Solar EPC contracts without major equipment supply don't qualify as composite supply under Section 2(30) CGST Act

AAR Karnataka ruled that a turnkey EPC contract for solar power plant construction does not constitute a composite supply under Section 2(30) of CGST Act, 2017, as goods and services are not naturally bundled when owners can procure major equipment independently. Since the applicant does not supply the major PV modules (70% of project value) due to high sea sale arrangements, no principal supply exists warranting 5% GST rate. Sub-contractors must be taxed individually based on their specific supply nature, without benefit of concessional rates applicable to main contractors.

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Issues Involved:
1. Whether the supply of turnkey Engineering, Procurement & Construction (EPC) Contract for the construction of a solar power plant can be construed as a Composite Supply under Section 2(30) of the CGST Act, 2017.
2. If yes, whether the Principal Supply in such a case can be said to be 'Solar Power Generating System' taxable at 5% GST.
3. Whether the benefit of the concessional rate of 5% for solar power generation systems and parts thereof would also be available to sub-contractors.

Detailed Analysis:

Issue 1: Composite Supply
Findings:
- Definition and Criteria: 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, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is the principal supply.
- Contract Examination: The Applicant’s draft contract shows that the major component (PV modules) is imported and directly transferred to the owner by way of High Sea Sale. This means the legal title of the goods shifts to the owner, and the Bill of Entry to clear goods from Customs is filed by the owner, not the Applicant.
- Free Issue Equipment: As per the contract, PV modules are supplied by the owner to the contractor as free issue equipment at the plant site for installation and commissioning. Thus, the contractor does not supply the PV modules.
- Conclusion: Since the major component (PV modules) is supplied by the owner, the contractor cannot claim to supply the principal component. Therefore, the supply does not qualify as a composite supply as the supplies are not naturally bundled.

Issue 2: Principal Supply
Findings:
- Principal Supply Definition: Section 2(90) defines principal supply as the supply of goods or services which constitutes the predominant element of a composite supply.
- Relevance: Given the conclusion that the supply does not constitute a composite supply, the question of identifying a principal supply is irrelevant.
- Conclusion: The major component (PV modules) is procured by the owner, and thus, it cannot be construed as the principal supply by the Applicant.

Issue 3: Concessional Rate for Sub-contractors
Findings:
- Individual Supply: The sub-contractor is an individual supplier, and the rate of GST applicable depends on the type of supply.
- Concessional Rate: No concessional rate of GST is provided to sub-contractors based on the main contractor's supply.
- Conclusion: The supply made by sub-contractors needs to be viewed as individual supplies, and the appropriate rate of GST has to be applied depending on the specific nature of the supply.

Ruling:
1. Composite Supply: The major component (PV Module) constituting 70% of the whole project cannot be construed to be supplied by the Applicant due to the High Sea Sale of the product. Hence, it cannot be a principal supply of the project and thereby cannot be a composite supply.
2. Principal Supply: The question is irrelevant due to the answer to question number 1.
3. Sub-contractors: The supply made by sub-contractors needs to be viewed as individual supplies, and the appropriate rate of GST has to be applied depending on the specific nature of the supply.

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