EPC contracts for solar power plants are works contracts under GST section 2(119), attracting 18% tax rate, not composite supplies at 5%.

AAR Rajasthan ruled that EPC contracts for solar power generating systems constitute works contracts under GST Act section 2(119), not composite supplies. The Authority held that turnkey EPC contracts involving design, engineering, procurement, civil works, installation, testing and commissioning cannot be split into separate goods and services contracts. Since solar power plants have permanent locations, require dismantling for relocation, and include immovable civil structures, they qualify as works contracts attracting 18% GST rate under SAC 9954, not the 5% rate applicable to PV modules under HSN 84/85/94 classification.

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Issues Involved:
1. Classification of EPC contract for solar power generating system.
2. Determination of tax rate applicable to the EPC contract.
3. Consideration of the EPC contract as a composite supply or works contract.
4. Classification of solar power generating system as movable or immovable property.
5. Applicability of Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate).

Detailed Analysis:

1. Classification of EPC contract for solar power generating system:
The applicant, M/s. Solairedirect India LLP, undertakes EPC activities for setting up solar power generating systems involving simultaneous supply of goods and services. The applicant sought to classify the supply of the solar power generating system as a composite supply with solar panels being the principal supply under HSN 8541, liable to 5% IGST.

2. Determination of tax rate applicable to the EPC contract:
The applicant argued that the EPC contract should be considered a composite supply with solar panels being the principal supply, thus attracting a tax rate of 5% under Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate). The applicant also submitted that if the contract is not considered a composite supply, it should be split into two separate supplies of goods and services, taxed at 5% and 18% respectively.

3. Consideration of the EPC contract as a composite supply or works contract:
The Authority analyzed whether the EPC contract could be classified as a composite supply or a works contract. The applicant contended that the contract should not be classified as a works contract since the solar power generating system is movable property. However, the Authority noted that the EPC contract involves designing, engineering, procurement, installation, testing, and commissioning of a functional solar power plant, which is inherently a works contract.

4. Classification of solar power generating system as movable or immovable property:
The Authority examined various judicial precedents to determine whether the solar power generating system is movable or immovable property. It concluded that the solar power plant is immovable property as it cannot be shifted without dismantling and reassembling, and it is intended to be permanently located at the site for the generation and transmission of electricity.

5. Applicability of Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate):
The Authority ruled that the EPC contract for the solar power plant does not fall under Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate), as this entry applies to goods, not to works contracts. The contract is classified 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.

Conclusion:
The Authority concluded that the EPC contract for the solar power plant is a works contract as defined under clause (119) of section 2 of the GST Act. Consequently, the EPC contract is not covered under Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate). Instead, it 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.

Ruling:
The "Turnkey EPC Contract" for the solar power plant, including designing, planning, civil works, procurement of goods, erection, testing, and commissioning, is classified as a works contract service. It is not covered under Entry 234 of Schedule I of the Notification No. 1/2017 - Integrated Tax (Rate) and attracts an 18% tax rate under the IGST Act, or 9% each under the CGST and SGST Acts.

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