2018 (9) TMI 1341 - AAAR - GST

Court rules on GST treatment of PV module supply in composite supply contracts.

The court held that the supply of the PV module is not part of a composite supply and is a distinct transaction. The remaining components and services in ... Composite supply - natural bundling - principal supply - free issue equipment - high sea sale - tax liability on composite supply determined by dominant nature - concessional rate for solar power generating system and parts - sub-contractor supplies independentComposite supply - natural bundling - free issue equipment - high sea sale - Supply of the PV module is naturally bundled with the supply of the remaining components and services of the solar power plant - HELD THAT: - The contract expressly treats Photovoltaic (PV) modules as 'Free Issue Equipment' supplied by the project owner, and records transfer of title to the owner on High Sea Sale with subsequent import and delivery to the plant site. These terms divide the overall transaction into distinct stages: (i) transfer of PV modules to the owner on High Sea Sale, (ii) free issue of those modules by the owner to the contractor, and (iii) the contractor's supply of remaining goods and services. The second stage (free issue without consideration) is not a taxable 'supply' under the CGST scheme except as provided in Schedule I. As the PV modules are separated in time, consideration and legal character from the contractor's supplies, they are not 'naturally bundled' with the contractor's supply of other components and erection/installation services. The contract itself excludes Free Issue Equipment from the definition of the contractor's 'Equipment', confirming the independent nature of that transaction. On these facts the PV module transaction cannot be regarded as a component of a single composite supply with the remaining works. [Paras 23, 24, 25, 26, 27]The supply of the PV module is a distinct transaction and is not naturally bundled with the supply of remaining components and services of the solar power plant.Composite supply - principal supply - tax liability on composite supply determined by dominant nature - Whether the remaining portion of the contract (excluding PV modules) constitutes a composite supply and how its tax liability is to be determined - HELD THAT: - Having separated out the PV modules, the balance of the contract - comprising supply of remaining components and the services of design, erection, installation and commissioning - can be characterised as a 'composite supply' because those goods and services are naturally bundled in the ordinary course of business. The tax liability on this composite portion must therefore be determined by identifying the dominant or principal nature of that supply and applying the rate applicable to that principal supply in accordance with the statutory rule governing composite supplies. [Paras 28, 30]The remaining portion of the contract is a composite supply and its tax liability will be determined by the dominant nature of that portion (i.e., the rate applicable to the principal supply of that composite supply).Concessional rate for solar power generating system and parts - sub-contractor supplies independent - Whether the concessional 5% GST rate on solar power generating systems and parts applies to sub-contractors - HELD THAT: - Supplies made by subcontractors to the appellant are independent supplies. If a subcontractor supplies goods that qualify as parts of a solar power generating system, those goods will be chargeable at the concessional 5% rate in terms of the relevant notification. If the subcontractor's supply is itself a composite supply, the rate applicable to the dominant nature of that subcontracted supply will determine taxability. Thus eligibility for the concessional rate depends on the character of the subcontractor's supply, not merely on their contractual position. [Paras 29]Subcontractor supplies are independent; parts of SPGS supplied by subcontractors attract the 5% concessional rate, while composite supplies by subcontractors are taxed according to their dominant nature.Final Conclusion: The impugned AAR order is modified: the PV module supply is distinct and not naturally bundled with the contractor's supplies; the contractor's remaining supplies constitute a composite supply whose tax is to be assessed by reference to the dominant/principal nature of that portion; and supplies by subcontractors are independent, with parts of SPGS eligible for the concessional 5% rate while composite subcontracted supplies attract the rate of their dominant element. The appeal is disposed accordingly. Issues Involved:1. Whether the supply of turnkey Engineering, Procurement & Construction (EPC) Contract for constructing a solar power plant is a composite supply under Section 2(30) of the CGST Act, 2017.2. Whether the principal supply in such a case can be said to be of “Solar Power Generating System” taxable at 5% GST.3. Whether the benefit of the concessional rate of 5% on the Solar Power Generation System and parts thereof is available to sub-contractors.Detailed Analysis:Issue 1: Composite Supply under Section 2(30) of the CGST Act, 2017The Appellant argued that the contract for the supply and setting up of a Solar Power Generating System (SPGS) should be considered a composite supply, with the principal supply being the SPGS itself. They contended that the contract included various components such as modules, structures, inverter transformers, and services like civil construction, which are ancillary to the provision of goods.The Authority for Advance Ruling (AAR) observed that the PV module, constituting 60-70% of the project, is imported and directly transferred to the owner by way of High Sea Sale. The owner files the Bill of Entry and makes the PV module available to the contractor. This separation indicated that the PV module could not be construed as part of a composite supply by the contractor.The Appellate Authority upheld the AAR's view, noting that the supply of the PV module is a distinct transaction and not naturally bundled with the supply of other components and services. The contract itself distinguished between 'equipment' supplied by the contractor and 'free issue equipment' (PV module) supplied by the owner. Therefore, the supply of the PV module cannot be considered part of a composite supply.Issue 2: Principal Supply and Tax RateThe Appellant argued that the principal supply should be the SPGS, which is taxable at 5% GST. They cited the Ministry of New and Renewable Energy (MNRE) Circular, which suggested that if the supplies under the contract are treated as a composite supply with SPGS as the principal supply, then the entire contract should be taxed at 5%.The AAR held that since the PV module is procured by the owner, it cannot be construed as the principal supply by the contractor. The Appellate Authority agreed, stating that the supply of the remaining components and services can be considered a composite supply. However, the tax rate for this composite supply would depend on the dominant nature of the supply. If the dominant nature is the supply of services, then the applicable GST rate for services would prevail.Issue 3: Concessional Rate for Sub-contractorsThe Appellant contended that the concessional rate of 5% GST should also apply to sub-contractors supplying goods or services for the SPGS. They argued that Notification No. 01/2017 Integrated Tax (Rate) does not specify the eligible persons for the concessional rate.The AAR held that supplies made by sub-contractors are independent supplies, and the appropriate GST rate should be applied based on the specific nature of each supply. The Appellate Authority upheld this view, stating that if the sub-contractor's supply can be termed as 'parts' of the SPGS, the rate would be 5%. However, if it is a composite supply, the rate applicable to the dominant nature of the supply will prevail.Conclusion:1. The supply of the PV module is not naturally bundled with the supply of other components and services and is a distinct transaction.2. The remaining portion of the contract, involving the supply of balance components and services, can be considered a composite supply. The tax rate will depend on the dominant nature of this composite supply.3. The concessional rate of 5% GST applies to sub-contractors only if their supply can be termed as 'parts' of the SPGS. Otherwise, the rate applicable to the dominant nature of the supply will prevail.The appeal was disposed of in the above manner.