2019 (8) TMI 1153 - AAR - GST

Supply of Works Contract Service to KMRCL Deemed on Advance Adjustment: GST Implications

The Applicant is deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by the lump-sum mobilisation advance, and GST ... Time and value of supply - levy of GST - mobilisation advance - GST implication on the lump-sum so received before the implementation of GST and its recovery by KMRCL against the Applicant’s sales invoices issued post introduction of the GST - whether GST shall be charged on the gross amount of the invoice or the net amount after adjusting the lump-sum amount outstanding as on 30/06/2017? HELD THAT:- The Finance Act, 1994 allowed the contractor to pay service tax on that portion of the works contract, which was attributable to the actual provisioning of service, arrived at applying Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006. Under this method, the value of the taxable service was the residual amount that remained after deducting from the gross amount charged for the works contract the actual value of the property in goods transferred in the course of executing the contract. The value of the taxable service was, therefore, not ascertainable before the contractor raised the invoice - As the value of the taxable service was not ascertainable before the invoice was raised, no payment received in advance could be included in the gross amount charged for such taxable service except the portion adjusted in the service bills - Therefore, no service tax was leviable on the mobilisation advance except the portion adjusted in the service bills. As the Applicant apparently raised no service bill, the unadjusted part of the advance as on 01/07/2017 has not suffered tax under the pre-GST regime under Finance Act, 1994. After the GST comes into force, the works contract is no longer divisible into a contract for the supply of goods and a service contract. It is a service contract and the entire unadjusted mobilisation advance as on 01/07/2017, according to the Contract, applies towards payment of consideration for the works contract service - The contract provides a mechanism in the form of a bank guarantee that ensures that the advance is not diverted or misappropriated. Its application as payment for inducing the supply is, therefore, direct and unambiguous. It is, therefore, ‘consideration,’ whether or not in the form of a deposit, for the supply of the works contract service. The Contract makes it amply clear that the entire amount is applied as consideration for provisioning works contract service. The valuation of works contract no longer requires a rule separate from other services. The Contract, therefore, is to be valued as provided under section 15(1) of the GST Act, which does not restrict in any way the scope of time of supply, as provided under section 13(2) of the GST Act. Moreover, ‘consideration’ under the GST Act has a wider scope and includes deposits if applied as consideration. In that context, whether the mobilisation advance is earnest money or not is of little relevance. The Applicant is, therefore, deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by the lump-sum that stood credited to its account on that date as mobilisation advance. As the supply to the extent of the above amount is deemed to have been made on 01/07/2017 and tax is leviable thereon accordingly, the value of the supply of works contract service in the subsequent invoices as and when raised should, therefore, be reduced to the extent of the advance adjusted in such invoices. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Authority for Advance Ruling (AAR) relate to the Goods and Services Tax (GST) implications on a lump-sum mobilisation advance received under a works contract executed prior to the implementation of GST. Specifically, the issues are:Whether GST is leviable on the gross amount of the invoice or on the net amount after adjusting the outstanding lump-sum mobilisation advance received before GST implementation.The timing and value of supply concerning the lump-sum mobilisation advance outstanding as on the date of GST implementation (01/07/2017).Whether the mobilisation advance constitutes 'consideration' under the GST Act and thus attracts GST at the time of receipt or at a later stage.The applicability and relevance of pre-GST tax regime principles and judicial precedents (under Service Tax and VAT laws) to the GST regime concerning mobilisation advances.2. ISSUE-WISE DETAILED ANALYSISIssue 1: GST Liability on Mobilisation Advance - Gross or Net Invoice AmountLegal Framework and Precedents: Section 13(2) of the GST Act governs the time of supply, stating that the earliest of invoice issuance, receipt of payment, or provision of service determines the time of supply. Explanation (i) to section 13(2) clarifies that if advance payment is received, supply is deemed made to that extent. Section 2(31) defines 'consideration' broadly, including any payment made for inducement of supply, and deposits count as consideration only if applied as such.Pre-GST judicial precedents under the Service Tax regime, including Thermax Instrumentation Ltd and GB Engineering Pvt Ltd, held that mobilisation advances akin to earnest money deposits do not attract service tax until actual service provisioning.Court's Interpretation and Reasoning: The AAR noted that under GST, the works contract is treated as a composite supply of service, unlike the pre-GST regime where it was divisible into goods and services. The mobilisation advance, though received prior to GST, is applied as consideration for the works contract service post-GST implementation. The contract's bank guarantee mechanism ensures the advance is not misappropriated, reinforcing its nature as consideration.The AAR distinguished the pre-GST precedents, observing that the GST Act's wider definition of consideration and unified valuation rules (Section 15(1)) render those precedents inapplicable. The mobilisation advance must be considered as supply made on the date it stood credited (01/07/2017), and GST is leviable accordingly.Key Evidence and Findings: The contract terms stipulated recovery of mobilisation advance against successive milestone invoices, with no specific allocation to any particular supply. The advance was interest-free and secured by bank guarantees. Pre-GST invoices treated mobilisation advance as sale of goods for CST purposes, with no VAT or service tax levied on the advance itself.Application of Law to Facts: Since no tax was levied on the mobilisation advance under pre-GST laws, the unadjusted portion as on 01/07/2017 is taxable under GST as consideration for works contract service supplied on that date. Subsequent invoices must be adjusted to avoid double taxation.Treatment of Competing Arguments: The Applicant's argument that mobilisation advance is akin to earnest money deposit and not taxable at receipt was rejected based on the GST Act's definitions and the contract's terms. The reliance on pre-GST tribunal decisions was held misplaced due to the changed legal framework under GST.Conclusion: GST is leviable on the mobilisation advance amount as on 01/07/2017, and subsequent invoices should be net of the adjusted advance.Issue 2: Timing and Value of Supply of Mobilisation AdvanceLegal Framework and Precedents: Section 13(2) of the GST Act prescribes the earliest of invoice issuance, receipt of payment, or provision of service as the time of supply. Section 15(1) governs valuation of supply without special rules for works contracts as under the previous regime.Court's Interpretation and Reasoning: The mobilisation advance received before GST implementation but outstanding as on 01/07/2017 is deemed to be supply made on that date to the extent of the amount credited. This aligns with the principle that receipt of payment can trigger time of supply if earlier than invoice or service provision.Key Evidence and Findings: The mobilisation advance was credited on 24/06/2011 and outstanding Rs. 13.80 crores remained as on 30/06/2017. The contract terms indicate recovery of advance against milestone invoices post 20% payment of contract value.Application of Law to Facts: Since the advance stood credited on 01/07/2017, the supply is deemed made on that date to the extent of the advance. The value of supply for subsequent invoices should be reduced by the advance amount adjusted to avoid double taxation.Treatment of Competing Arguments: The Applicant's contention that GST should be charged on gross invoice value was rejected as it would result in double taxation of mobilisation advance.Conclusion: Time of supply for mobilisation advance is 01/07/2017, and GST should be charged accordingly on that date with subsequent invoice values adjusted.Issue 3: Applicability of Pre-GST Tax Regime Principles and Judicial PrecedentsLegal Framework and Precedents: Under the pre-GST regime, works contracts were divisible for VAT and service tax. Service tax was payable only on the service portion ascertained after deducting value of goods. Mobilisation advances were considered deposits or earnest money, not attracting service tax until actual service provisioning.Court's Interpretation and Reasoning: The AAR observed that under GST, works contracts are treated as supply of service in entirety, and the valuation is governed uniformly by Section 15(1). The broader definition of consideration under GST includes mobilisation advances applied as payment for supply.Key Evidence and Findings: The contract's mobilisation advance was not subject to VAT or service tax under pre-GST laws. Tribunal decisions cited by the Applicant were relevant under the Finance Act, 1994 but not under the GST regime.Application of Law to Facts: The AAR held that the pre-GST principles and decisions do not govern GST valuation and timing of supply. Mobilisation advance is taxable under GST when applied as consideration, irrespective of its treatment under earlier laws.Treatment of Competing Arguments: The Applicant's reliance on Thermax Instrumentation Ltd and GB Engineering Pvt Ltd was rejected as inapplicable under GST.Conclusion: Pre-GST tax rules and precedents do not apply to GST valuation and timing; mobilisation advance is taxable under GST as consideration when applied.3. SIGNIFICANT HOLDINGS'The Applicant is deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by the lump-sum that stood credited to its account on that date as mobilisation advance and GST is leviable thereon accordingly.''The value of the supply of works contract service in the subsequent invoices as and when raised should, therefore, be reduced to the extent of the advance adjusted in such invoices. The GST should, therefore, be charged on the net amount that remains after such adjustment.'Core principles established include:Mobilisation advances received prior to GST implementation but outstanding as on GST commencement date are deemed supplies made on that date to the extent of the advance amount.'Consideration' under GST includes mobilisation advances applied as inducement for supply, irrespective of their characterization as deposits or earnest money under previous tax regimes.Valuation and timing of supply under GST are governed by Sections 13(2) and 15(1) of the GST Act, superseding pre-GST tax laws and judicial precedents.To prevent double taxation, GST on subsequent invoices must be charged on net amounts after adjusting mobilisation advances already subjected to GST.