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 ... Supply of Works Contract or not - Composite Contract - contract entered into with DMRC for supply, erection, installation, commissioning and testing of UPS system - rate of tax - Sr. no. 3(v) of N/N. 11/2017-C. T. (Rate), as amended w.e.f. 25.1.2018? - HELD THAT:- From a perusal of the Agreement submitted by the applicant, it is found that even though the contract is for Supply, installation, testing, and commissioning, etc., of Uninterrupted Power Supply System for Signalling, Telecommunication and Automatic Fare Collection System for the Mass Rapid Transport System of DMRC there is a provision for separate consideration for supply of goods and services. Even though the applicant has bifurcated the work into supply of goods from their Maharashtra GST registered premises and supply of services from their New Delhi GST registered office and accordingly raising separate invoices on DMRC for supply of goods and supply of services, we find that the contract has been entered into, by the applicant’s Maharashtra office and not by their New Delhi GST registered office - Thus we are taking up the contract as one contract for which agreement has been entered into, by DMRC and the applicant situated in Maharashtra. Works Contract or Composite Supply? - HELD THAT:- The applicant first despatches the goods to DMRC under an Invoice and E-Way Bill. Thus the title in property of the said goods are transferred as soon as the delivery is completed. It is only thereafter that installation, etc takes place. We agree with the applicant’s contention that the contract for supply of UPS system to DMRC does not qualify as a ‘works contract’ under Section 2(119) of the CGST Act since the installed UPS system cannot be said to result in the emergence of an immovable property - Hence Works contract will be treated as service and tax would be charged accordingly. In the subject case UPS is not as immovable property as it can be dismantled and moved to a different location without any damage - it is found from the submissions and agreement that the contract is considering a clear demarcation of goods & services to be provided by the applicant. Now we have to decide whether the supplies are naturally bundled & in conjunction with each other as required by the definition of composite supply. In the contract submitted by the applicant the major part of the contract is supply of goods. i.e. UPS Units, etc. These goods are delivered to the client by the applicant and such goods that are supplied are used by the applicant to provide services of installation, testing and commissioning of the substations. Without these goods the services cannot be supplied by the applicant and therefore, the goods and services are supplied as a combination and in conjunction and in the course of their business where the principal supply is supply of goods. Thus there is a composite supply in the subject case. The principal supply in this case is a supply of goods and therefore the GST will have to be paid on the goods at the appropriate rate after classification under the appropriate heading - The principal goods in the subject case is UPS units which are most important for the applicant to render supply as per the contract. Thus, the contract entered into with DMRC for supply, erection, installation, commissioning and testing of UPS system do not qualify as a supply of works contract under Section 2(119) of the CGST Act. 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.