2018 (9) TMI 1339 - AAAR - GST

Appeal delay condoned due to formation delay. Solar plant contracts treated as works contracts.

In Re: M/s. Fermi Solar Farms Private Limited

The delay in filing the appeal was condoned as the Appellate Authority was not formed initially. The contracts for supply of goods and services for a ... Supply of goods or services - Works Contract - transaction of setting up an operation of Solar Photovoltaic Plant - indivisible contract - transfer of immovable property. Whether in case of separate contracts for supply of goods and services for a solar power plant, there would be separate taxability of goods as ‘solar power generating system’ at 5% and services at 18%? - Held that:- While the contracts are ostensibly two separate contracts, one for supply of material and other for rendering works and services, they are in fact one single indivisible contract. The goods supplied to the owner by the appellant are specifically brought for the purpose of the erection of the system. The appellant is entrusted with the work mainly for their expertise in erection and installation of the plant in the execution of turnkey project. The function relating to the supply of material and the rendering of services of erection and installation are integrally connected and interdependent. The terms of supply clearly show that the implementation schedule is not only for supply but also for erection, testing and commissioning of the plant. Schedule A of the supply agreement part II makes it clear that the complete supplies required for the construction of the 60MW (AC/81 MW DC) Solar PV project shall be in the scope of the supply. The supply of the goods and the supply of works are inextricably linked with each other. It is not that the appellant has been assigned with the work of supply of goods only. But the appellant has been given the task of setting up the ‘Solar generating system’. Thus, though the agreements are made separately, it is one indivisible contract for the setting up of the solar power generating plant - The functions relating to the supply of goods and the installation thereof are clearly inter-dependent and though distinct agreements are made they are linked to each other and are indivisible. Whether the contract for the setting up of the solar power generation plant is a ‘composite supply’? - Held that:- By making two separate agreements - one for the supply of goods and the other for the ‘supply for services’ what is purported to be done is an artificial division of contracts which though done, cannot take away the true and inherent nature of the contract. It is a single supply of a ‘SOLAR POWER GENERATING SYSTEM’ consisting of two or more taxable supplies - This is clearly a case of composite supply of goods and installation thereof. The entire transaction of providing the goods and the services are naturally bundled- it is natural and also a practice to expect that a contractor who will supply the goods may also supply the services along with it. Immovable property or not - What would be the principal supply and whether it would be a supply of services or supply of goods? - Held that:- The erection of the solar power generating system is not as simple or movable as it is made out to be. It is an entire system comprising a variety of different structures which are installed after a lot of prior work which involves detailed designing, ground work and soil survey. As said earlier, the amount of drawings done indicates the magnitude of the work done. Solar systems tend to be tailored specifically to fit the dimensions and orientation of the needs of the project. It is not easy to move them from one place to the other. Rather moving them from one place to other would be imprudent. Moving them to a new location would mean retrofitting the system on to a property they simply weren’t designed for, meaning that they would be much less efficient. It would not be in the interest of the buyer to move it from one place to the other. Thus, the project fulfills both the conditions of an immoveable property - The mode of annexation shows that the groundwork, being the necessary foundation, is an important part of the project. In the present case, we have seen that the detailing of the system being what it is, it cannot be called a ‘simple machine’ by any stretch of imagination. The PV module may be an important part of the system but what is intended to be bought is not the PV module but an entire system - the conclusion drawn by the ARA that the Agreements made lead to the erection of a Solar Power generating System, is affirmed. The clear legislative intent is that at all levels, from part to system, GST will be payable at 5%. In fact, the effective rate for such contracts even prior to GST was approx. 3%, and an application of the “equivalence principle” also affirms that the intent of the Government was never to tax the entirety of the goods and services in relation to setting up an SPGS at a significantly higher rate of 18%. Whether parts supplied on standalone basis (when supplied without PV modules) would also be eligible to concessional rate of 5% as parts of solar power generation system? - Held that:- The Advance Ruling Authority had not given any ruling on the above on the following grounds, In the absence of any document before us, we would not be able to deal with this question in the present proceedings. Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors? - Held that:- The Advance Ruling Authority had not given any ruling on the above on the following grounds,’ In the absence of any document before us, we would not be able to deal with this question in the present proceedings. Ruling:- The agreements tendered in support of this question are for setting up and operation of a solar photovoltaic plant and are in the nature of a ‘works contract’ in terms of clause (119) of section (2) of the GST Act. Schedule II ( Activities to be treated as supply of goods or supply of services) treats ‘works contract’ u/s 2 (119) as supply of services .Depending upon the nature of supply, intra-state or inter-state the rate of tax would be governed by the entry no 3(ii) of the Notification No 8/2017-Integrated Tax (rate) under the Integrated Goods and Services Tax Act, 2017 (IGST Act) or the Notification no 11/2017 Central Tax/State Tax (Rate)under the CGST Act and MGST Acts. The rate of tax would be 18% under the IGST Act and 9% each under the CGST Act and the MGST Act, aggregating to 18% of CGST and MGST Act. Other two issues not decided in the absence of documents. Issues Involved:1. Condonation of Delay2. Taxability of Separate Contracts for Supply of Goods and Services for a Solar Power Plant3. Eligibility of Concessional Rate for Parts Supplied by the Contractor4. Eligibility of Concessional Rate for Sub-Contractors5. Taxability of Contract for ServicesIssue-wise Detailed Analysis:1. Condonation of Delay:The appellant argued that the delay in filing the appeal should be condoned due to the non-formation of the Appellate Authority for Advance Ruling in Maharashtra. The delay was condoned as the appellant had taken steps within the stipulated period and filed the appeal within one month of the formation of the authority.2. Taxability of Separate Contracts for Supply of Goods and Services for a Solar Power Plant:The appellant contended that the supply of goods (SPGS) should be taxed at 5% and services at 18%. However, the authority held that the contracts, though separate, are inextricably linked and form a single indivisible contract for setting up a solar power generating system. The agreement included design, engineering, manufacturing, inspection, testing, erection, and commissioning, which are integrally connected. The authority concluded that the transaction is a composite supply of works contract, taxable at 18% as per the GST Act.3. Eligibility of Concessional Rate for Parts Supplied by the Contractor:The appellant did not provide sufficient documents or agreements to support this claim. The authority could not determine the eligibility for a concessional rate of 5% for parts supplied by the contractor in the absence of detailed agreements and terms.4. Eligibility of Concessional Rate for Sub-Contractors:Similarly, no documents or agreements were provided to determine if sub-contractors could avail the concessional rate of 5%. The authority did not give a decision due to the lack of specific details and agreements.5. Taxability of Contract for Services:The appellant argued that the contract for services should be taxed independently at 18%. The authority noted that the services contract included various activities such as construction, civil works, and commissioning, which are essential for setting up the solar power plant. The authority held that the entire contract, including both goods and services, forms a composite supply of works contract, taxable at 18%.Additional Findings:- The authority emphasized that the agreements, though separate, were essentially for setting up a solar power generating system and could not be artificially split into separate contracts for goods and services.- The authority referred to several judgments to conclude that the solar power generating system is immovable property due to the nature of its installation and annexation to the earth.- The authority affirmed that the agreements lead to the erection of a solar power generating system, which is immovable property, and hence, the entire contract is taxable as a works contract at 18%.Order:1. The agreements for setting up and operating a solar photovoltaic plant are in the nature of a works contract and taxable at 18%.2. No determination was made regarding the eligibility of a concessional rate for parts supplied by the contractor due to the absence of specific agreements.3. No determination was made regarding the eligibility of a concessional rate for sub-contractors due to the absence of specific agreements.This detailed analysis preserves the legal terminology and significant phrases from the original text while providing a comprehensive summary of the judgment.