2019 (2) TMI 834 - AAR - GST

Classification and GST Rate for Solar Energy Systems and RO Plants Supply

The case involved determining the classification and applicable GST rate for the supply of solar energy-based bore well water pumping systems and Reverse ... Composite supply - principal supply - works contract - movable or immovable property test - tax liability on a composite or mixed supply determined by the principal supply - rate for works contract for water supply/treatment supplied to Government under Entry 3(iii) (HSN 9954)Composite supply - principal supply - works contract - movable or immovable property test - Classification of the activity of supply, design, installation, commissioning, testing and O&M of Reverse Osmosis (RO) plants as supply of goods or supply of services. - HELD THAT: - The Authority found the transaction to constitute a composite supply because it comprises two or more taxable supplies (goods and services) that are naturally bundled, supplied in conjunction and contracted together under a single tender with one predominant element. The concept of works contract under GST, being a composite supply treated as a service where construction/installation/commissioning relates to immovable property, requires examination whether the plant is movably or immovably situated. Reliance was placed on statutory definitions and guidance (including the General Clauses Act definition of immovable property and CBEC clarification regarding items attached to earth) to observe that the classification hinges on whether the installation results in an immovable property. On the facts before the Authority - single tender for supply, installation and 7 years O&M, contractual conditions making O&M integral and payment/security linked to installations collectively - the supply of the RO plant with installation, commissioning and O&M was held to be a single composite supply and, as per Schedule II and the works contract definition, to be a works contract wherein the predominant element is service. The Authority therefore treated the composite supply as a works contract service rather than a supply of goods.The activity is a works contract forming a composite supply, and its predominant element is supply of services.Tax liability on a composite or mixed supply determined by the principal supply - rate for works contract for water supply/treatment supplied to Government under Entry 3(iii) (HSN 9954) - Applicable GST rate on the said composite works contract when supplied to a Government Department (PHED). - HELD THAT: - Having classified the transaction as a works contract service and noting that the supply is to a Government Department for water treatment/supply, the Authority applied the notification dealing with rates for works contract services. Entry 3(iii) of the Notification provides the rate for composite works contracts relating to water supply or water treatment supplied to Government entities. On the facts that the contract is for RO plants and associated commissioning and O&M for PHED, the Authority held that the specified rate in the notification applies to this supply.The works contract service is taxable as provided in Entry 3(iii) and attracts IGST @12% (CGST@6% and SGST@6%).Final Conclusion: The supply, design, installation, commissioning, testing and O&M of RO plants as procured by PHED is a works contract forming a composite supply whose predominant element is service; accordingly it is taxable under Entry 3(iii) for works contract services supplied to Government and attracts IGST@12% (CGST@6% and SGST@6%). Issues Involved:1. Classification of the supply as goods or services.2. Determination of the applicable GST rate.Detailed Analysis:1. Classification of the Supply:The applicant is engaged in designing, providing, installing, commissioning, operating, and maintaining solar energy-based bore well water pumping systems and Reverse Osmosis (RO) Plants. The applicant sought clarification on whether this activity should be classified as a supply of goods or services.The applicant argued that the supply of RO plants, along with installation, commissioning, and maintenance, constitutes a single supply, thus falling under the ambit of composite supply. The applicant contended that the predominant element is the supply of RO plants, making it a supply of goods under HSN code 8421, taxable at 18%. Alternatively, if considered a works contract service, the applicant suggested a tax rate of 12% under Entry 3(iii) of Notification No. 11/2017-CT (Rate).2. Determination of Applicable GST Rate:The jurisdictional officer agreed with the applicant's classification as a composite supply but emphasized that it should be treated as a supply of services. The Authority for Advance Ruling (AAR) analyzed the definitions and provisions under the Central Goods and Services Tax (CGST) Act, 2017.Findings and Conclusion:- Composite Supply: As per Section 2(30) of the CGST Act, a composite supply involves two or more taxable supplies of goods or services naturally bundled and supplied in conjunction with each other, with one being the principal supply.- Principal Supply: Defined under Section 2(90) as the predominant element of a composite supply.- Works Contract: Defined under Section 2(119) as a contract involving the construction, erection, installation, etc., of any immovable property.The AAR observed that the supply in question is a composite supply, as it involves multiple taxable supplies naturally bundled together. The principal supply in this case is the service component, as the activities involve significant installation and commissioning work, making it a works contract.The AAR referenced the General Clauses Act, 1897, and CBEC Circular No. 58/1/2002-CX to determine the nature of immovable property. It concluded that the RO plant installation, being attached to the earth and not easily dismantled, qualifies as immovable property.Ruling:The activity of supply, design, installation, commissioning, and testing of the RO plant, along with operation and maintenance (O&M) work, constitutes a works contract of composite supply. This composite supply is predominantly a supply of services. As it is undertaken for a Government Department (PHED, Rajasthan), the applicable tax rate falls under Entry 3(iii) with HSN Code 99544, taxable at IGST 12% (CGST 6%, SGST 6%).Conclusion:The ruling clarifies that the applicant's activities are classified as a composite supply of services under a works contract, with the applicable GST rate being 12%.