2019 (10) TMI 481 - AAR - GST

DMRC contract for UPS systems not a works contract under CGST Act; GST rate 18% applies, not 12%.

The contract for supply, erection, installation, commissioning, and testing of UPS systems with DMRC does not qualify as a works contract under Section ... Works contract - composite supply - principal supply - transfer of property in goods - immovable property - classification of supply as goods or services - concessional rate for works contract pertaining to railwaysWorks contract - immovable property - transfer of property in goods - classification of supply as goods or services - Contract for supply, erection, installation, commissioning and testing of UPS systems with DMRC does not qualify as a works contract under Section 2(119) of the CGST Act. - HELD THAT: - The Authority found on the facts and documents that the applicant despatched UPS units to DMRC under invoice and e-way bill, and title in the goods passed on delivery prior to installation. The installed UPS units are capable of being dismantled and moved without substantial damage and were affixed only for operational stability; such attachment did not result in emergence of an immovable property. Given that a 'works contract' under Section 2(119) requires a contract in relation to immovable property involving transfer of property in goods during execution, the contract in question does not meet that requirement. The Authority therefore treated the supply as not being a works contract and proceeded to examine composite-supply principles.Answered in the negative; the contract does not qualify as a 'works contract'.Composite supply - principal supply - classification of supply as goods or services - concessional rate for works contract pertaining to railways - Whether the overall transaction is a composite supply and, if so, the tax treatment of the composite supply. - HELD THAT: - Having held that the contract is not a works contract, the Authority applied the definition of 'composite supply'. The goods (UPS units) constitute the principal supply because they are the major part of the contract and the services of installation, testing and commissioning are supplied in conjunction with those goods and are ancillary to the principal supply. Consequently, the composite supply is taxed according to the rate applicable to the principal supply. The UPS units fall under Heading 8504 and attract GST at 18% as supply of goods; therefore the composite supply is liable to tax at the rate applicable to those goods.There is a composite supply with goods as the principal supply; tax liability is according to the rate applicable to the principal supply (UPS units) - 18%.Concessional rate for works contract pertaining to railways - works contract - Applicability of the concessional 12% rate under Sr. no. 3(v) of Notification No. 11/2017-C.T. (Rate) where the supply is not a works contract. - HELD THAT: - The question of applicability of the concessional 12% rate was not adjudicated on merits because the prerequisite condition - that the supply be a 'works contract' - was negatived. As the Authority concluded the transaction is not a works contract, the concessional rate tied to works contracts was not applied. The Authority therefore did not answer the application of the concessional rate independently of that factual/legal threshold.Not answered on merits because the supply was held not to be a works contract; concessional rate therefore not applicable.Final Conclusion: The contract with DMRC is not a 'works contract' within Section 2(119) and, on the facts, constitutes a composite supply with goods (UPS units) as the principal supply; GST is therefore payable at the rate applicable to those goods (18%). The concessional 12% rate for works contracts was not applied since the contract was held not to be a works contract. ISSUES PRESENTED AND CONSIDERED 1. Whether the contract for supply, erection, installation, commissioning and testing of UPS systems qualifies as a 'works contract' within the meaning of Section 2(119) of the GST Act. 2. If the contract qualifies as a works contract, whether such supply would be eligible for the concessional composite works-contract rate of 12% under the specified entry of the rate notification (Sr. no. 3(v)). ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the contract qualifies as a 'works contract' under Section 2(119) Legal framework: Section 2(119) defines 'works contract' as a contract for building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods is involved. Schedule II deems a works contract to be a supply of services. Precedent treatment: The Authority relies on appellate jurisprudence applying the 'attachment to earth' or permanence tests to determine whether a supplied and subsequently installed machine or plant becomes immovable property; these tests consider (a) rooted/embedded attachment, (b) imbedding comparable to buildings/walls, and (c) attachment for permanent beneficial enjoyment. Interpretation and reasoning: The contract facts show that (i) UPS units are manufactured and dispatched under invoice and e-way bill to the recipient's designated sites, with title/property passing on delivery; (ii) separate consideration is stipulated for goods and for installation/related services; (iii) UPS units are affixed by nuts/bolts to foundations only to ensure stability and may be dismantled and relocated without significant damage; (iv) civil/foundation work required is ancillary and does not indicate an intention to create a permanent immovable structure; and (v) the contract was entered into by the supplier's Maharashtra office and documents evidence transfer of property prior to installation. The Authority holds that these facts show transfer of property in goods occurs before installation and that the installed UPS does not result in the emergence of immovable property as required by Section 2(119). Ratio vs. obiter: Ratio - The contract does not amount to a works contract because (a) the supplied UPS units are movable and removable without permanent attachment to earth and (b) property in goods transfers prior to installation; thus the essential requirement of execution 'in relation to an immovable property' is not satisfied. Obiter - Observations on separate registration/invoicing and on composite-supply tests are explanatory and contextual to the principal finding. Conclusion: The contract does not qualify as a works contract under Section 2(119) because the UPS units are movable (not immovable property) and property in goods transfers on delivery prior to any installation; therefore Schedule II's deeming of works contract as service is inapplicable. Issue 2: If a works contract, applicability of the concessional 12% rate under Sr. no. 3(v) Legal framework: The rate notification provides a concessional 12% (6% CGST + 6% SGST) for composite supplies/works contracts relating to specified original works for railways (excluding metro and monorail) and certain other categories. Composite supply and principal-supply concepts under Section 2(30)/definition of composite supply determine tax treatment where multiple supplies are naturally bundled and one is principal. Precedent treatment: The Authority applies composite-supply principles to determine whether the contract is a single composite supply that would fall within the concessional entry if it were a works contract for an eligible category. Interpretation and reasoning: Given the negative answer to Issue 1 (the contract is not a works contract), the concessional works-contract rate cannot apply. Independently, the Authority finds that goods (UPS units) constitute the principal supply and that installation/testing services are naturally bundled with the goods; therefore, the transaction is a composite supply with goods as the principal element. UPS units classify under the relevant tariff heading attracting 18% GST as supply of goods; accordingly, the entire composite supply is taxable at the rate applicable to the principal supply (i.e., 18%). Ratio vs. obiter: Ratio - Because the contract is not a works contract, the concessional 12% rate under Sr. no. 3(v) is not available; the composite-supply principal-supply rule leads to taxation of the whole composite supply at the rate applicable to the principal element (goods at 18%). Obiter - Observations on the recipient's option to take installation separately and the supplier's bifurcation of invoice/registration are explanatory to the composite-supply conclusion. Conclusion: As the contract is not a works contract, the concessional 12% rate under Sr. no. 3(v) does not apply. The supply is a composite supply in which the principal supply is goods (UPS units) classifiable under the relevant heading attracting 18% GST; therefore the composite transaction is taxable at 18%. Cross-References and Interdependence of Findings The negative finding on Issue 1 is determinative of Issue 2; because the contract fails the immovable-property requirement of Section 2(119), the works-contract deeming and any related concessional works-contract rates do not arise. Separately, application of composite-supply and principal-supply principles (referred to in Issue 2) reinforces that where goods are principal, the applicable goods rate governs the tax liability for the combined transaction.