2019 (6) TMI 1062 - AAR - GST

Network setup is a composite works contract under CGST Act - 18% GST rate

The supply of goods or services for setting up a network qualifies as a composite supply of works contract under Section 2(119) of the CGST Act. The ... Classification of supply - Works Contract or not - supply of goods or services for ‘setting up of network’ - composite supply or not - rate of tax applicable to the supplies made under the contract. Whether the supply of goods or services for ‘setting up of network’ would qualify as ‘works contract’ as defined in Section 2(119) of the CGST Act? - HELD THAT:- Since the network which comes into existence only when the data centers, nearline. data centers, disaster recovery station, etc. are set up as firmly attached to the ground, it comes into existence in the form of an immovable property - the ‘network’ to be set up in accordance with the contract partakes the character of an immovable property inasmuch as the network as it comes into existence is firmly attached underground and cannot be moved in ‘as is’ from one place to the other - The network to be set up by the Applicant in accordance of its contract with BSNL results in creation of an immovable property and thus qualifies as a works contract as per Section 2(119) of the CGST Act and attract the assessment of GST liability accordingly. Composite supply of services - naturally bundled services - If supplies contemplated as per the contract with BSNL are not treated as works contract, can these continue to qualify as composite supply? if yes what is the principle supply? - HELD THAT:- In the present facts, supply of material and services for setting up of network, supply of training services and supply of satellite connectivity vehicles amongst all the other ancillary activities required under the contract are aimed at creation of a network and operations - in such a case, if the activity of setting up of network per se qualifies as ‘works contract’; then such works contract constitutes the pre-dominant element of the entire contract and partakes the character of a ‘principal supply’. What is the rate of tax applicable to the supplies made under the contract? - HELD THAT:- The present contract in our view is a works contract as it involves provision of services and goods, but it is for us to decide whether it is works contract as defined under the GST Act - It is evident from above that they are constructing civil structure to house various equipment, electrical installation, infrastructure, etc. We further find from the Project Schedule submitted by the applicant that their work involves Construction buildings for housing the equipment room, Data centers, Nearline data centers, Disaster Recovery Center, Training of Project Management Team, Supply of Equipment at a central site of bidder and segregrated as per, site; Staging of Equipment, Joint Testing, Delivery of Equipment to sites, Installation of equipment, Certification of Network by a Certifying Authority, Commissioning of the Network, Training for trainers and Completion of Warranty. Thus from a reading of the terms of the contract is for a surveillance system to be put into place for which the most important items are the equipments which are requires for the system to function. This is the principal requirement and after supply of these equiments the same are required to be put to use. Hence the equipments have to be installed, connected with wires to various components etc, as submitted by the applicant and since the same cannot be kept in the open they are to be housed in buildings consisting of operational areas, etc. The subject work to be undertaken by the applicant is a composite supply of works contract, since it includes supply of both, goods and services and does not fall in any of the clauses (i) to (xii) except clause (ii) of Section 5 of Notification No 11/2017 - CT (Rate) as amended - the subject contract is taxable and the tax rate to be applied is 18% GST. Issues Involved:1. Whether the supply of goods or services for ‘setting up of network’ qualifies as ‘works contract’ as defined in Section 2(119) of the CGST Act.2. If supplies as per the contract with BSNL are not treated as works contract, can these continue to qualify as composite supplyRs. If yes, what is the principal supplyRs.3. What is the rate of tax applicable to the supplies made under the contractRs.Issue-wise Detailed Analysis:1. Whether the supply of goods or services for ‘setting up of network’ qualifies as ‘works contract’ as defined in Section 2(119) of the CGST Act:The applicant, engaged in providing goods and services, sought a ruling on whether their activities under a contract with BSNL for setting up a network qualify as a ‘works contract’. The contract involves constructing buildings, laying optic fiber cables, installing equipment, and other ancillary activities necessary for creating network infrastructure. The applicant argued that the network to be set up qualifies as immovable property, thus meeting the definition of a works contract under Section 2(119) of the CGST Act.The authority analyzed the definition of works contract, which includes building, construction, fabrication, erection, installation, and other activities related to immovable property involving the transfer of property in goods. The authority considered judicial precedents and the nature of the network, which involves permanent fixtures and cannot be moved without dismantling. Based on these factors, the authority concluded that the supply of goods or services for setting up the network qualifies as a composite supply of works contract as defined in Section 2(119) of the CGST Act.2. If supplies as per the contract with BSNL are not treated as works contract, can these continue to qualify as composite supplyRs. If yes, what is the principal supply:The authority did not address this question directly due to the affirmative answer to the first issue. However, the applicant had argued that if the supplies were not treated as works contract, they would still qualify as a composite supply under Section 2(30) of the CGST Act. The contract involves naturally bundled supplies made in conjunction with each other, aimed at setting up and operating the network. The principal supply in such a composite supply would be the predominant element, which, based on the substantial quantity and value, would be the supply of material.3. What is the rate of tax applicable to the supplies made under the contract:The authority determined that the composite supply of works contract is treated as a supply of services under Schedule II of the CGST Act. The rate of GST applicable for such services is notified under Notification No. 11/2017 - Central Tax (rate). The relevant entry, 3(vi)(a), specifies a 12% GST rate for works contract services provided to a government entity for non-commercial use. However, the authority found that the subject contract does not fall under this entry as it does not involve original works or civil structures as defined. Consequently, the applicable tax rate for the supplies under the contract is 18% GST.Order:1. The supply of goods or services for setting up the network qualifies as a composite supply of works contract as defined in Section 2(119) of the CGST Act.2. The question regarding composite supply if not treated as works contract was not answered due to the affirmative answer to the first issue.3. The rate of tax applicable to the supplies made under the contract is 18% GST.