2018 (9) TMI 1645 - AAR - GST

Power distribution company denied 12% concessional GST rate for government scheme works contracts, must pay 18% rate

AAR, Madhya Pradesh ruled that M.P. Paschim Kshetra Vidyut Vitran Co. Ltd. is a government entity under full state control but not entitled to ... Government Entity - concessional GST rate for construction services to government entities - works contract treated as supply of service - composite supply of works contract - applicability of Notification No. 24/2017 and Notification No. 31/2017Government Entity - Whether the applicant qualifies as a 'Government Entity' under the Notifications - HELD THAT: - The Authority examined ownership, control and the entrustment of functions. The applicant is a wholly owned subsidiary of M.P. Power Management Co. Ltd., which in turn is wholly owned by the Government of Madhya Pradesh; the audited annual accounts demonstrate 100% shareholding by the Secretary (Energy), Government of Madhya Pradesh. The applicant was entrusted by the State government to carry out distribution of electricity in specified commissionerates. On these facts the Authority concluded that the Government of Madhya Pradesh has full control over the applicant and the applicant falls within the definition of 'Government Entity' as set out in the notification. [Paras 7]The applicant is a 'Government Entity' within the meaning of the Notifications.Concessional GST rate for construction services to government entities - applicability of Notification No. 24/2017 and Notification No. 31/2017 - Whether the concessional rate under the Notifications applies to the works undertaken by the applicant - HELD THAT: - The Authority considered the scope of the concessional entry which grants reduced rate for construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of specified structures when provided to government entities, and analysed the nature and purpose of the projects undertaken by the applicant (DDUGJY, IPDS, Saubhagya, ADB-funded projects, SSTD, FSP etc.). Although the applicant qualifies as a Government Entity, the Authority found that these projects are undertaken for strengthening the power distribution network and for the business of supplying electricity; the works involve construction of distribution lines, substations and infrastructure meant predominantly for sale of electricity. Accordingly, the Authority held that the notified concessional rate is not available to the applicant for works carried out for such business-purpose projects. [Paras 6, 7]The concessional rate under the Notifications is not available for the works in question because the works are carried out for business purposes (predominantly for sale of electricity).Works contract treated as supply of service - composite supply of works contract - Rate of tax applicable on the works contract entered into by the applicant - HELD THAT: - The Authority noted the statutory definition of 'works contract' and that composite supply of a works contract is treated as supply of service. The applicant awarded contracts involving supply of materials and erection; such contracts fall within the definition of works contract. Given that the concessional entry does not apply to these business-purpose works, the Authority held that the relevant entry attracting the standard rate for works contracts (as per entry (ii) of S. No. 3 of the table of Notification No. 11/2017 - Central Tax (Rate), as amended) governs the taxable rate. Consequently, the applicable rate was determined accordingly. [Paras 7, 8]The works contracts awarded by the applicant are taxable at the standard rate; the applicable GST rate is 18% (9% CGST and 9% SGST).Final Conclusion: The Authority ruled that although the applicant is a 'Government Entity', the notified concessional rate for construction services to government entities does not apply because the works were undertaken for business purposes (predominantly for sale of electricity); the contracts qualify as works contracts and are taxable at 18% (9% CGST and 9% SGST). Issues:1. Applicability of Notification No. 11/2017-Central Tax (Rate) on works contract.2. Determination of liability to pay Tax.Analysis:1. Applicability of Notification No. 11/2017-Central Tax (Rate) on works contract:The applicant, a power distribution company, sought clarification on the applicability of clause(vi)(a) of Sr. No. 3 of table of Notification No. 11/2017-Central Tax (Rate) on their works contract. The department contended that the works contract undertaken did not fall under the category attracting a 12% tax rate but rather an 18% tax rate. The applicant argued that they qualified as a Government Entity, citing various notifications and their relationship with the Government of Madhya Pradesh. The ruling authority examined the definition of Government Entity and concluded that the applicant met the criteria, being wholly owned by the Government of Madhya Pradesh. However, based on the nature of work undertaken by the applicant for various government projects, it was determined that the concessional rate of 12% did not apply, and the applicable tax rate was 18% under the works contract category.2. Determination of liability to pay Tax:The ruling clarified that the applicant was not entitled to the concessional rate of 12% under Notification No. 24/2017-Central Tax (Rate) and Notification No. 31/2017-Central Tax (Rate). Instead, the applicable tax rate for their projects was 18% (9% under Central tax and 9% State tax). The ruling was declared valid subject to the provisions under section 103(2) until and unless declared void under Section 104(1) of the GST Act. The decision was based on the specific nature of the projects undertaken by the applicant and the relevant provisions of the GST Act regarding works contracts and tax rates.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the authority's decision based on the facts presented and the legal provisions applicable to the case.