In Re: Cummins India Limited
GST
2019 (3) TMI 656 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2019 (23) G. S. T. L. 356 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AAR
Dated:- 19-12-2018
GST-ARA- 65/2018-19/B-161
GST
SHRI B.V. BORHADE, AND SHRI B. TIMOTHY, MEMBER
PROCEEDINGS
(under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Cummins India Limited, the applicant, seeking an advance ruling in respect of the following issue.-
“Determination of GST liability by deciding principal supply of the composite supply qua maintenance contracts executed between the customer and the Applicant”.
At the outset, we would like to make it clear that the provisions of both the CG
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oviding goods and services which qualify as 'supply' as per provisions of the Central Goods and Service Tax Act, 2017 (“CGST Act”) and is duly registered thereunder bearing GSTIN 27AAACC7258B1zW,
3. The Applicant is inter alia engaged in the business of manufacturing diesel and natural gas engines and this business can broadly be bifurcated as follows:-
* Engine business – It manufactures engines of 60 HP which is generally used in automobile industry
* Power Systems business – This unit manufactures high horsepower engines of 700 HP to 4500 HP which are used in marine, railways and defense.
* Distribution business – It provides after sales services to its customers which includes supply of spare parts, maintenance services, rebuilding of engines and batteries.
4. The Applicant executes an Annual Maintenance Contract (“AMC”) with end customers to provide maintenance services to their customers which aid in keeping customer's engines in a good working condition. Thes
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nd the value for such parts or consumables are recovered from the Applicant under AMC.
6. These goods, consumables etc. required for undertaking activities referred under AMC are made available to the customers by dealers themselves, except customers. Engaged in mining industry in which case the goods are supplied from the depots of the Company directly.
7. Given the above background and keeping in mind the fact that the transaction involves supply of services and goods, present application is being preferred before the Hon'ble Authority for Advance Ruling to decide the taxability of the underlying transaction.
STATEMENT CONTAINING APPLICANTS INTERPRETATION OF LAW IN RESPECT OF THE QUESTIONS RAISED
Statement containing the applicant's interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s)
1. ISSUE FOR DETERMINATION
Determination of GST liability by deciding principal supply of the composite supply qua maintenance contracts executed
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ct'. In the present facts, the Applicant is engaged in providing repair and maintenance in respect of engines which are movable in nature and hence, it would not be considered as 'works contract'. Therefore, it is necessary to analyze the definition of 'composite supply as given in Section 2(30) of the CGST Act. Relevant extract of the same is reproduced below for ease of reference:-
“(30) “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;”
2.3. On perusal of the above definition, it appears that a composite supply means and includes multiple supplies of goods or services or both which are supplied together in the ordinary course of business. Accordingly, the definition of composite supply provides for tw
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ST Act, the tax structure applicable thereto including determination of assessable value, classification, tax rate etc. needs to be determined with reference to the principal supply comprised thereunder. The term 'principal supply' is defined under Section 2(90) of the CGST Act and is reproduced below:-
“(90) “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 apply is ancillary;”
2.6. On scrutiny of the above referred definition, it is submitted that principal supply basically signifies the supply of goods/services that form a substantial or a predominant element of a composite supply and all other related supplies are ancillary in nature. Accordingly, in order to decide the taxability of the underlying transaction, it is important to determine the 'principal supply of the transaction i.e. dominant intention behind the contract.
2.7. It is su
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lity of the contract. Relevant extract of the judgment is reproduced below for your easy reference:-
“The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in person performing work or rendering service and no property in the thing produced as a whole In case of a contract for sale, the thing produced as a whole had individual existence as the sole property of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto the other party price.”
2.9. The above judgment has laid down the primary test to determine the taxability of the transaction. It states that the contract whose main object is transfer of property in a chattel to the buyer even though some work may be required to be done under the contract, is incidental to the sale. Based on the aforesaid analogy, the Hon'ble Courts in the following judgments have held that the contract is f
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F INDIA The Appellant is engaged in the business of photocopying. It was decided that the contract between the Appellant and the customer is a contract of work or service, not a contract of sale.
2.10. Accordingly, in the present facts, it is submitted that there is no intention of transfer of property in goods to the customer. The engines on which maintenance activity is being carried out by the Applicant belongs to the customer itself. Further, the maintenance contract has been executed by the customer to avail the services of professionals who are expert in the field of maintenance of the engines attached to the machines such as gensets, excavators, dumpers etc. It is submitted that the intention of an annual maintenance agreement is to ensure that systems/machines should function properly. Maintenance of the machines helps to extend the life of the machine, maximize the energy efficiency of the equipment and eliminate unexpected system failure. Such AMC's are generally execute
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quired with the Bank
Failing which the Bank, will decide for location/DG set specific (as the case may be) penalty to be levied @ 10% of AMC amount payable/paid under. Annual Maintenance Contract in respect of assets installed at such location locations, per instance of delayed TAT's for the SLA as agreed in Annexure II attached herewith.
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Part-ll: Obligations of Cummins:-
a. To ensure that uptime of equipment will be to an extent of 92% per annum
b. CAMC scope is revised with inclusion of out of jobs like all minor and major repairs providing rental DG sets during down time, Battery etc will be part of CAMC scope.
C. Requesting services:-
1. Four preventive maintenance visits per annum – Mandatory Quarterly PM visit
2. Maintenance of DG Set will be carried out as per manufacturer's standord practice.
……………… For C and D check only filters and lube oil shall be provided by Cummins.
All other parts and repairs shall be charged at actual.
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* Replacement or supply of major parts of the machine are specifically excluded from the scope of contract.
* Fixed price has been decided for the AMC.
2.13. It is settled position: that intention of the contract is required to be understood in terms of the clauses of the agreement. Considering the factuat position narrated in Para 2.12 above, it is also submitted that the dominant intention of the activity would be considered as service where skill is important rather than supply of goods. The same can be corroborated by the following facts:-
* Mere availability of parts/components, in absence of an engineer competent to use this, neither suffices the customer's requirement nor discharges Applicant from its obligation under AMC;
* Applicant's obligation under AMC had been at numerous times suitable discharged by merely applying intellect, efforts and monitoring, without necessitating any part/ component
2.14. In light of the above, it is submitted that the main object
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determined as per the definition provided under Section 2(15) of the IGST Act which is as under:
“location of the supplier of services means,-
(a) where o supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business for which registration has been obtained a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier”
2.17. In view of the above definition, registered premises from where supply is made is considered as location of the service provider. Accordingly, in the present facts, maintenance services are provided by the Ap
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-Since the supply of maintenance service is for a one and fixed price with or without supply of spare parts/goods and supply of service and goods is made in conjunction with each other in the ordinary course as per maintenance contracts, this maintenance service to the extent of presence of all the necessary ingredients cited in the legal provisions quoted supra, is naturally, bundled with the incidental supply of goods., it is case of composite supply of service,
b) In case the said contract is considered as composite supply, what is the principal supply between goods or services? Ans. – The said contract merits to be considered to be a composite supply of service, and principal supply is service inasmuch as the supply of goods is merely incidental to the maintenance contract in the given facts and circumstances.”
2.20. On a bare perusal, it is submitted that the Ruling referred above relates to identical issue of determination of principal supply involved in a composite supply. I
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issues. Comments on their application are as under:
I. Determination of Principal Supply
The applicant stated that they are engaged in the business of manufacturing diesel and natural gas engines and also engaged in distribution business which provides after sales services to its customers which includes supply of spare parts, maintenance services, rebuilding of engines and batteries. As per their submissions, they execute an Annual Maintenance Contract (AMC) with end customers to provide maintenance services to keep customer's engines in a good working condition. The AMC primarily include carrying out routine maintenance, preventive maintenance, inspection of parts, supply of consumables and other repairs and replacements.
The applicant submitted that the AMC undertaken by them falls under 'composite supply' as it consists of two or more taxable supplies of goods or services or both and hence, the applicable tax structure is to be determined with reference to the princi
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out supply of all maintenance consumables, periodic maintenance and troubleshooting in engines and alternators. Also, in their application, at para 2.11 the applicant submitted text of a portion of the AMC agreement which explains the obligations of Cummins under the maintenance agreement which is reproduced as under:
Part-II: Obligations of Cummins:-
a. To ensure that uptime of equipment will be to an extent of 92% per annum.
b. CAMC scope is revised with inclusion of out of jobs like all minor and major repairs providing rental DG sets during down time, Battery etc. will be part of CAMC scope
c. Requesting services:-
* Four preventive maintenance visits per annum-Mandatory Quarterly PM visit
* Maintenance of DG set will be carried out as per manufacturer's standard practice …………….. For C and D check only filters and lube oil shall be provided by Cummins. All other parts and repairs shall be charged at actual.
* To supply all maintenance consumables covered un
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parts of the machine are specifically excluded from the scope of contract.
VI. Fixed price has been decided for the AMC.
In view of the above and the fact mentioned in the copy of the Maintenance agreement submitted to this office, it appears that the predominant element of supply under AMC is supply of service.
04. HEARING
The case was scheduled for 11.09.2018 for Preliminary hearing when Sh. Rohit Jain, Advocate along with Sh. Narender Vaidya, DGM Taxation appeared and made oral contentions for admission of application as per contentions in their ARA application. Jurisdictional Officer Sh. B. K. Mishra, Supt., Pune II, CGST Commissionerate appeared and stated that they would be making submissions in due course.
The application was admitted and called for final hearing on 27.11.2018, Sh. Rohit Jain, Advocate along with Deepak L Bahirwani, Tax Director-Cummins India Group, Group CFO's Officer and Sh. Vivek Baj, C.A. ELP appeared and made oral contentions as per details submitt
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Engines fitted on BH160M Dumpers a/c CCI”. We find that the applicant executes an Annual maintenance Contract (“AMC”) with end customers to provide maintenance services, which helps in keeping customer's engines in a good working condition. These services are provided for a fixed charge based on the nature of maintenance activity that may be required, which includes carrying out preventive maintenance, routine maintenance, general inspection of parts, supply of consumables, etc. As per terms of the AMC agreement between the customer and the Applicant, the Applicant is responsible to upkeep the engines in good working condition by undertaking regular maintenance. In order to provide immediate services to the customer and to keep the minimum downtime of the engines, the Applicant has engaged dealers who provide maintenance services to the customers on their behalf and if required to utilize consumables, parts etc., they can do so at their discretion (i.e: without any prior permission
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ervices mentioned in the contract. The goods, material, spare parts, etc. are required to be supplied only when necessary i.e. when, during the course of maintenance services it is found by the skilled personnel that there is a need for such parts which will effectively keep the runtime of the DG Sets at maximum acceptable time.
Now, to arrive at a decision, we first of all will refer to the definition of 'composite supply which is given in Section 2(30) of the CGST Act, 2017 and is reproduced below:-
“(30) “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;”
Thus it is clear that a composite supply means that there is a supply of two or more goods or services together and such goods or services are provided together
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whether it is a supply of goods or supply of services. Therefore we refer to the definition of the term 'principal supply' which is defined under Section 2(90) of the CGST Act and is as under:-
“(90) “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;”
In the subject case it is seen that even though the AMC covers both, supply of goods and service, the predominant intention is to provide maintenance services for the proper upkeep of the machines belonging to their clients and, supply of goods follows as a consequent to the supply of maintenance service. Hence we find that supply of maintenance service is the dominant intention of the contracts and can be considered as the 'principal supply'.
Now that we have found that the principal supply in the transaction before us is supply of service, then the place of supply is
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