between public streets, places and buildings. However for example, Municipality cleans public streets outside buildings but does not clean the buildings which might belong to a government organization. These are borderline and specific issues and unless until contrary brought on record, service provided would be taxable and would not fall in the purview of exemption.