2018 (9) TMI 1183 - AAAR - GST

Appellate Authority: Solar Power Plant Contract = Works Contract Taxable at 18%

The appellate authority concluded that the contract for setting up a solar power plant is a composite supply but qualifies as a works contract, taxable at ... Composite supply - principal supply - works contract - immovable property - tax liability on composite and mixed supplies - benefit to sub contractors (remanded)Composite supply - tax liability on composite and mixed supplies - works contract - Whether the turnkey EPC contract for supply and erection of a solar power plant is a composite supply and, if so, whether it falls within the definition of works contract under the CGST Act. - HELD THAT: - The Appellate Authority held that the EPC contract comprises two or more taxable supplies (goods and services) that are naturally bundled and supplied in conjunction with each other in the ordinary course of business. Applying the statutory tests and the CBIC e flyer indicia (single contract/price, elements integral to one overall supply, market practice of supplying plant as a package), the contract was found to qualify as a composite supply. The Authority then examined Schedule II and the definition of works contract and concluded that the composite supply in question also falls within the definition of a works contract (a contract for commissioning/installation of immovable property involving transfer of goods). Consequently, the transaction was treated as a works contract and thereby as a supply of services under Schedule II. [Paras 31, 41, 42, 43]The turnkey EPC contract is a composite supply and is treated as a works contract for the purposes of the CGST Act.Principal supply - immovable property - Whether the principal supply is the solar power generating system taxable at 5% (and whether the contract is to be taxed as supply of goods) was not determined on merits because the transaction was held to be a works contract. - HELD THAT: - Having treated the transaction as a works contract under clause (119) of Section 2 and noted that para 6 of Schedule II treats works contracts as supply of services, the Authority refrained from determining the principal supply or applying the principal supply rule under Section 8. The Authority recorded detailed factual and legal reasoning on the immovability question (mode and object of annexation, scope and scale of civil works and commissioning, industry practice, and precedents) and concluded that on the facts before it the agreement leads to erection of a solar power generating system with an element of permanency, thereby supporting the characterization as works contract; accordingly there was no occasion to decide whether the principal supply would be the SPGS taxable at 5%. [Paras 42, 43]No separate determination that the principal supply is the SPGS at 5% was made because the transaction was treated as a works contract and hence as supply of services.Benefit to sub contractors (remanded) - Whether concessional rate of 5% for SPGS and its parts is available to sub contractors was not adjudicated due to lack of documents. - HELD THAT: - The Authority noted that the AAR had declined to deal with the question for want of documents. No fresh documentary evidence was produced before the Appellate Authority on this point. In consequence, the Appellate Authority recorded that it would not deal with the availability of the concessional rate to sub contractors in the present proceedings. [Paras 44]Question as to availability of the concessional 5% rate to sub contractors not decided for want of documents; not dealt with in these proceedings.Final Conclusion: The Appellate Authority answered that the EPC turnkey contract for construction and commissioning of the solar power plant is a composite supply and, on the facts before it, falls within the definition of a works contract and is therefore to be treated as a supply of services; consequently the Authority did not determine whether the principal supply is the solar power generating system taxable at 5%, and the question of concessional rate for sub contractors was left undecided for want of documents. Issues Involved:1. Condonation of Delay2. Whether the contract for supply/construction of a solar power plant is a composite supply or a works contract3. Principal Supply determination and applicable GST rate4. Applicability of concessional rate to sub-contractorsCondonation of Delay:The appellant filed the appeal within one month of the formation of the Appellate Authority in Maharashtra, which was constituted on 10.05.2018. The delay was condoned because the appellant had filed letters within 30 days of the advance ruling communication.Issue 1: Composite Supply vs. Works Contract:The appellant argued that the contract for setting up a solar power plant should be treated as a composite supply under Section 2(30) of the CGST Act, 2017, with the principal supply being the solar power generating system (SPGS), taxable at 5%. The contract involves the supply of goods and services, including design, engineering, procurement, installation, and commissioning of the solar power plant.The Authority for Advance Ruling (AAR) had previously ruled that the contract is a works contract, which is treated as a supply of services under Schedule II of the CGST Act, taxable at 18%. The appellant contended that the SPGS is movable and not an immovable property, hence should not be classified as a works contract.Findings:The appellate authority analyzed the contract and concluded that it is indeed a composite supply as it involves naturally bundled goods and services supplied in conjunction with each other. However, the authority also agreed with the AAR that the contract results in the erection of an immovable property, thus qualifying as a works contract under Section 2(119) of the CGST Act. The authority cited various judicial precedents and the nature of the project, which includes significant groundwork, soil testing, and construction, indicating an inherent element of permanency.Issue 2: Principal Supply and GST Rate:Since the contract is classified as a works contract, it is treated as a supply of services under Schedule II of the CGST Act. Therefore, the question of determining the principal supply does not arise, and the entire contract is taxable at 18%.Issue 3: Concessional Rate for Sub-Contractors:The AAR had not dealt with this question due to the absence of documents. The appellate authority also refrained from addressing this issue in the absence of relevant documents.Conclusion:1. The contract for setting up a solar power plant is a composite supply but falls under the definition of a works contract, taxable at 18%.2. The question of principal supply does not arise as the contract is treated as a works contract.3. The applicability of the concessional rate to sub-contractors was not addressed due to the lack of documents.Order:1. The EPC contract is a composite supply under Section 2(30) of the CGST Act, 2017, but it falls within the definition of works contract under Section 2(119) of the CGST Act, 2017.2. The contract is taxable as a supply of services at 18%.3. The issue of concessional rate for sub-contractors was not addressed due to the lack of documents.