2019 (3) TMI 1076 - AAAR - GST

Annuity payments exempt under GST; limited ITC in construction phase; full ITC in O&M phase.

In Re: Nagaur Mukundgarh Highwys Pvt. Ltd., Udaipur (NMHPL)

The Appellate Authority ruled that annuity payments are exempt under Entry No. 23A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. ... Input Tax Credit - procurement of goods and services for construction of the project during the Construction Period - entire revenue received during the said period is subject to GST - Held that:- The works contract services by way of construction of road was exempt from service tax. However, service tax was leviable only on the service component of such works contract (40%). The material or goods component of the works contract was leviable to VAT. However, it was subject to State VAT (composition rate). Construction of roads is now subject to 12% GST. EPC contractor (Engineering, Procurement and Construction) pays 12% GST on the service of road construction to the concessionaire - In the present case, Input Tax Credit - procurement of goods and services during the O & M period after reversal of ITC as per Section 17(2) of the Central Goods and Services Tax Act, 2017 read with Rule 42 of the Central Goods and Services Tax Rule, 2017 - Annuity Payment received during the said period is exempt whereas O & M payments received are subject to GST - Held that:- there is a free flow of ITC from EPC Contractor to the concessionaire and thereafter to NHAI. As a result, the GST of 12%leviable on the service of road construction provided by concessionaire to NHAI would be paid partly from the ITC available with him. Also, there is no hitch in providing the benefit of the Entry No. 23A ibid to the annuity payments i.e. road construction payments received after COD (during O&M phase). But this benefit does not come free. It comes with a rider that only 50% ITC of the GST paid on the Input and Input service used in the construction phase is available to the Appellant because annuity (50% of the construction payments) is not taxable and the appellant is not having any other non-business and/or exempted supply. Grant of exemption to annuity paid by NHAl/State Highways Construction Authority to concessionaires for construction of roads - Held that:- Full ITC of the tax paid on the inputs and input services used in the O&M phase is available to the Appellant if they are having no other outward supply during this phase. Issues Involved:1. Classification of the project under the GST framework.2. Eligibility for Input Tax Credit (ITC) during the construction phase.3. Eligibility for ITC during the Operation and Maintenance (O&M) phase.4. Applicability of GST on annuity payments.Issue-wise Detailed Analysis:1. Classification of the Project under GST Framework:The Appellant, M/s. Nagaur Mukundgarh Highways Pvt. Ltd., engaged as a 'Concessionaire' for a State Highway project under a DBOT basis, sought clarity on the classification of their project under GST. The AAR classified the project as a 'Works Contract' under Section 2(119) of the CGST Act, 2017, which includes building, construction, and maintenance of immovable property. The Appellant contended that the principal supply was financing and constructing the project, not merely a works contract, and referenced Article 3 of the Concession Agreement to support this.2. Eligibility for ITC During the Construction Phase:The Appellant sought to claim full ITC on goods and services procured during the construction phase, arguing that the entire revenue during this period was subject to GST. The AAR ruled in favor of the Appellant, agreeing that they were entitled to claim full ITC during the construction phase as they were paying applicable GST on the full value of the project and not supplying any exempted goods or services during this period.3. Eligibility for ITC During the O&M Phase:The Appellant also sought to claim ITC on goods and services procured during the O&M phase. The AAR ruled against this, stating that the annuity payments received during the O&M period were exempt from GST, and thus ITC could not be claimed on these payments. The Appellant contended that under Section 17(2) of the CGST Act, 2017, read with Rule 42 of the CGST Rules, 2017, they should be able to claim ITC proportionately. The Appellate Authority, however, clarified that only 50% ITC of the GST paid on inputs and input services used in the construction phase was available, as the annuity payments were exempt.4. Applicability of GST on Annuity Payments:The AAR initially ruled that annuity payments were not exempt under Entry No. 23A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as the services provided by the Appellant were classifiable under SAC 9954, not SAC 9967. The Appellant argued that the annuity payments should be exempt, as they were akin to toll charges, which are exempt from GST. The Appellate Authority reviewed the agenda and minutes of the 22nd GST Council meeting, which clarified that annuity payments made by NHAI or State Highways Construction Authorities to concessionaires for road construction were to be treated at par with toll and exempt from GST. Thus, the Appellate Authority ruled that annuity payments were indeed exempt under Entry No. 23A, but only 50% ITC of the GST paid on inputs and input services used in the construction phase was available to the Appellant.Ruling:1. Annuity payments are exempt under Entry No. 23A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. However, only 50% ITC of the GST paid on inputs and input services used in the construction phase is available to the Appellant.2. Full ITC of the GST paid on inputs and input services used in the O&M phase is available, subject to the provisions of Section 17(5) of the CGST Act, 2017.