When Infrastructure Meets Tax Law
Large infrastructure projects are widely regarded as visible symbols of economic progress, improved connectivity, and urban transformation. Metro corridors, highways, and redevelopment initiatives often reshape a city's commercial and social landscape in a positive, lasting manner. However, alongside these long-term public benefits, such projects frequently create pockets of short-term disruption for residents, shopkeepers, and other occupants located in the immediate vicinity of construction sites.
In practical terms, major construction activity - particularly in densely populated market areas may raise safety concerns, require temporary evacuations, restrict access, or cause business interruption. Responsible project authorities, mindful of both public safety and commercial sensitivity, often step in to provide monetary relief or compensation to affected occupants. While such payments are primarily intended to mitigate hardship and maintain commercial balance, they also raise an important and often misunderstood question under the Goods and Services Tax regime.
The GST law, with its broad and inclusive definition of "supply," has on several occasions sparked debate over whether compensatory or damage-related payments could inadvertently fall within the tax net. The issue becomes particularly delicate where money flows from one party to another without any conventional commercial transaction. In certain situations, tax authorities have attempted to examine such payments through the prism of consideration for a deemed or inferred supply.
It is in this backdrop that a specific and practically relevant question arises: where occupants are temporarily displaced due to safety concerns arising from infrastructure construction and are paid compensation purely to offset their loss and inconvenience, does such payment constitute a taxable supply under the CGST Act, 2017?
The present discussion examines this nuanced issue in the factual context of Shreyans Infrastructure Projects Ltd. Through a careful analysis of the statutory provisions, interpretative principles, and judicial guidance, the article seeks to evaluate whether GST liability can legitimately arise in such circumstances or whether the payment retains its true character as non-taxable compensation.
The Factual Backdrop - What Really Happened
In the course of executing a major infrastructure project, certain old and structurally vulnerable buildings located in the immediate vicinity of the construction zone came under technical and safety review. During this process, signs of structural stress were observed in a few nearby commercial premises. Given the potential safety risks involved, Shreyans Infrastructure Projects Ltd. adopted a precautionary and responsible approach by arranging for the temporary evacuation of the occupants from the affected premises.
It was recognised at the outset that even a temporary displacement of business occupants can lead to operational disruption, loss of customer footfall, and practical inconvenience. Conscious of this ground reality, the Company chose to adopt an equitable and humanitarian approach rather than a purely technical one. Accordingly, it decided to extend uniform monetary relief to both tenants and owners who were required to vacate the premises as a safety measure.
With a view to ensuring transparency and objectivity in determining the appropriate quantum of relief, a three-member committee was constituted to examine the extent of impact and recommend suitable compensation amounts. The committee's recommendations were subsequently presented to the competent authority and received approval, thereby lending institutional backing to the proposed relief framework.
Thereafter, the approved compensation structure was formally communicated to the Local Market Traders Association , representing the affected occupants. The Association, after due consideration, accepted the proposed rates. More importantly, the Association expressly clarified in its communication that the payment under discussion was not in the nature of rent or any form of commercial consideration but was intended purely as compensation to mitigate the loss and inconvenience suffered by the displaced occupants. It was also suggested that the terminology used in documentation should clearly reflect the word "compensation" so as to avoid any unintended interpretational or tax ambiguity.
It is in this factual and commercial backdrop that the GST implications of the said payment call for careful legal examination.
The Real Question - Does Compensation Trigger GST?
Against the above backdrop, the central issue requiring careful examination is whether the compensation paid by Shreyans Infrastructure Projects Ltd. to the affected occupants and owners - who were required to vacate their premises due to nearby construction activity - can be subject to GST under the CGST Act, 2017.
At first glance, the mere flow of money from one party to another may appear to invite tax scrutiny. However, GST is not attracted merely because a payment has been made. The levy under GST is triggered only when the statutory ingredients of a "supply" are satisfied in the manner contemplated by the law. Therefore, the real enquiry is not about the payment in isolation, but about the true legal character of that payment in the light of the GST framework.
The answer to this issue lies deeply embedded in the statutory architecture of GST, particularly in the precise meaning and scope of the expression’s "supply" and "consideration." Unless the payment in question can be shown to satisfy these foundational requirements, the mere existence of compensation cannot, by itself, bring the transaction within the tax net.
It is this statutory lens that must now be carefully applied to the facts of the present case.
Section 7(1)(a) - The Gateway Test of Taxable Supply
The natural starting point of any GST analysis is Section 7(1)(a) of the CGST Act, 2017, which lays down the statutory foundation for determining whether a particular transaction can at all be regarded as a "supply." Since GST is fundamentally a tax on supply, the existence of a valid supply becomes the primary jurisdictional requirement before any tax liability can arise. The term "supply" has been defined as follows, vide Section 7(1)(a):
"Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business ."
A careful and holistic reading of the above provision makes it clear that not every payment or transaction automatically falls within the GST net. For an activity to qualify as a taxable supply, three essential ingredients must coexist cumulatively and not in isolation. First, there must be a supply of goods or services or both. Second, such supply must be made for a consideration. Third, the activity must be undertaken in the course or furtherance of business. The absence of any one of these elements is sufficient to take the transaction outside the ambit of Section 7(1)(a).
Equally significant is the perspective from which this provision must be applied. In the present factual matrix, the analysis cannot be carried out from the standpoint of Shreyans Infrastructure Projects Ltd., which is merely making the payment. Instead, the statutory test must be applied from the perspective of the affected occupants, because they are the persons who, if at all, would be regarded as suppliers under the GST framework.
This correct identification of the supplier’s perspective becomes crucial in determining whether the essential ingredients of Section 7(1)(a) are actually satisfied in the present case.
Did the Occupants Really Supply Anything?
At the heart of the GST framework lies a simple but fundamental principle: tax can arise only when there is a "supply." The concept of supply necessarily presupposes a positive and identifiable act on the part of the supplier. Typically, this may involve the transfer of goods, the provision of a service, the grant of a lease or licence, or the undertaking of a conscious commercial obligation in return for consideration.
In the present factual matrix, however, the conduct of the occupants does not fit into any of these recognised categories of supply. The occupants vacated their premises not as part of any commercial arrangement, but purely due to safety concerns arising from nearby construction activity . Their movement out of the premises was essentially a precautionary response to circumstances rather than the result of any negotiated or voluntary commercial understanding.
It is equally important to note what the occupants did not do. They did not grant any right to use the property to Shreyans Infrastructure Projects Ltd. They did not enter into any lease, licence, or service agreement. Nor was there any contractual promise on their part to tolerate an act, refrain from an act, or provide any facility in return for payment. In substance, there was no positive supply-side conduct that could be said to have been offered to the Company.
Viewed in this light, the act of vacating the premises appears purely reactive and compelled by safety considerations, rather than an activity undertaken in the course or furtherance of business.Such conduct lacks the essential characteristics of a supply under the GST law. Consequently, the first foundational limb of Section 7(1)(a) does not get satisfied in the present case and fails at the very threshold of analysis.
Is the Payment Really "Consideration" under GST?
Even if one were to assume, purely for the sake of argument, that some form of activity exists on the part of the occupants, the enquiry does not end there. The next and equally critical question is whether the payment made by Shreyans Infrastructure Projects Ltd. can at all be regarded as "consideration" within the meaning of the GST law. This step is crucial because, in the absence of valid consideration, the statutory definition of supply under Section 7(1)(a) cannot be fulfilled.
In this context, the following statutory definition contained in Section 2(31) assumes central importance.
"Consideration" in relation to the supply of goods or services or both includes -
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
A careful reading of the above definition makes one principle abundantly clear: consideration must bear a direct, identifiable nexus to an underlying supply. The statutory expressions "in respect of, " "in response to, " and "for the inducement of" unmistakably import the well-settled concept of quid pro quo - that is, something must move from the supplier in return for the payment.
When the present factual matrix is examined through this statutory lens, the essential reciprocity appears to be completely absent. The occupants have not undertaken any obligation to provide the Company with any service. Nor is the payment structured to induce any commercial activity on their part. Instead, the payment has been made purely to compensate the occupants for the hardship, disruption, and inconvenience caused by their temporary displacement.
In substance, therefore, the payment is remedial and compensatory rather than contractual. It does not arise from any bargain or commercial exchange between the parties. Consequently, the payment does not withstand statutory scrutiny as "consideration" within the meaning of Section 2(31). The second essential limb of Section 7(1)(a) accordingly remains unsatisfied.
Is the Displacement Connected to Business Activity?
The third statutory filter embedded in Section 7(1)(a) requires that the alleged supply must take place in the course or furtherance of business. This condition serves an important purpose within the GST framework, as it ensures that only activities with a real commercial nexus to business operations are brought within the tax net.
In the present context, this test must again be applied from the standpoint of the affected occupants. The relevant enquiry is not whether the occupants are generally engaged in business, but whether the specific act under examination - namely, vacating the premises - bears any meaningful connection with the conduct or promotion of their business activities.
On careful consideration of the facts, such a connection appears clearly absent. The temporary vacation of the premises was prompted by safety considerations arising from the surrounding construction activity. It was not a step taken in the normal course of trade, nor was it intended to advance any commercial objective of the occupants . The act did not facilitate business expansion, improve operational efficiency, or generate any revenue.
Rather, the displacement was a compelled and protective response to an external situation beyond the occupants’ commercial control. Activities undertaken under such circumstances cannot ordinarily be characterised as being in the course or furtherance of business.
In the absence of this essential business nexus, the third statutory limb of Section 7(1)(a) remains unfulfilled. Consequently, the transaction, when viewed holistically, falls outside the scope of a taxable supply under the GST framework.
Judicial Signal - Why Compensation Is Not Consideration
The distinction between compensation and consideration is no longer res integra in indirect tax jurisprudence. Judicial forums have repeatedly emphasised that every monetary payment does not automatically assume the character of taxable consideration. Useful guidance in this regard emerges from the decision of the Hon’ble CESTAT, Kolkata in MNH Shakti Ltd. v. Commissioner of CGST & Central Excise, Rourkela [Final Order No. 75689/2021 dated 10.11.2021].
In this decision, the Tribunal drew a clear conceptual boundary between contractual consideration and compensatory payments. It was observed that "compensation cannot be equated with consideration, for consideration flows from a contract, whereas compensation arises from frustration or extinction of contract." This important observation reinforces the principle that a payment made to remedy loss, hardship, or statutory consequences does not, by that fact alone, become consideration for a taxable supply.
The ruling thus highlights a broader interpretative approach under GST - namely, that the true character and underlying purpose of a payment must be carefully examined before bringing it within the tax net. Where the dominant intention of the payment is compensatory rather than commercial, the element of quid pro quo is ordinarily regarded as absent.
When the present factual matrix is tested against this judicial yardstick, the position becomes considerably clearer. The payment made by Shreyans Infrastructure Projects Ltd. is ex gratia and compensatory in nature. It does not emanate from any contractual commitment undertaken by the occupants, nor is it linked to any positive supply-side obligation on their part.
Accordingly, the judicial ratio discussed above lends substantial support to the view that the impugned payment does not partake the character of consideration and, therefore, does not attract GST.
CBIC Clarification - Administrative View Also Aligns
Further support for the above position can be found in CBIC Circular No. 178/10/2022-GST dated 03.08.2022, wherein the Board clarified the taxability of various compensatory payments. The Circular recognises that where a payment is made merely to compensate for loss, injury, or inconvenience, and is not linked to any contractual obligation involving supply, such a payment would not qualify as consideration for the purposes of GST.
The Circular, while analysing different fact situations, emphasises the importance of examining the true substance of the transaction and the presence or absence of a quid pro quo. It reiterates that GST applies only where the payment is made in return for a supply of goods or services, and not where the payment is purely compensatory.
Viewed in the light of the above administrative clarification, the compensatory payment made by Shreyans Infrastructure Projects Ltd. further strengthens the position that the transaction does not partake the character of taxable consideration under the GST framework.
Possible Departmental View - And Why It May Not Prevail
In matters involving compensatory payments, it is not uncommon for the tax authorities to examine the transaction through a wider interpretational lens. From a departmental standpoint, an argument may occasionally be advanced that the occupants, by vacating the premises and thereby facilitating uninterrupted execution of the project, have effectively tolerated an act or agreed to a situation in return for monetary payment . Based on this line of reasoning, an attempt could be made to characterise the payment as consideration for a deemed supply of service.
At first blush, such an argument may appear attractive, particularly given the expansive wording of the GST law. However, a closer and more disciplined application of statutory principles tends to weaken this proposition considerably.
For a payment to be taxed as consideration for "tolerating an act," there must exist a clear and conscious agreement - either express or implied - under which one party agrees, for a price, to endure or permit something that it is otherwise legally entitled to resist. The essence of such taxable tolerance lies in the presence of a pre-existing contractual understanding coupled with commercial reciprocity.
In the present factual setting, these critical elements appear to be missing. The occupants did not enter into any negotiated arrangement to permit the construction activity to proceed. Nor is there any material to indicate that the payment was structured as a fee for tolerating inconvenience. The temporary vacation of the premises was undertaken for safety considerations and was fundamentally precautionary in character. The compensation was determined unilaterally as a measure of equitable relief rather than as consideration flowing from a bargained exchange.
It is also relevant to bear in mind that GST is a tax on supply, not on every monetary outflow. Where the dominant intention of the payment is compensatory, and the element of commercial quid pro quo is absent, courts and tribunals have generally been reluctant to stretch the concept of supply merely on the basis of incidental benefit flowing to the payer.
Viewed in this analytical light, while a theoretical departmental argument may be conceivable, its sustainability on strict legal scrutiny appears limited. The substance of the transaction continues to retain the character of compensatory relief rather than consideration for any taxable supply.
Why Schedule II Cannot Be Invoked in the Present Case
In similar fact situations, it is sometimes argued that Section 7(1A) read with Schedule II - particularly Paragraph 2 dealing with leases, tenancies, or licences relating to land or buildings - may bring the transaction within the GST net. At a superficial level, such an argument may appear attractive. However, a closer examination of the statutory scheme reveals a fundamental flaw in this line of reasoning.
Section 7(1A) is essentially classificatory in nature. Its function is limited to determining whether an activity, which is already established as a "supply" under Section 7(1), is to be treated as a supply of goods or a supply of services. In other words, Section 7(1A) operates at a secondary stage of analysis. It does not, and cannot, independently create a taxable supply.
Schedule II must therefore be read as a tool of classification and not as a charging mechanism. Unless the primary conditions of Section 7(1) are first satisfied, the question of invoking Schedule II simply does not arise. This sequencing is critical to a correct understanding of the GST framework.
In the present factual matrix, the foundational requirements of Section 7(1)(a) have already been found to be absent. There is no identifiable supply by the occupants, no qualifying consideration in the statutory sense, and no activity undertaken in the course or furtherance of business. Once the transaction fails at this threshold stage, the analysis cannot be artificially revived by resorting to Schedule II.
It is equally important to note that the facts do not indicate the existence of any lease, licence, tenancy, or grant of right to use property in favour of Shreyans Infrastructure Projects Ltd. The temporary vacation of premises was purely a safety-driven measure and not a commercial arrangement involving property rights.
Accordingly, viewed both from the standpoint of statutory sequencing and factual substance, Section 7(1A) read with Paragraph 2 of Schedule II has no application to the present case.
The Legal Position That Clearly Emerges
When the statutory provisions and the relevant judicial guidance are read together in a cumulative and harmonious manner, the legal position that emerges is both clear and reasonably well-settled. The payment made by Shreyans Infrastructure Projects Ltd. to the affected occupants bears the unmistakable character of a compensatory and ex gratia disbursement rather than that of a commercial payment.
On a careful appreciation of the factual and legal matrix, it becomes evident that the essential ingredients required to constitute a taxable supply are not satisfied. The occupants have not provided any goods or services to the Company. The payment, in turn, does not qualify as "consideration" within the meaning of Section 2(31) of the CGST Act, 2017, as it lacks the necessary element of quid pro quo. Further, the temporary vacation of the premises cannot be regarded as an activity undertaken in the course or furtherance of business from the standpoint of the occupants.Once these foundational elements fail on a combined reading, the superstructure of GST liability ordinarily does not sustain. The transaction, viewed in substance and in law, retains the character of non-taxable compensatory relief rather than that of a taxable supply under the GST framework.This interpretative position also finds support from CBIC Circular No. 178/10/2022-GST dated 03.08.2022.
Documentation - The Real Shield in GST Matters
Although the legal position in cases of this nature appears to lean reasonably in favour of non-taxability, practical experience suggests that GST disputes often arise not because the law is unclear, but because the supporting documentation fails to adequately reflect the true character of the transaction. In many situations, avoidable litigation is triggered by imprecise drafting, inconsistent terminology, or incomplete contemporaneous records.
It is therefore advisable for infrastructure companies and affected stakeholders to exercise particular care in maintaining clear and consistent documentation. The underlying records, correspondence, and internal approvals should unambiguously demonstrate that the payment is compensatory in nature and is being made as an ex-gratia measure to mitigate hardship arising from safety-driven displacement.
Special caution should be exercised to avoid the use of expressions that may inadvertently suggest the existence of rent, licence fee, or consideration for tolerating an act. Even stray or loosely drafted language in agreements or communications can sometimes invite unwarranted interpretational challenges from the tax authorities.
Equally important is ensuring the factual narrative remains consistent across all documents - including committee recommendations, approval notes, payment records, and stakeholder communications. Where the documentation clearly establishes the absence of any commercial obligation and highlights the purely compensatory character of the payment, the GST position generally becomes far more defensible.
In tax jurisprudence, substance undoubtedly prevails over nomenclature; however, in practical tax administration, well-structured documentation often becomes the first and most effective line of defence. The present discussion serves as a timely reminder that sound legal analysis and careful record-keeping must always move hand in hand.
By: CA Raj Jaggi & Adv Kirti Jaggi
CAclubindia
