In Re : M/s Giriraj Renewables Private Ltd.
GST
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)
AUTHORITY ON ADVANCE RULINGS, KARNATAKA – AAR
Dated:- 21-3-2018
Advance Ruling No. KAR ADRG 01/2018
GST
Mr. Harish Dharnia, Member And Dr. RaviPrasad. M. P., Member
For The Represented : Sri. Prashant Agarwal
RULING
1. M/s Giriraj Renewables Private Ltd., (called as the 'Applicant' hereinafter), I Floor, CTS 906/B, Shivaji Galli, Basavan Bagewadi, Dist. Vijayapura (Bijapur), Karnataka – 586203, having GSTIN number 29AACCE0525D1Z4, have filed an application for Advance Ruling under Section 97 of CGST Act,2017, KGST Act, 2017 & IGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST ARA-01. They also enclosed copy of challan for Rs. 5,000/- bearing CIN number IBKL17112900071003 dated 16.11.2017.
2. The Applicant is an EPC contractor and enters int
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e to set up and operate solar photovoltaic plants for supply of power generated. In various cases, the Applicant also is a project developer wherein it is engaged in operation of renewable energy power plant projects.
b. Typically a turnkey contract is entered into by the Applicant to do end to end setting up of a solar power plant which includes supply of various goods (such as modules, structures, inverter transformer etc.,) as well as complete design, engineering and studies transportation, unloading, storage and site handling, installation and commissioning of all equipments and material, complete project maintenance as well as supply and construction related in various other packages for complete PV plants.
c. Accordingly, the contract entered into by the Applicant, 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.
d. The intent of the contract is that the entire contract would
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entry reads as follows:
Chapter
Heading
Description
84 or 85 or 94
Following renewable energy devices and parts for their manufacture
a) Bio-gas plant
b) Solar power based devices
c) Solar power generating system
d) Wind mills and wind operated electricity generator
e) Waste to energy plants/devices
f) Solar lantern/solar lamp
g) Ocean waves/tidal waves energy devices/plants
h) Photo voltaic cells, whether or not assembled
in modules or made up into panels
Per the above, concessional rate of 5% has been provided to the following (when covered under heading 84, 85 or 94):
* PV modules
Solar power generating system – This term has not been defined
* Parts for manufacture of solar power generating system and PV modules – There is no restriction provided on what would qualify as parts and in such case all goods which qualify as 'parts' of solar power generating system should be eligible for concessional rate of tax
4.1.2 Concept of composite supply and mixed
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s taxed at the supply with highest rate of tax.
4.1.3 Concept of works contract
Works contract has been defined under Section 2 (119) of CGST Act as follows:
“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 propeqy in goods (whether as goods or in some other form) is involved in the execution of such contract.”
Works contract has been deemed to be a service under GST – Schedule II of GST law specifies that composite supply of works contract would be deemed to be a service. The general rate of works contract service is 18%.
4.1.4 Our understanding in present context
Per the above legal provisions, we understand that in present case, since the scope of work of the Applicant includes provision of both goods and services, the entire contract is one turnkey_ EPC, contract and hence, would qua
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'
Thus, principal supply refers to the supply which is the predominant element in a composite supply.
Illustration as provided in GST law is that In case goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
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 a composite or a mixed supply, shall be determined in the following manner, namely:-
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply'
Per the above, the essential conditions for a supply to qu
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n 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. It is submitted that the entire contract including goods supplied used in AC electrical, DC electrical, transmission lines as well as other ancillary parts/ goods and services should get covered as composite supply and be taxable as principal supply of 'solar power generating system'.
It is further submitted that Ministry of New and Renewable Energy ('MNRE') in various instances has also approved entire BOQ consisting of various parts e.g. cables, module mounting structures, spares, transmission lines etc. as essential to solar power generating system and hence the concessions applicable have been extended to all goods to be used in solar power plant. Drawing a corollary, concessional rate of 5% should be applicable on all the goods approved under BOQ by MNRE as well. Further, as highlighted ab
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ecting network”. Similarly, the system is defined in Chambers 20th Century Dictionary as “anything formed of parts placed together or adjusted into a regular and connected whole”. Hence, system typically includes various components/ parts which are manufactured/ assembled together for performing a function. In the present case, the term system should include all goods provided under the contract which help in end to end generation as well as transmission of electricity.
Further, under erstwhile law also, solar power generating systems have not been defined. However, under erstwhile excise law, various exemptions were extended to non-conventional energy devices which included solar power generating systems – List 8 of Notification no. 12/2012-Central Excise, dated 17 March 2012.
Reference is made to the judgment of Delhi Tribunal in the case of Rajasthan Electronics 8z Instruments Ltd. vs. Commr. Of C. Ex., Jaipur wherein it was held that '7. The adjudicating authority admitted th
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lar 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 compact fluorescent lamp of a solar lantern. In view of the above, expert opinion, we hold that the impugned item can be considered as solar power generating system and is entitled for the benefit of the exemption Notification. Therefore, we allow the appeal with consequential relief”
Please find attached the aforesaid judgments as Annexure – B.
Per the above, where a contract is awarded as a whole for supply of solar power generation system consisting of various components (as highlighted above) as well as services, the entire contract should qualify as a solar power generating system. This is in line with the concept of 'composite supply' in which case the taxability is as per the principal supply which is the solar power generating system.
4.2.3. Reference to Education Guide issued under service tax
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e 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 any other service or services. An example of 'bundled service' would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.'
The Education Guide also clarifies that in cases of composite transactions, i.e. transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction then the nature of such transaction would be determined by the application of the dominant nature test.
Further,
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le 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 other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
* Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are:
* There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use
* The elements are normally advertised as a package
* The different e
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d 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 has been discussed in various countries. Provided below is relevant extract from various countries regarding the same:
4.2.4.1. Australia
In terms of Goods and Services Tax Ruling 2001/8 issued under Australia, Composite Supply means a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. Composite supply is treated as supply of one thing.
There have been various precedents in which the courts have defined a composite supply. Few are highlighted below:
* The Full Federal Court in the case of Luxottica found that while 'supply' is widely defined it 'invites a commonsense, practical approach to characterisation'. It was observed that while 'Supply' is defined broadly,
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en 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, composite supply is taxed as supply of the dominant activity to Per the above, composite supply is taxed as supply of the dominant activity to which others are merely ancillary. In the present case also, the dominant supply is those of goods (which constitutes solar power generating system' and services is merely incidental to provision of such goods.
4.2.4.2. European Union
Per the European Union Directive, a composite supply is a transaction where supplies with different VAT treatments are sold together as one. The supplies with a composite supply may consist of parts that, if assessed separately, have different tax rates. Some have standard rates, reduced rates or are exempt from VAT.
The European Court of Justice ('ECJ') has deliver
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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 is potentially zero rated) and a magazine (potentially zero rated) as well as the right to attend classes which would be standard rated. The Court decided that there was a single standard rated supply of the right to belong to the playgroup and the T shirt and magazine were incidental to that main supply. No one who was not in the playgroup could have bought the T shirt or magazine separately.
Per the above, it is clear that globally also composite supply means a supply of more than one goods/services wherein one supply qualifies as principal supply. Therefore, taxes as applicable on the principal supply are applied on the whole composite supply.
4.3. Intention of parties
As discussed above, section 2(30) of CGST Act states that supply of two or mo
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tted 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, 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.
It is our case that the intent of the contract executed by the Applicant are not in the nature of erection, commissioning or fitting out, etc. Instead the contract is entered for provisioning of solar power generating system and the main intent of parties is to procure a solar power generating system to which the activity/ services of erection/ commissioning etc are only incidental.
In the present case, even if the contract qualifies as composite contract, the principal supply would be that of provision of solar power generating system and not provision of wor
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ional 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.
4.6. Conclusion
* As per Section 2(30) of the CGST Act, in case more than one goods are supplied which are bundled together in the ordinary course of business, such supply would be considered as composite supply. Further, per Section 8 of the CGST Act, a composite supply comprising two or more supplies, one of which is a principal supply will be treated as supply of such principal supply. Therefore, GST applicable on the principal supply would be applied on such composite supply.
* In view of the above, a position can be taken that the Applicant engaged in the
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;
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 submitted Specific Power of Attorney appointing M/s Price Waterhouse Coopers Private Limited, represented by Shri Prashanth Agarwal, as their authorized legal representative, who attended the proceedings held before the Authority on Advance Ruling in Karnataka, Bengaluru on 09.02.2018 and furnished additional written submissions. The authorized representative during the proceedings stated / pleaded that the contract is for supply of system / solar plant only which includes both supply of goods (PV plates) and installation & does not include maintenance; also the contract is for one lump sum amount; the rate of GST should be at 5% as per specific entry in schedule; it is not a works contract as the equipments are n
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ioning 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 Applicant. The said schedule clearly outlines the entire scope to be undertaken and provides that the Applicant would be responsible for supply of Solar Power Plant.
“The Contractor 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…”
(d) It is further stated that typically the said contract is entered into for supply of solar power generating system which involves supply of equipment and undertaking certain services. Separate prices are specified for different equipment which are supplied under the agreement for commercial convenience such as movement of goo
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es 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 involved in the contract is clearly to supply
As explained above, the intention of the parties entering into a contract with the Applicant, is to procure a completely functional solar power plant wherein the Applicant undertakes end to end responsibility of supply of equipment for solar power plant including designing, engineering, supply, installation, testing and commissioning of the solar power plant. The intention of the parties is not to undertake any activity on an immovable property, but to supply Solar power plant.
Solar power plant is not an immovable property
It is submitted that it has been highlighted in various pronouncements by the judicial authorities that in cases where
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ant 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 the same is not an immovable property.
Reference is also made to Clause 4.1(xiii) of the draft agreement, which contemplates possibility of transferring the Plant:
(xiiz) Any costs incurred by the Contractor for any changes made in the land/premises of the Owner, while development of Plant, due to the requirement of transferring the Plant to another location, would be borne by the Owner. Such costs incurred would be charged by the Contractor from Owner separately and does not form part of the Contract price highlighted in Schedule 3 of the Contract. The amount to be charged due to the changes will be mutually decided between the parties.
Reliance is also placed on the Char
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ovable 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 the aforesaid circular the Applicant contends that as the solar power plant, once installed, is capable of being removed and transferred from one place to another without substantial damage, the same should qualify as movable property.
The applicant further states that the service portion of the contract constitutes a meagre 6% of the entire contract, solely for the purpose of operation of the solar power plant. The solar power plant can be easily transferred to another location in case required. Hence, it is abundantly apparent that the activity of erection, commissioning and installation is for the beneficial enjoyment of the solar power plant, and hence, solar powe
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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 in the following manner, namely :-”
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply'
Per the above, the essential conditions for a supply to qualify as composite supply can be highlighted as under :
a. 2 or more taxable supplies of goods or services or both
b. The taxable supplies should be naturally 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 t
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le 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 been submitted.
Reliance can also be placed on Chartered Engineer Certificate which provides that the most critical component is PV Modules both in terms of the value and the functionality that such Modules perform.
Even in the draft agreement, reference can be made to Schedule I of the scope of work which provides as below:
“The Contractor 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.
Both parties agree that of the total supplies, the most critical part of the Plant are the supply of the mo
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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 Power Generating System. We find that other parts are only panel housing consisting of controllers and switches. Hence the 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'.
Basis the above submissions, it is clearly evident that the PV Modules qualifies as 'principal supply' and hence the whole contract even if construed as composite supply should be liable to tax considering it to be supply of PV Module
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sed 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 liable to tax at 5%.
II. that solar power generating system should not qualify as immovable property.
III. that even if the agreement is construed as a composite supply, the principal supply would be the supply of PV Modules which again are liable to tax @5%.
IV. That the Applicant submits that the proposed agreement with its customers should be taxable @5% GST, and the same should be applicable to sub-contractors as well.
FINDINGS & DISCUSSION:
8. We have gone through the records of the application, filed by M/s Giriraj Renewables Private Ltd., (the Applicant), the issue/transaction(s) involved on which ad
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('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 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 the principal supply.
9.2 In order that a supply be categorised as a Composite supply its essential to have (a) two or more taxable supplies and (b) they should be naturally bundled in conjunction with each other. In the present application before us and in terms of the draft contract the applicant contends that they are supplying the goods and are also carrying out services related to the installation of the supplied good. Thus they are engaged i
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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 around 60% – 70% of the entire Solar Power Plant and the rest of the components constitute for around 30% – 34% and are merely parts or sub-parts which are required for panel housing and setting up of the module such as controllers and switches. The PV module is a packaged, connect assembly of typically 6 x 10 photovoltaic solar cells, which constitute the photovoltaic array of a photovoltaic system that generates and supplies solar electricity. In other words they are nothing but an assembly of solar cells that helps in converting solar power into electricity. Hence PV module is the most important comp
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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 modules, are not being supplied by the contractor / Applicant.
3. As per the scope of contract, as mentioned at clause 3 of the contract, 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, which is contradictory to the free issue eq
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uestion 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 envisaged supply does not constitute a composite supply.
9.3.7 Therefore upon examination of the specific nature of the supply envisaged under the draft contract we conclude that the envisaged supply does not amount to a composite supply.
10. The second question is ―If yes, whether the Principal supply in such case can be said to be 'Solar Power generating System' which is taxable at 5% GST‖.
10.1 The answer to this question flows from the answer to the first question. During the examination of the first question it is borne out that the major component of PV Modules is procured by t
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