1. Whether the exclusion clause applies even to persons other than Indian Railways?

2. Will the exclusion clause really help Indian Railways to escape from service tax net?

The Budget, 2006 proposes to levy service tax on certain new services like “transport of goods in container by rail”, and also “Support services of business or commerce”.

The definition as given in the Finance Bill for the service “transport of goods in container by rail” seeks to exclude specifically Indian Railways from the purview of service tax. However, a close look at the related definitions would bring out a situation wherein it may result exclusion of entire private players, who are likely to be licensed by Indian Railways to operate their own container trains.

This article attempts to analyse the above questions that are likely to arise, in the days to come.

Sec. 65 (105) (zzzp): to any person, by any other person other than Government Railway as defined in clause (20) of Sec. 2 of the Railway Act, 1989 in relation to transport of goods in containers by rail, in any manner

By reading the above definition it is very clear that the Government deliberately excluded Indian Railway from the purview of service tax. This new tax is obviously aimed at the private players who are likely to be licensed by the Indian Railways in response to the recent decision by the Railways to open up container freight by rail to private operators. At present this sector is totally controlled by CONCOR – a subsidiary company of Indian Railways but it will now be opened up for private players who have submitted their bids.

As per the policy initiative declared by the Indian Railways, the privatization of container traffic by rail works on the following parameters:

• The private companies should have their own rail-linked Inland Container Depot (ICD), while Indian Railways will provide engines and drivers, the companies will have to provide bogies and procure its own rolling stock required for the movement of container trains. The Railway ministry would run the trains and provide the locomotive for which the companies would need to pay a haulage charge.
• Companies can exit operations by transferring the permission to another eligible operator, with Railway's approval.
• They are free to decide the tariffs for rail haulage, terminal handling and ground rent.
• They can also have read-only-access to Railways' freight operating information system by paying some nominal.
• The permission to operate container trains would be valid for a period of 20 years extendable by another 10 years.

Reliance Infrastructure, Adani Logistics, Gateway Distriparks, JM Baxi, Container Corporation, Mundra International Container Terminal and Pipavav Rail Corporation are among 10 companies that have received in-principle approval for running private container trains in the country. The coming of additional container traffic through the entry of new players would bring in additional revenue of Rs 5,000-10,000 crore to the Railways in haulage charges. In terms of volume, it will mean a minimum 100 million tonne piecemeal and non-bulk traffic to the Railways.

A close look at the definition given in the Finance Bill vis-a-vis policy parameter laid out for the privatization of container traffic (as outlined above), would give raise curious doubts.:

As per the definition (mentioned supra), Government Railway has the meaning as given in clause (20) of Sec.2 of the Railway Act, 1989. This section of Indian Railway Act defines Government Railway as follows:

Clause (20) of Sec.2 of Inidan Railway Act, 1989:

"Government Railway" means a Railway owned by the Central Government

clause (31) of Sec.2 of the Railway Act defines the word “Railway" (which is not mentioned in the Finance Bill.). As per the Railway Act, Railway means:

(31) "Railway" means a Railway, or any portion of a Railway, for the public carriage of passengers or goods, and includes-

(a) all lands within the fences or other boundary marks indicating the limits of the land appurtenant to a Railway;

(b) all lines of rails, sidings, or yards, or branches used for the purposes of, or in connection with, a Railway;

(c) all electric traction equipments, power supply and distribution installations used for the purposes of, or in connection with, a Railway;.

(d) all rolling stock, stations, offices, warehouses, wharves, workshops, manufactories, fixed plant and machinery, roads and streets, running rooms, rest houses, institutes, hospitals, water works and water supply installations, staff' dwellings and any other works constructed for the purpose of, or in connection with, Railway;

(e) all vehicles which are used on any road for the purposes of traffic of a Railway and owned, hired or worked by a Railway, and

(f) all ferries, ships, boats and rafts which are used on any canal, river, lake or other navigable inland waters for the purposes of the traffic of a Railway and owned, hired or worked by a Railway administration, but does not include-

(i) a tramway wholly within a municipal area;. and

(ii) lines of rails built in any exhibition ground, fair, park, or any other place solely for the purpose of recreation;

A combined reading of definition of Government Railway with the definition of Railway it would mean that any portion of Railway is also Government Railway, and it also includes all lines of rails, sidings, or yards, or branches used for the purposes of, or in connection with, a Railway; all electric traction equipments, power supply and distribution installations used for the purposes of, or in connection with, a Railway.

As per the privatization policy discussed above the private parties will own containers and flat wagons to carry containers. The Railways will provide locomotive with driver. That means a part of the rail (container rail) belongs to private parties and a part to the Indian Railway (locomotive, driver, lines etc.,). Thus, the private container rails operated by the private players will also be Government Railway (by being a portion of government Railway) by virtue of definition. Accordingly these services rendered by private players would also be interpreted to be covered in the exclusion category. That is to say all private players need not pay any service tax if the definition for taxable service- transportation of goods in container by rail- given in the Finance Bill is read with definition of Government Railway and Railway given in the Indian Railway act.

Even otherwise, as the definition includes all lines of rails and electric traction equipment under its ambit of government Railway, all container trains (partly belongs to private players) which run on these rails, would automatically be treated as government Railway.

Thus the exclusion clause in the definition of taxable service though aimed at to exclude Indian Railway, it may be interpreted to mean that this exclusion clause apply equally to all private players.

Will the exclusion clause really help Indian Railway to escape from service tax net?

Indian Railway is expecting to collect around Rs.10, 000 cr. from private players towards haulage charges. How these amounts are likely to be collected towards various services by Indian Railway are to be treated from the service tax angle.

Since, the private parties, who would be permitted to operate container freight by rail invariably have to use infrastructure provided by Railway like rails, locomotive, signalling system, electric traction system and other facilities required to operate the container freight by rail, the Railway will be providing these services for a consideration.

The following are the some of the charges Indian Railways are likely to collect from private operators:

Railways collects haulage charges for letting operators use its infrastructure such as tracks and signalling system. This depends on distance between two points. At present Railways are collecting Rs.13000/- per container (approx.) between Delhi - Mumbai. As the average Exim traffic is 12-13 tonnes /container.

Indian Railway is also likely to collect wagon maintenance charges. All private players have to arrange their own wagons but are mandated to get the wagons tested periodically for maintenance by the Railways. Currently, the Railways wagon maintenance charges are at five percent of the updated capital cost of wagon (The new wagon cost is around Rs.23 Lakhs )

This apart the Railways also collect lease charges, for providing Railway land to private parties for any of their requirement.

The moot point is whether Indian Railway can escape paying service tax on the consideration it is receiving for the above services rendered? The answer is a big NO.

This is because the above services are likely to fall under the newly introduced "Business Support Service ". As per the Finance Bill, the definition of this service is as follows:

“Support services of Business or Commerce” means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management process, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.

Explanation- for the purpose of this clause, the expression “ infrastructural support services’ includes providing office along with office utilities, lounge, reception, with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security.

The above definition is an inclusive definition (both in the main definition as well as explanation part), and it not possible for the Railway to take a stand that the supporting services – like providing locomotive with driver, providing Railway lines, electric traction, signalling system, freight operating information system, land – as not falling under the category of “ supporting services for business or commerce” nor the wise central excise officers (who are known to have brought many service providers, who are having even remote relation with another persons business, under Business auxiliary service using their interpretative acumen) would lend support to such argument.

Though the TRU letter dt.28/02/2006 at para 3.12 mentions that suitable abatement will be provided to service providers of – transport of goods in container by rail- for the amount paid to Railway for haulage services. Then, will the Indian Railway pay service tax on the haulage charges (under business support services) without collecting from their clients?

Let us hope that the government will fine-tune the definitions of both the services mentioned above to fulfill the objective of excluding the Indian Railway from service tax purview, otherwise it will be like another legal controversy, inbuilt, only to surface in future.

(The author is working with the Department and the views expressed are strictly personal )