2018 (12) TMI 1867 - AAR - GST

Classification of Contracts under GST: Composite vs. Works Contracts and Relevant GST Rates

The case involved determining the classification of contracts under GST law. The ruling stated that a contract qualifies as a Composite Contract under GST ... Works Contract - Composite contract or not - making of supply of goods and services which are inter connected and inter-dependent on each other even though BOQ mentions separate value of goods and services - pre GST Period Contract - separate Sale and Service Billing in Pre GST period - contract for designing, installation and setting up of Automatic Fare Collection System for Lucknow Metro Project shall amount - Supply of Service or Work Contract - principal supply - rate of GST - LMRC Project - Rate of 18% or 12% to be charged after considering Rate Change Notification No. 1/2018- Integrated Tax (Rate) dated 25/01/2018 and all other provisions of GST Laws? Whether a contract can be treated as Composite Contract under GST if it involves making of supply of goods and services which are inter - connected and inter - dependent on each other even though BOQ mentions separate value of goods and services? - HELD THAT:- If the goods and services are naturally required to work together in an inter-connected and inter dependent manner and are required to complete the principal service as clearly stipulated in the illustration of the 'composite supply', the services will fall under the category of 'Composite Supply'. Whether a pre GST Period Contract can be treated as Composite Contract in GST even though there was separate Sale and Service Billing in Pre - GST period? - HELD THAT:- If the goods and services works together in inter-connected and inter-dependent manner and fall under the category of 'Composite Supply', the Contract executed under Pre- GST period would be treated as Composite Contract in GST era as in the GST era both sale and supply of services both are covered under GST Laws. Accordingly, the Contract laid down under Pre GST era be covered under Composite Contract in GST era under GST Laws, if the conditions for 'Composite Supply' are satisfied. Whether contract for designing, installation and setting up of Automatic Fare Collection System for Lucknow Metro Project shall amount to a Composite Contract with Principal Supply being Supply of Service or Work Contract? - HELD THAT:- The end structure or machinery that cannot be located/ moved or shifted elsewhere at frequent intervals will be considered as immovable property. Therefore, we find that the contract given to the applicant by LMRC for designing and installation of the Automatic Fare Collection System which cannot be shifted or moved to other places/ buildings at frequent intervals and is meant for permanent beneficial of the building i.e. Stations under LMRC; will fall under the 'Works Contract'. GST rate to be charged on LMRC Project i.e. Whether 18% or 12% to be charged after considering Rate Change Notification No. 1/2018- Integrated Tax (Rate) dated 25/01/2018 and all other provisions of GST Laws - HELD THAT:- Vide Notification No. 20/2017-Integrated Tax(Rate) dated 22.08.2017, the entries against serial number 3 for item (iii) in column (3) and the entries relating thereto in the Notification No. No. 1/2018-Integrated Tax (Rate) dated 25.01.2018, were substituted with “(v) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Service Tax Act, 2017, supplied by way of construction, erection, commissioning or installation of original works pertaining to,- (a) railways, excluding monorail and metro; attracting the duty rate @ 12% - Later, vide Notification No. 1/2018-Integrated Tax (Rate) dated 25.01.2018 the notification No. 8/2017-Integrated Tax (Rate) was amended and the word `excluding' was substituted by 'including' also classifying that the Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Service Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity would attract duty at the rate of 12%. Since, in the instant case, the composite supply of work contract is being provided by a sub-contractor to the main contractor i.e. Government Authority, the same shall be covered under the amendment carried out vide the notification dated 25.01.2018, the same shall now attract duty at the rate 12%. Issues Involved:1. Whether a contract can be treated as Composite Contract under GST if it involves making of supply of goods and services which are inter-connected and inter-dependent on each other even though BOQ mentions separate value of goods and services.2. Whether a pre-GST Period Contract can be treated as Composite Contract in GST even though there was separate Sale and Service Billing in Pre-GST period.3. Whether contract for designing, installation, and setting up of Automatic Fare Collection System for Lucknow Metro Project shall amount to a Composite Contract with Principal Supply being Supply of Service or Work Contract.4. GST rate to be charged on LMRC Project i.e., Whether 18% or 12% to be charged after considering Rate Change Notification No. 1/2018- Integrated Tax (Rate) dated 25/01/2018 and all other provisions of GST Laws.Detailed Analysis:1. Composite Contract under GST:- Applicant's View: The applicant argued that as per the definition of “Composite Supply and Mixed Supply” under GST law, where all the goods and services are required to work together in an inter-connected and inter-dependent manner, it naturally results in a 'composite supply' fully covered under the definition contained in Section 2(30) irrespective of item-wise values specified in BOQ.- Department's View: The Authority referred to Section 2 of the Central Goods and Service Tax Act, 2017, defining 'composite supply' as a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. The Authority concluded that if the goods and services are naturally required to work together in an inter-connected and inter-dependent manner, they fall under the category of 'Composite Supply'.2. Pre-GST Period Contract as Composite Contract in GST:- Applicant's View: The applicant contended that the GST law differs significantly from pre-GST taxation laws, where taxation on sales was under the state list and services under the central list. Therefore, classification of goods/services should be done as per GST provisions for post-GST taxation purposes.- Department's View: The Authority observed that in the pre-GST period, there were separate taxation systems for sales (VAT) and services (Central Excise & Service Tax). Under GST, both sales and services are covered, and both state and center have taxation authority. If the conditions for 'Composite Supply' are met, contracts from the pre-GST era would be treated as Composite Contracts under GST.3. Contract for Automatic Fare Collection System as Work Contract:- Applicant's View: The applicant argued that the Automatic Fare Collection System installed at LMRC stations is movable property, with the service portion being the essential element. Therefore, the principal supply under the contract should be the supply of service, and tax should be levied at the rate applicable for services.- Department's View: The Authority referred to the definition of 'Works Contract' under the Central Goods and Services Act, 2017, which includes contracts for installation of any immovable property involving the transfer of property in goods. The Authority concluded that the Automatic Fare Collection System, though movable, is fixed permanently to the building and meant for permanent beneficial enjoyment of the LMRC station building. Therefore, it qualifies as a 'Works Contract'.4. GST Rate for LMRC Project:- Applicant's View: The applicant submitted that GST should be charged at 12% as it is a composite service supplied to a government entity in relation to work entrusted by the Central and State Government.- Department's View: The Authority referred to Notification No. 1/2018-Integrated Tax (Rate) dated 25.01.2018, which amended the previous notification to include composite supply of works contract provided by a sub-contractor to the main contractor (a Government Authority) under the 12% tax rate. Since the composite supply of work contract is provided by a sub-contractor to a Government Authority, it attracts a 12% duty rate.Ruling:1. A contract shall be treated as a Composite Contract under GST if it involves making of supply of goods and services which are inter-connected and inter-dependent on each other even though BOQ mentions separate value of goods and services.2. A pre-GST period contract shall be treated as a Composite Contract in GST if it satisfies the condition of Composite Supply.3. A contract for designing, installation, and setting up of Automatic Fare Collection System for Lucknow Metro Project will amount to a Work Contract.4. GST will be charged at 12% in terms of Notification No. 01/2018-Integrated Tax (Rate) dated 25.01.2018, being composite services supplied to a Government entity procured by the said entity in relation to work entrusted to it by the Central and State Government.