2018 (6) TMI 1127 – AUTHORITY ON ADVANCE RULINGS, KARNATAKA – 2018 (13) G. S. T. L. 228 (A. A. R. – GST), [2018] 2 GSTL (AAR) 100 (AAR) – Levy of GST – Composite supply – natural bundle of services – Sub-contract – Whether supply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of solar power plant wherein both goods and services are supplied can be construed to be a Composite Supply in terms of Section 2(30) of CGST Act, 2017? – If Yes, Whether the Principal Supply in such case can be said to be ‘Solar Power Generating System’ which is taxable at 5% GST? – Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors?
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Whether supply of turnkey EPC Contract for construction of solar power plant wherein both goods and services are supplied can be construed to be a Composite Supply in terms of Section 2(30) of CGST Act, 2017? – Held that:- The different goods and /or servic
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nent of PV Modules is procured by the owner himself. Therefore the same cannot be construed as a principal supply by the applicant. Therefore this question does not remain relevant.
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Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors? – Held that:- The sub-contractor is an individual supplier and the rate of GST applicable depends on the type of supply and no concessional rate of GST is provided to sub-contractor on the basis of main contractor. Hence the supply made by sub-contractor need to be viewed as an individual supply and thereby the appropriate rate of GST has to be applied.
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Ruling:- The major component (PV Module) said to have been constituting 70% of the whole project can not be construed to be supplied by the applicant consequent upon High Sea Sale of the said product and hence it cannot be construed to be a principal supply of the project and thereby cannot be a composite suppl
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e solar photovoltaic plants for supply of power generated. The contracts are for supply of goods as well as services. The applicant has sought advance ruling in respect of the following questions: a) Whether supply of turnkey Engineering, Procurement & Construction ( EPC ) Contract for construction of solar power plant wherein both goods and services are supplied can be construed to be a Composite Supply in terms of Section 2(30) of CGST Act, 2017. b) If Yes, Whether the Principal Supply in such case can be said to be Solar Power Generating System which is taxable at 5% GST. c) Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors. 4. The applicant furnishes, in exhibit II to the application, some facts relevant to the stated activity: a. The applicant is an EPC contractor & enters into contract with various developers who desire to set up and operate solar photovoltaic plants for supply of power
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tting up of the solar power plant as well as transmission lines for transmission of the electricity generated up to the storage or the GRID. e. There may be a single lump sum price for the entire contract for supply of both goods and services and payment terms may be defined depending on various milestones. The applicant also provided a diagrammatic illustration of the solar power system. 4. The applicant, in Exhibit III to the application, has furnished their understanding of rate of tax / exigibility in respect of the impugned transaction, on the basis of the following grounds: 4.1. Legal provisions and applicability 4.1 . 1 Rate of solar power generating system Under GST regime, various rates have been prescribed for goods and services. Per, Notification No. 1/2017 – Integrated tax (Rate) dated 28 Jun 2017, solar power generating systems and parts for their manufacture are taxable at 5%. The relevant entry reads as follows: Chapter Heading Description 84 or 85 or 94 Following renewa
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o a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply'. Section 2(90) defines principal supply as -principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary'. Further, mixed supply has been defined under the Act as mixed supply means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply . Hence, for mixed supply there should be a single price and entire contract gets taxed at the supply with highest rate of tax. 4.1.3 Concept of works contract Works contract has been defined under
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contract (including_ services, portion) should be taxable at 5%. 4.2. Ambit of composite supply 4.2.1. Wide ambit of term 'Composite Supply' Composite Supply has been defined in Section 2(30) of the Central Goods and Services Tax Act, 2017 as 'composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;' Further, Principal Supply has been defined in Section 2(90) of the CGST Act as 'principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary' Thus, principal supply refers to the supply which is the predominant element in a composite supply. Illustration as provided in GST la
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turally bundled c) The taxable supplies should be supplied in conjunction with each other d) One taxable supply should be a principal supply In such case, the supply which is the principal supply is treated as the main supply and the entire transaction is taxed as per the principal supply. In the present case, the Applicant would like to submit that the main intent of the contract is provision of the solar power generation system which consists of various components such as modules, structures, inverter transformers, cables, SCADA, transmission lines, etc. Services like civil construction are merely incidental to provision of such goods and form an ancillary part of the contract. It is submitted that service portion of the contract is only -10 to 15% and balance is supply of goods. This also substantiates the fact that provision of services is incidental to supply of goods and hence, the supply of goods should form the principal supply and the entire contract should be taxed as supply
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enerating system'. 4.2.2. Wide ambit of term 'solar power generation system' The term 'solar power generating system' has not been defined under GST. Solar power generating system generally are the systems which absorb sunlight and convert it into electricity which can be put to further use. Solar power system has been defined under Solar Power – Grid connected Ground Mounted and solar Rooftop and metering Regulation 2014 issued by State of Goa. Solar power system as per the regulation means 'a grid-connected solar generating station including the evacuation system up to the Grid inter-connection point'. Typically the term system has a wide ambit. As per the Oxford Dictionary, the definition of the term 'system is -a complex whole, a set of things working together as a mechanism or interconnecting network . Similarly, the system is defined in Chambers 20th Century Dictionary as anything formed of parts placed together or adjusted into a regular and conne
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he whole system is a Solar Power Generating System and is entitled for the benefit of notification. Therefore, the denial of benefit of notification by the adjudicating authority is not sustainable. The impugned order is set aside and the appeals are allowed'. Further, in the case of Bangalore Tribunal in the case of B.H.E.L. vs. Commissioner of Central Excise, Hyderabad it was held that In the present case, the appellants have claimed exemption in respect of inverter charger card as solar power generating system. The appellants actually manufactured SPV lantern. The above lantern required electricity for its working. It is possible to convert solar energy to electricity with the help of inverter charger manufactured by the appellants. The Dy. General Manager has certified that the inverter merger constitutes solar power generating system as it performs the function of generating the required high frequency AC power from Sunlight with, the help of SPV module and supplying it to the
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Section 66F (3) of the Finance Act, 1994 (the Finance Act') two rules have been prescribed for determining the taxability of such services The rules prescribed are explained as under: 1. If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character' 2. If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax. The concept of naturally bundled services was explained in the Education Guide issued by the CBEC in the year 2012 (the Education Guide'). The relevant extract of the Education Guide is reproduced as under for case of reference: Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of an
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ry course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below – * The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business. * Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines * The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the oth
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be drawn: * In case more than two supplies are supplied together wherein one of the supply is principal supply would qualify as composite supply. * Further, goods supplied under the composite supply are supplied in conjunction with each other. Also, such composite supply is supplied in the ordinary course of business. * The composite supply would qualify as supply of the principal supply. Taxes would be applicable as on such principal supply. Drawing reference to the above, it is submitted that the customer perceives the entire contract is for supply of solar power generating system as the intent of both the parties is supply of the goods/ system which would help in generation of electricity. Hence, the entire contract (both goods and services) and bundled and linked wherein the main intent is provision of the goods which constitute solar power generating system. 4.2.4. Global Jurisprudence – Meaning of Composite Supply The concept of 'composite supply' is a global concept and
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rately there can be little doubt that the sale of the completed vehicle is a single supply. Like a motor vehicle, spectacles are customarily bought as a completed article and in such circumstances are treated as such by the purchaser. The cost that either the frame or the lenses may be purchased separately is not to the point. Similarly the fact that one component, the lenses, is GST-free or that one component is subject to a discount does not alter the characterisation. • In the case of Saga Holidays, Stone J focused on the 'social and economic reality' of the supply and found that there was a single supply of accommodation and the adjuncts to that supply (including the use of the fitrniture and facilities within each room, cleaning and linen services, access to common areas and facilities such as pools and gymnasiums and various other hotel services such as porterage and concierge) were incidental and ancillary to the accommodation part of the supply.' Per the above,
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rded as ancillary to a principal service if it does not constitute for customers an aim in itself but a means of better enjoying the principal service supplied'. Per the above principal, in the present case also, what the customer wishes or intends to obtain is the main supply of solar power generating system and services are only a means to enjoy the same and hence, services are incidental to the main supply of goods. 4.2.4.3. United Kingdom Under the UK VAT laws, a multiple supply (also known as a combined or composite supply) involves the supply of a number of goods or services. The supplies may or may not be liable to the same VAT rate. If a supply is seen as insignificant or incidental to the main supply, then for the purposes of VAT it is usually ignored – the liability is fixed by the VAT rate applicable to the main supply (or supplies). In the case of Tumble Tots (UK) Ltd v R & C Commrs [2007] BVC 179. Members of a playgroup received a T-shirt (children's clothing i
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osite supply. Further, in terms of Section 2(90) of CGST Act, principal supply means the supply of goods or services which constitutes predominant element of a composite supply. Further, as per Section 8, in case of composite supply, the taxes applicable on principal supply would be applicable on the composite supply. In the present case, the intention of both the parties is to supply the whole of solar power generating system in totality which consists of various goods and services are incidental to provision of such goods. What the customer wants is a functional solar power system and services such as erection, commissioning etc are only a means to provide the main supply of goods. 4.4. Contract does not constitute works contract It is submitted additionally that works contract is also defined as a composite contract and includes a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovat
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fit would also be available to sub-contractor 4.5.1 In certain cases, the turnkey contractor engages various sub-contractors (manufacturers/supplies/ sub-contractors) who further supply the goods to such contractor or engage in provisioning of certain portion of the turnkey contract. 4.5.2 Further, there may be cases wherein the Developer divides the EPC contract between two separate EPC contracts of construction of solar power generation system. 4.5.3 Notification no. 1/2017-Integrated Tax (Rate), which provides concessional rate on solar Power generating system does not specify the persons who would be eligible for concessional rate of 5% i.e. developer, EPC contractor or manufacturer/ supplier/ sun-contractor. 4.5.4 Since the concessional rate of 5% is provided to renewable energy products and parts thereof, the same should be applicable to all suppliers providing such products as long as it can be established (through certification or otherwise) that these are to be used in solar p
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ncipal supply. Other services, erection, testing and commissioning of solar power plants are ancillary to the supply of solar power generating system and hence, entire contract (including all goods as well as services) should qualify as solar power generating system taxable at 5%. * Concessional rate of 5% for supply of solar power generating system or its parts should also be available to sub-contractors. Further to above submissions, we most respectfully pray that: 1. Allow us to reiterate all the submissions without prejudice to one another; 2. Grant a personal hearing put forth our contentions and explain our submissions before passing any order in this regard; 3. Allow us to amend, alter and add to the present reply; 4. Allow us to produce additional documents and other material during the time of Personal Hearing; and 5. In that behalf pass such other orders and directions as may be deemed proper and necessary. PERSONAL HEARING: / PROCEEDINGS HELD ON 09.02.2018. 5. The Applicant
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ing the applicant made the following additional written submissions. 6.1 The Applicant has put forth the argument that the proposed transaction/ Contract is one for supply of 'Solar Power Generating System' as a whole and hence the rate of GST should be 5%. In furtherance to the same the applicant puts forth as follows: (a) The intent of the parties is always for supply of Solar Power Generating system as a whole. (b) The applicant has also submitted a draft contract and draws attention to Clause B of the draft contract which provides that B. Owner has appointed the Contractor for supply of the Solar Power Plant which includes engineering, design, procurement, supply, development, testing and Commissioning of the Plant as per scope defined in relevant schedule of this Contract, as per Applicable Law and Technical Specifications (c) The Applicant has further drawn reference to Schedule I of the agreement which defines the scope of work to be executed by the Contractor i.e. the A
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tract does not constitute works contract. The following submissions have been made in this regard. (a) Works contract is defined as a composite contract and includes a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. (b) Therefore, in order to determine whether the supply made by the Applicant is of works contract, it is imperative to understand (i) the essence of the contract and the intention of the parties involved in the contract to determine whether the parties intend to undertake works contract or supply of solar power plant and (ii) whether the activities are undertaken on an immovable property for the contract to qualify as works contract. Essence of the contract and intention of the parties i
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no intention to make such plant permanent, the foundation would not change the nature of the plant and make it an immovable property. (c) The applicant has relied upon the following judgments in furtherance of their arguments. (i) Sirpur Paper Mills Ltd., vs. Collector of Central Excise, Hyderabad (1998 1 SCC 400) (ii) Commissioner of Central Excise v. Solid and Correct Engg Works & Ors. (2010 (175) ECR 8 (SC)), (iii) Sri Velayuthaswamy Spinning Mills v. The Inspector General of Registration and the Sub Registrar (2013 (2) CTC 551), (iv) Perumal Naicker v. T. Ramaswami Kone and Anr. (AIR 1969 Mad 346) In view of the aforesaid judgments, the applicant submits that in the instant case, the solar power plants supplied by the Applicant is commissioned and installed only for the purpose of better functioning of the plant and are capable of being removed and transferred from one place to another. Hence, the fact that the plant is firmly but not permanently attached to the land means that
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99 – CX4 dated 15 January, 2002 ('the Circular), after realizing the anomaly in case of plant and machinery assembled at site, issued the Circular clarifying the following: (i) If items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then the items would not be considered asmoveable and will, therefore, not be excisable goods. (vi) If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable and thus excisable. The mere fact that the goods, though being capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be dutiable merely because they are transported in dismantled condition….. Relying on
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T Act defines composite supply to mean 'a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply'. Section 2(90) defines principal supply as principal supply means 'the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary'. Further, in terms of Section 8 of the CGST Act, it has been clarified that a composite supply comprising two or more supplies, one of which is a principal supply will be treated as supply of such principal supply. The relevant para of Section 8 of the CGST Act provides as follows: 8. Tax liability on composite and mixed supplies. – The tax liability on composite or a mixed supply, shall be determined
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ers and switches. This is due to the fact that PV module is a packaged, connect assembly of typically 6xio photovoltaic solar cells, which constitute the photovoltaic array of a photovoltaic system that generates and supplies solar electricity. In other words PV modules are nothing but an assembly of solar cells that helps in converting solar power into electricity. Hence, PV module is the most important component of solar power generating system and therefore, would squarely qualify as the 'principal supply'as per the provisions of the GST law. Accordingly, it is submitted that the GST rate of PV modules which is 5% should be applicable on the whole of the contract. Reference can be made to the CERC Order dated 23 March 2016 involving determination of Benchmark Capital Cost Norm for Solar PV Power Project for FY 16-17. In the said case also, the CERC, of the total cost of the project including land cost, PV Modules cost is considered as 62%. A copy of the said order has also b
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rt of the contract. The same shall not in any manner exceed the lumpsum price agreed between the Parties and also does not in any manner dilute the responsibility of the Contractor… Further, there is a definition in the draft agreement, Major Equipment [1.1.67] which clearly identifies PV Modules as the Major Equipment Major Equipment(s) means PV solar modules which is an assembly of solar cells that helps in converting solar power into electricity and all other Equipments specified in Schedule 3 (Contract Price and Payment Milestones) for facilitation of Payment under this Contract; Reference in this regard is made to the judgment of Delhi Tribunal in the case of Rajasthan Electronics & Instruments Ltd. vs. Commr. Of C. Ex., Jaipur wherein a Solar Photovoltaic Module was held to be a Solar Power Generating System. Relevant extract of the judgement is reproduced below for ease of reference: 7. The adjudicating authority admitted the fact that Solar Photovoltaic Module is a Solar
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r divides the contract between two separate contracts of construction of solar power generation system. Notification no. 1/2017-Integrated Tax (Rate), which provides concessional rate on solar power generating system does not specify the persons who would be eligible for concessional rate of 5% i.e. developer, contractor or manufacturer/ supplier/ sub-contractor. Since the concessional rate of 5% is provided to renewable energy products and parts thereof the same should be applicable to all suppliers providing such products as long as it can be established (through certification or otherwise) that these are to be used in solar power generation system. This would also be in line with practice under erstwhile excise law wherein benefit was extended to sub-contractors also through MNRE certification. 7. The applicant has concluded their presentation as follows: I. that the Applicant is engaged in the business of supply of 'solar power generating system' and the same should be liab
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ly of turnkey Engineering, Procurement & Construction ( EPC ) Contract for construction of solar power plant wherein both goods and services are supplied can be construed to be a Composite Supply in terms of Section 2(30) of CGST Act, 2017. 2. If Yes, Whether the Principal Supply in such case can be said to be Solar Power Generating System which is taxable at 5% GST. 3. Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors. 9. Question No. 1 is ―Whether supply of turnkey Engineering, Procurement & Construction ( EPC ) Contract for construction of solar power plant wherein both goods and services are supplied can be construed to be a Composite Supply in terms of Section 2(30) of CGST Act, 2017?‖. 9.1 Composite Supply is defined under Section 2(30) of the CGST Act, 2017 as a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or
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ain intent is provision of the goods which constitute solar power generating system. 9.3 We thus proceed as follows to determine whether the intended supply constitutes a Composite Supply. 9.3.1 The scope of contract, as mentioned at clause 3 of the draft contract provides that the contractor (Applicant) shall supply all the equipment as per the terms of the said contract and in accordance with the execution schedule, to the plant site and complete development, installation and commissioning of the works in accordance with the technical specifications, applicable law, applicable permits and the terms of the contact, in addition to the detailed drawings / documents finalized during engineering. This clause indicates that the Applicant would supply all the required goods and also provide services related to installation and commissioning of the project. 9.3.2 The Applicant submits that the major component of Solar Power System is Solar Photovoltaic module (PV module), which comprises aro
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ransferred to the owner by way of High Sea Sale. Therefore the legal title of the goods shifts to the owner and also the Bill of Entry to clear goods from Customs Area is filed by the owner and not the Applicant. This indicates that the owner has procured the goods and made them available to the Applicant. This is in contrast to what the Applicant has claimed. Once the owner files the Bill of Entry at the time of import they become the titleholders in respect of those goods. After clearance of the goods once they are made available to the Applicant for further action of installation etc, then the Applicant cannot claim to have supplied the goods. 2. As per clause 1.1.45 of the contract ―Free Issue Equipment‖ is defined as Photovoltaic Modules to be supplied by the owner to the contractor as free issue equipment at the plant site for the installation and commissioning of the solar power plant. Hence it is clearly evident from this clause that the major equipment i.e PV modul
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ontract as discussed in the preceding para indicates that the major portion of contract, i.e. the PV module constituting 60% – 70% of the total contract value, is supplied by the owner and not the contractor. Therefore the contractor cannot claim that they will supply the PV Module & thereby there is no principle supply involved in the instant case. 9.3.6 This further raises the point whether the supply envisaged in the draft contract qualifies to be a composite supply. The different goods and /or services supplied should be naturally bundled. However here the draft contract opens up the question whether such supplies are indeed bundled or not. The draft contract clearly demonstrates that in such projects the owner can procure the major equipments involved on their own also and the contractor may carry out the supply and services portion in respect of the remaining portion. Thus the concept of natural bundling does not apply to the present envisaged supply. In other words the envis
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e of supply and no concessional rate of GST is provided to sub-contractor on the basis of main contractor. Hence the supply made by sub-contractor need to be viewed as an individual supply and thereby the appropriate rate of GST has to be applied. 10. In view of the foregoing, we rule as follows RULING 1. Question No. 1-The major component (PV Module) said to have been constituting 70% of the whole project can not be construed to be supplied by the applicant consequent upon High Sea Sale of the said product and hence it cannot be construed to be a principal supply of the project and thereby cannot be a composite supply. 2. Question No. 2- The question does not not remain relevant on account of answer to question number 1. 3. Question No. 3- The supply made by sub-contractor need to be viewed as an individual supply and thereby the appropriate rate of GST has to be applied depending on the specific nature of supply. – Case laws – Decisions – Judgements – Orders – Tax Management India
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