2018 (9) TMI 1341 – APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – 2018 (17) G. S. T. L. 156 (App. A. A. R. – GST) – Supply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of a solar power plant – Composite supply – natural bundling of services – rate of GST – Benefit of Concessional rate of duty – Nature of supplies made by sub-contractors.
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Whether supply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of a 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 the CGST Act, 2017?
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If yes, whether the principal supply in such case can be said to be of “Solar Power Generating System”, which is taxable at 5% GST?
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Whether, benefit or concessional rate of 5% on Solar Power Generation System and parts thereof would also be available to sub-contractors?
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Held that:- In the instant case there is no dispute that the c
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self makes it abundantly clear that the term “equipments” does not cover “free issue equipment”. Therefore, the Contract itself recognises the supply by the owner as a distinct transaction which is separate from the supply of the other equipments and components by the contractor – the concept of natural bundling does not apply to the instant envisaged supply of the PV module in terms of the draft contract in question.
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Once the contract in question is that of a multistage supply as already discussed, having been already vivisected into the supply of the PV module by the owner as free issue to the Appellant, what remains to be executed by the Appellant is undertaking the supply of the remaining equipments and components and parts of the Solar Power Plant and supplying the services of design, erection, installation and commissioning of the Solar Power Plant – the supply of this remaining portion of the contract in question (involving the supply of the balance components and parts as
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be 5% in terms of Sl. No. 234 of Notification No. 01/2017 Integrated Tax (Rate) dated 28.06.2017. However, if the supply by the sub-contractor to the Appellant is a composite supply, then the rate applicable to the dominant nature of the supply will prevail.
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Ruling:- The supply of the PV module which is the major component of the Solar Power Plant is not naturally bundled with the supply of the remaining components & parts of the Solar Power Plant and the supply of the services of Erection, Installation and Commissioning of the Solar Power Plant.
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The supply of PV module is a distinct transaction from the supplies in contract in question as it is the owner whose responsibility it is to procure and supply the PV module. This PV module is to be supplied as free issue material over and above the plant being supplied by the contractor. The owner is responsible for transportation of the PV module from the point of origin till plant site and he bears the other risks and rewards
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Rao, Advocate PROCEEDINGS (Under Section 101 of the CGST Act, 2017 and the KGST Act, 2017) At the outset, we would like to make it clear that the provisions of both the Central Goods and Services Tax Act. 2017 and the Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act, 2017 and KGST Act, 2017) are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the corresponding similar provisions under the KGST Act. The present appeal has been filed under Section 100 of the CGST Act, 2017 and the KGST Act, 2017 by M/s. Giriraj Renewables Private Ltd (hereinafter referred to as Appellant ) against the Advance Ruling No KAR ADRG 01/2018 dated 21-03-2018 = 2018 (6) TMI 1127 – AUTHORITY ON ADVANCE RULINGS, KARNATAKA pronounced by the Karnataka Authority for Advance Ruling. Brief facts of the case: 1. The Appellant is registered under GST with GSTI
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lant includes end to end activities i.e, supply of various goods and services intended for setting up, operation and maintenance Of a Solar Power Plant. 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 agreed milestones. 4. The appellant filed an application on 24.11.2017 before the Karnataka Authority for Advance Ruling under Section 97 of CGST/KGST read with Rule 104 of CGST/ KGST Rules, 2017 in form GST ARA-01, seeking a ruling on the following questions: a. Whether supply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of a 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 the CGST Act, 2017 b. If yes, whether the principal supply in such case can be said to be of Solar Power Generating System , which is taxable at 5% GST, c. Whether, benefit or concessional rate of
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PV module) which comprises around 60-70% of the entire Solar Power Plant and the rest of the components are merely parts or sub-parts which are required for panel housing and setting up of the module such as controllers and switches; that the service portion of the contract is only 10-15% and balance is supply of goods -Which 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 of goods itself. They also submitted that they would be supplying the PV module which is the major equipment and installation of the same. 7. They also drew reference to the erstwhile Service Tax regime wherein the concept of naturally bundled services is identical to the concept of composite supply under GST. They referred to the Education Guide issued by the CBEC in 2012 wherein the Concept of naturally bundled service was explained and submitted that in their case, th
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contract, the equipment (PV module) is imported and directly transferred to the owner by way of High Sea Sale. The owner files the Bill of Entry with the Customs for clearance of the PV module. This indicates that the owner has procured the goods and made them available to the contractor. Further, 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 the major component (PV Module) said to be constituting 70% of the whole project cannot 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. On the issue whether the terms of supply as envisaged in the draft contract qualifies it to be a composite Supply, the Authority held that for a supply to be a composite supply different goo
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t the made by sub-contractor is an individual supply and thereby the appropriate rate of GST has to be applied depending on the specific nature of supply; 9. Being aggrieved by the above mentioned Ruling of the Authority (hereinafter referred to as Impugned Order ), an appeal was preferred before the Appellate Authority for Advance Ruling on 08-06-2018 on the following grounds: i. The proposed transaction is for composite supply of solar power generating system as a whole and hence the rate of GST should be at GST. The appellant submits that the term Solar power generating system has not been defined under GST. The term solar power system has been defined under Solar Power -Grid Connected Ground Mounted and Solar Rooftop and Metering Regulations – 2014 issued by the State of Goa to mean a grid connected solar generating station including the evacuation system upto the Grid interconnection point . Under the erstwhile law also solar power generating systems Were not defined. However unde
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ontract, Reference is made to Schedule I of the draft contract which defines the scope of work to be executed by the Appellant. The said Schedule provides that the Appellant would be responsible for Supply of equipment and undertake all necessary activities ancillary to such supplies (such as erection, civil work, etc) to ensure complete supply of Solar power plant. Separate process are specified for different equipment which are supplied under the agreement for commercial convenience such as movement of goods, claiming of payment or availing trade credit, etc. The appellant submitted that the MNRE has issued a clarification vide Circular F.No. 283/11/2017-GRID SOLAR dated 3rd April 2018 wherein it was highlighted that if the supplies under the Contract can be treated as composite supply with supply of solar power generating systems as the principal supply, then such supplies may be eligible for 5% GST rate as a whole. In view of the above; in the instant case, the draft contract shoul
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mercial convenience and in order to avail benefit of concessional customs duty as benefit of concessional rate of customs duty is only available to the owner. However, the risk and liabilities pertaining to all the equipment provided and to the development and design; procurement, supply, development, construction, testing and commissioning of the plant shall be borne by the Appellant till the completion of the plant. Hence it cannot be said that the PV modules are being procured by the Project owner. iv. The appellant submitted that in certain case, they engage various sub-contractors who further supply the goods to the Appellant or engage in provision of certain portions of the contract. Notification No 01/2017 Integrated Tax (Rate) which provides for concessional rate on solar power generating system does not specify the persons who would be eligible for concessional rate of 5% i.e. whether the developer, contractor, manufacturer or subcontractor. Since the concessional rate of 5% i
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main equipment of the contract i.e. PV Module was imported and transferred on High Sea Sales basis to the owner who then supplied the PV module to the Appellant at the site. While admitting to the factual position of transfer of title of the PV module on High Sea Sales to the owner and later supplying it to the, Appellant under the Free Issue clause of the contract, he emphasised that this was done only for commercial reasons; that since the owner alone was eligible for customs duty exemptions, the import was done by the owner. However, the terms of the contract was such that the rights and risks and liabilities rested with the Appellant till the Solar plant was supplied to the Owner in totality. He stressed on the essence of the contract and the intention of the parties involved in the contract to drive home the fact that the Appellant was responsible to supply the entire Solar Power Generating System. He pleaded that the impugned order be set aside and the benefit of 5% GST on the v
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on HSS basis to the project owner against HSS contract which is a sub set Off main EPC Contract entered into as referred to above. e. In pursuance of the purchase orders from the Appellant, foreign vendors supply the goods to the Appellant f. Thereafter, the Appellant sells those goods on HSS basis to the project owner against HSS contract which is a sub set of main EPC contract entered into as above. 12. Accordingly, the Appellant has made payments to the foreign vendors against the purchase orders. The project owner has made payment to the Appellant despite HSS transaction, in terms of and pursuance to payment terms under EPC contract They submitted that despite being the ultimate buyer/owner of the goods under HSS, the goods never came into possession of the project owner, as the goods are cleared, transported and incorporated in solar power generation systems by the Appellant only; that the risk and rewards have not been transferred by the Appellant to the project owner; that the A
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d on to the project owner only after completion of the project, that is supply of SPGS which includes supply of equipment and ancillary service like development, design, procurement, supply construction, testing and commissioning Of the plant etc. They relied on the Andhra Pradesh High Court decision in the case of M/s. Larsen & Toubro Ltd Vs. State of Andhra Pradesh reported in 2015-TIOL-3055-HC-AP-CT = 2015 (12) TMI 470 – ANDHRA PRADESH HIGH COURT, wherein the Hon ble High Court observed that in cases Of turnkey contract; wherein both goods and services are provided, the intention of the parties under the contract needs to be taken into consideration to determine when the ownership of the goods are transferred. The Hon ble High Court also observed that the nature of procurement of goods (even by Way of HSS) does not determine who would be the owner of such goods, and a person can be an importer even without being the owner of the goods. In view of the above they submitted that it
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e taxed at 5%. 15. As regards the question whether the benefit would also be available to the subcontractor, they submitted that Notification no 01 /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, Discussion & Findings: 16. We have gone through the records of the case and taken into consideration the findings of the AAR in the impugned order and the submissions made by the Appellant in their grounds of appeal as well at the time of personal hearing and in the written additional submissions. 17. The Appe
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ct only on 25th April 2018. Hence we condone the delay in filing this appeal. 19. Coming to the matter at hand, we find that certain facts as observed by the AAR have not been disputed by the Appellant viz. The fact that the contract in question is an EPC contract for supply of Solar Power Generating System; that the contract involves both the supply of goods as well as the supply of services; that the major equipment as per-the contract is the Photovoltaic module which forms about 60-70% of the contract; that the said Photovoltaic module is purchased overseas and transferred on High Sea Sale basis to the owner of the project (the other contracting party) who then imports the same by filing the Bill of Entry and availing of applicable Customs duty exemptions; that the Said PV module is later made available to the Appellant without a consideration at the project Site; that the procurement and supply Of the remaining parts and components which are essential to complete the Solar Power pl
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n 8 of the CGST Act states that the tax liability on a composite supply shall be determined in the following manner, namely:- a composite supply comprising two or more supplies, one of which is principal supply, shall be treated as a supply of such principal supply. Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is u composite supply and supply of goods is a principal supply; In addition we also note that Section 2 (31) of the CGST Act 2017 has defined consideration , goods and mixed supply , as follows: (31) 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
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supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately. 22. In the instant case there is no dispute that the contract in question involves a supply of both goods and services. However in order for the supply to be termed as a composite supply , what is required is that the supply of the goods and the services should at least be bundled, more specifically be naturally bundled and supplied in conjugation with each other. The term naturally bundled has not been defined in the GST Act. We note that the concept of composite supply under the GST law is similar to the concept of naturally bundled services that prevailed under the service tax regime, and the same was understood to refer to those transactions involving an element
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commissioning of the SPP. The obligations of the owner in terms of Para 4 of the contract include providing for insurance required for Free Issue Equipment, third party/public liability insurance and insurance required for its representative, engineers and labours until completion of its obligations under this contract- In terms of Para 9 of the contract, the owner agrees to provide Free Issue Material as agreed between the parties. The said material would be over and above the Plant being supplied by the Contractor under this contract. The owner shall be responsible for transportation of Free Issue Equipment from the point of origin till the Plant site and in this regard, the owner shall remain solely liable, including in respect of any damage during transit. Furthers in terms of Para 15.3, the Contractor Shall, on arrival of the Free Issue Equipment at the Plant site, shall be entitled to inspect the Free Issue Equipment at the Plant Site and notify the Owner in writing, detailing th
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reasons since it is the project owner who is eligible for custom duty exemptions and therefore. the PV module although has been identified and arranged for purchase by the Appellant, the same has been actually procured and imported by the other contracting party. We find that the reason for this modus, though compelling is not the relevant to the issue at hand. What is relevant is that the Appellant having resorted to such a structuring, has the effect of making the supplies effected in this instance to have been effected in at least three Clear and distinct stage. One is the transfer of ownership of the PV module from the Appellant (the original purchaser) to the Project owner on High Sea Sale basis. Second is the free issue of the PV module by the Owner to the Contractor at the Plant Site. The third part is the supply of the remaining part of the goods and services by the Appellant. 25. The effect of the first transaction under the contract is to transfer the chattel as chattel to th
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wer Plant and the services for setting up the Solar Power Plant. In fact, the supply of the PV module in the situation is separated both in time and intent and is distinct and never coupled with supply of other items/ services within the impugned contract (and Which, it is the responsibility of the owner to procure and make available to the contractor). The transaction of supply of PV module in itself is abstracted from the rest of the elements of the EPC contract. It is clearly c separate instance of sale/ delivery from the rest of the agreement of work or service and the sale of other items, and just because the contractor may have arranged the procurement of it for the owner, does not take away from the distinct and separate nature of the supply. The distinction is observed by the contracting parties too in having separately received the consideration for this element of supply from the rest of the supplies made under the contract. Transfer of property of goods for a price is the li
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undantly clear that the term equipments does not cover free issue equipment . Therefore, the Contract itself recognises the supply by the owner as a distinct transaction which is separate from the supply of the other equipments and components by the contractor. To this extent the AAR was right in the impugned order in holding that the concept of natural bundling does not apply to the instant envisaged supply of the PV module in terms of the draft contract in question. 28. Once the contract in question is that of a multistage supply as already discussed, having been already vivisected into the supply of the PV module by the owner as free issue to the Appellant, what remains to be executed by the Appellant is undertaking the supply of the remaining equipments and components and parts of the Solar Power Plant and supplying the services of design, erection, installation and commissioning of the Solar Power Plant. We are of the opinion that the supply of this remaining portion of the contra
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r the balance part of the supply under the contract in question, the goods element of What we agree to call a composite supply are the predominant or principal component in the transaction. We modify the ruling of the Advance Authority in the-impugned order to the above extent. It is emphasised that the discussions and findings as detailed above are limited to the facts involved in the contract in question. 29. As regards the question whether the benefit of concessional rate of 5% GST on the supply of solar power generating systems and its parts will apply to the sub-contractors, we are of the view that the supplies made by the sub-contractor to the Appellant are independent supplies. If the supply by the sub-contractor to the Appellant is of goods which can be termed as parts of the Solar Power Generating System, then the rate applicable will be 5% in terms of Sl. No. 234 of Notification No. 01/2017 Integrated Tax (Rate) dated 28.06.2017. However, if the supply by the sub-contractor t
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nt of origin till plant site and he bears the other risks and rewards of ownership. The PV module which is procured by the Project owner on High Sea Sale basis and imported by availing Customs duty exemptions and later supplied to the Appellant as a free issue for use in the setting up of the Solar Power Plant. c) The supply of the remaining portion of the contract in question by the Appellant Which involves the supply of the balance components and parts of the Solar Power Plant and the supply of services of Erection, Installation and Commissioning of the Solar Power Plant is viewed as a composite supply as the supply of goods and services are naturally bundled. d) The tax liability on this portion of the contract in question (other than PV module) which is termed as a composite supply will be determined in terms of Section 8 of the CGST Act, 2017 wherein the rate applicable to the dominant nature of the supply will prevail. The Appeal is disposed off in the above manner. – Case laws
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