2018 (9) TMI 693 - AAR - GST

Classification of Solar Power Plant EPC Contract under GST Laws: Works Contract Services Ruling

The case involved the classification of a contract for Erection, Procurement, and Commissioning (EPC) of a Solar Power Plant under the Central Goods and ... Works contract - composite supply - principal supply - immovable property - movable property - permanency test - marketability testWorks contract - immovable property - permanency test - composite supply - Classification of the EPC contract for erection, procurement and commissioning of the Solar Power Plant as supply of goods or supply of services - HELD THAT: - On the stated facts the contract is a turnkey EPC contract under which the contractor undertakes end to end responsibility including design, engineering, procurement, transport, delivery, development, erection, installation, testing and commissioning to deliver a functional solar power plant at a specified site for the owner for long term operation. The plant includes civil works and transmission/evacuation infrastructure and is to remain at a permanent location with a design life (contractually) of at least 25 years. Applying established tests and precedents, the Authority found that the project has an element of permanency, cannot be used or sold in the market 'as is', and cannot be shifted without dismantling and re erection. Viewing the transaction as a whole it falls within the definition of a works contract under section 2(119) and thus constitutes a supply of services (works contract service) rather than supply of goods. The Authority therefore held that the question of identifying a principal supply of goods does not arise.EPC contract for the Solar Power Plant is a works contract and is a supply of services.Works contract - SAC 9954 - marketability test - Tax classification and rate applicable where the EPC contract is held to be a works contract service - HELD THAT: - Because the impugned transaction is a works contract service, it is classifiable under works contract services. The Authority ruled that such EPC works contract for solar power plants is covered by works contract services (SAC 9954) in the relevant notifications and that the applicable tax rate is 18% in aggregate (IGST 18% or CGST 9% + SGST 9%). The entry treating 'Solar Power Generating System' under the goods notification (Entry 234 of Notification No. 1/2017) is therefore not applicable to turnkey EPC contracts which are services.Turnkey EPC contract is classifiable as works contract services (SAC 9954) and attracts tax at 18% (IGST) or 9% CGST + 9% SGST.Final Conclusion: The Advance Ruling admits the applicant's facts and holds that turnkey EPC contracts for solar power plants constitute 'works contract' services (i.e., supply of services) and are not covered by the notification entry for supply of 'Solar Power Generating System' as goods; such EPC works contract services are classifiable as works contract services (SAC 9954) and attract tax at 18% (IGST) or 9% CGST + 9% SGST. Issues Involved:1. Classification of any goods or services or both.2. Determination of the liability to pay tax on any goods or services or both.Issue-wise Detailed Analysis:Issue 1: Classification of any goods or services or bothThe primary question was whether the contract for Erection, Procurement, and Commissioning (EPC) of a Solar Power Plant should be classified as a supply of goods or services under the Central Goods and Services Tax Act 2017 and the Rajasthan State Goods and Services Tax Act 2017.Findings:- The applicant, M/s. RFE Solar Private Limited, is engaged in the business of developing solar power projects, including design, engineering, supply, installation, testing, and commissioning of solar power plants.- The contract involves a composite EPC contract for setting up a Solar Power Plant, including civil work and the installation of various components.- The applicant argued that the solar power plant is movable as it can be dismantled and reinstalled elsewhere without substantial damage, suggesting it should be classified as a supply of goods.- The term 'works contract' under Section 2(119) of the CGST Act includes contracts for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property.- The solar power plant involves significant civil work and is intended to be a permanent installation, which implies immovability.- Judicial precedents and CBEC circulars were considered, which generally classify installations that require dismantling and reassembly as immovable property.Conclusion:The contract for EPC of the Solar Power Plant is classified as a 'works contract' under Section 2(119) of the GST Act, as it involves the creation of immovable property.Issue 2: Determination of the liability to pay tax on any goods or services or bothThe second issue was to determine the tax liability and the appropriate HSN classification if the supply is classified as goods or services.Findings:- The applicant claimed that if the supply is classified as goods, it should fall under Chapter 84: Solar Power Generating System with a tax rate of 5% as per Notification No. 01/2017-CT (Rate).- However, since the supply is classified as a 'works contract,' it is treated as a supply of services.- The applicable tax rate for 'works contract services' under SAC 9954 is 18% (9% CGST and 9% SGST) as per Notification No. 11/2017-Central Tax (Rate).Conclusion:The EPC contract for the Solar Power Plant falls under 'Works Contract Services' (SAC 9954) and attracts an 18% tax rate under the IGST Act, or 9% each under the CGST and SGST Acts, aggregating to 18%.Ruling:1. The 'Turnkey EPC Contract' for the Solar Power Plant is not classified under the supply of 'Solar Power Generating System' under Entry 234 of Schedule I of the relevant GST notifications. It is classified as a 'works contract' as per Section 2(119) of the GST Act.2. The contract for Erection, Procurement, and Commissioning of the Solar Power Plant falls under 'Works Contract Services' (SAC 9954) and attracts an 18% tax rate under the IGST Act, or 9% each under the CGST and SGST Acts, aggregating to 18%.