In Re: M/s. Giriraj Renewables Private Ltd.
GST
2018 (9) TMI 1341 – APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – 2018 (17) G. S. T. L. 156 (App. A. A. R. – GST)
APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – AAAR
Dated:- 5-9-2018
KAR/AAAR/02/2018-19
GST
SHRI. A.K. JYOTISHI, AND SHRI. M.S. SRIKAR, MEMBER
Represented by: Sri. Mallaha 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
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s, structures, inverter transformer etc.) as well as complete design, engineering and transportation, unloading, storage and site handling, installation and commissioning of all equipments and material, complete project management as well as civil works/ construction related services for setting up of a functional Solar Power Plant.
3. The contract entered into by the Appellant 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 & Constr
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ion lines as well as other ancillary parts/goods and services should be considered ag supply of SPGS; that if the contract qualifies as a 'composite supply' then the Same should be taxable at 5% as principal supply is the supply of Solar Power Generating Systems”.
6. Further, the appellant also submitted that the major component of Solar Power System is Solar Photovoltaic module (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 th
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ed that the supplies made by them are to be used in SPGS.
8. Subsequently, the Karnataka Authority for Advance Ruling, vide Advance Ruling No KAR ADRG 01/2018 dated 21-03-2018 = 2018 (6) TMI 1127 – AUTHORITY ON ADVANCE RULINGS, KARNATAKA (hereinafter referred to as 'Impugned Order') made the following observations on a detailed examination of the draft contract:
As per clause D Of the 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
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e Authority held that since the main equipment i.e PV module is procured by the owner himself, it cannot be construed as a principal supply by the contractor (applicant)and hence the question is irrelevant.
On the question Whether the benefit of concessional rate of 5% on the Solar Power Generation System and parts thereof would also be available to the sub-contractors, the Authority held that 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
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e main intent of the contract is provision of Solar Power Generating System as a whole which consists of various components such as PV module, structures, inverter transformers, cables, SCADA, transmission lines, etc. The contract also included services like civil installation and commissioning as well as construction which are incidental to provision of such goods and form an ancillary part of the contract, 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
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tract should be taxable at 5% GST.
iii. The Appellant submitted that in the impugned order, the AAR has held that merely because the PV module is supplied on HSS basis, the contract cannot qualify as composite supply of SPGS. They submitted that procurement of goods on High Sea Sales('HSS') basis does not change the nature of the contract. The intention of procuring the PV modules on HSS basis is for commercial 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-contracto
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Was called for a personal hearing on 28.0812018 and was represented by Shri Mallaha Rao, Advocate. During the hearing the Advocate highlighted that the main intention of the parties to the contract was the Supply and setting up Of the Solar Power Generating Plant. He argued that the issue Whether the contract was to be considered as a 'composite supply' was misunderstood by the AAR merely on the grounds that the 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 t
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with the commitment for power supply under the agreement, the project owner enters into contract with the contractor by entering into EPC contract with the Appellant.
c. Thereupon, the Appellant places purchase orders on various vendors for supply of goods in order to execute the EPC contract entered into with the project owner.
d. Moreover, the Appellant also places purchase order with Foreign Vendors for supply 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 transac
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d services in that regard in Order to complete the project. Further they submitted that even though certain goods are being supplied On High Sea Sale basis, the Same does not change the nature of the contract and obligation of the contractor to provide such goods to the owner; that the said goods transferred on HSS basis still form part of the contract and the risk and liabilities remain with the contractor and are passed 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,
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n application of the 'equivalence principle' also affirms that the intent of the Government was never to tax the entirety of the goods and services in relation to setting up an SPGS at a significantly higher rate of 18%. Furthers the clear intention of the Legislature is that the 'system' must be taxed at an aggregated level in whatever form it is, as a 'system', where all the value elements which comprise the 'system' must be 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 c
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r hearing.
18. The Appellant has also sought for condonation of delay in filing this appeal on the grounds that the Appellate Authority was not constituted at the time when the date for filing this appeal was due and hence the delay was beyond their control. We note that the appeal in this case ought to have been filed by the 20th April 2018. However, the Appellate Authority for Advance Ruling was constituted under the KGST Act 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 an
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re transaction.
21. The definition of 'composite supply' as per Section of the CGST Act reads as under:
“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.
Whereas, Section 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 'considera
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than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
(74) “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;
Illustration: A 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 t
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with its associated accessories, conductors, electrical cables, instruments, apparatus and other items /equipment required to be supplied by the Contractor for completing and integrating the SPP, as per the Technical Specification, excluding Free Issue Equipment(Emphasis supplied).
In terms of Para 1.1.45 “Free Issue Equipment” means Photovoltaic Modules to be supplied by the owner to the contractor, as a free issue equipment at the Plant Site for the installation and 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 und
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parts and components and services.
24. The first part of the supply is done by purchasing from a foreign supplier the PV module and transferring the title of the said PV module on High Sea Sales basis to the owner of the project. The Project owner clears the PV module through the Customs and makes available the same to the contractor (Appellant) without consideration to the project site. The Appellant have argued that the above modus is merely undertaken for commercial 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 effec
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ppellant for Setting up the Solar Power plant. This supply without consideration is not within the fold of the definition of 'supply' as stated in Section 7 of the CGST Act. Other than the exceptions spelt out in Schedule I, any supply without a consideration is not a 'supply' and hence does not attract GST. What crystallizes from the above is that, the Supply of the PV module which is the major component of the Contract is not coupled at all with the supply of the other parts of the Solar Power 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
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he contract is one for work and labour- The intention in the two different transactions is different- on the matter of PV module sold on high seas, it is sale; and thereafter Other transactions in goods and services are to follow.
27. Therefore, in view of the above, we find that the supply of PV module is a distinct transaction by itself and Cannot be said to be naturally bundled with the supply of the remaining parts required for setting up the Solar Power Plant. The contract itself 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. 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
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ble to be termed as a composite supply will be determined on the basis of the dominant nature of the supply. In other words, if the dominant nature of the remaining portion of the contract in question which is executed by the Appellant is principally a supply of services of design, erection, installation and commissioning, then the tax rate will the rate as applicable to the services if they form the principal supply of the remaining portion of the contract. It has never been contended before us that for 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
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components & parts of the Solar Power Plant and the supply of the services of Erection, Installation and Commissioning of the Solar Power Plant.
b) 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 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
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