2019 (11) TMI 1363 - AAR - GST

Solar PV Project Activities Classified as Works Contract for GST Purposes

In Re: M/s. McNally Bharat Engineering Company Limited

The activities carried out by the applicant under three contracts for the establishment of a Solar PV Power Project were deemed a Composite Supply by the ... Levy of GST - composite supply or not - 3 contracts entered for establishment of Solar PV Power Project - whether classified under SI. No.234 of Schedule I of the Notification No.1/2017- Central Tax (Rate) dt.28.06.2017? - whether GST can be paid on value relating to supply of solar modules alone at 5 % as per SI. No.234 of Schedule I of the Notification No.1/2017- Central Tax (Rate) dated. 28.06.2017? HELD THAT:- In the instant case, “The cross fall breach clause” as mentioned above establishes the indivisibility of the contract and reinforces the conditionality that all the three contracts in unison obligate the applicant to take up all activities i.e., end to end setting up of Solar Power Plant right from procurement of equipment to Erection and Operation & Maintenance of the same. In the present case, the applicant received the contracts for providing the design, procurement, supply, installation, testing & commissioning and the operation & maintenance of the Solar PV Plant along with grid connecting system for a period of 5 years from the date of successful completion of trial run. There is both supply of goods and services in the case as per agreement and they are naturally bundled as a package - the contention of the applicant that it's a composite supply is agreed upon. Whether the composite supply of the applicant would fall under works contract or not? - HELD THAT:- In the present case, the applicant submits that the solar Plant is fixed to land for its efficient functioning and for this purpose, minor civil work is undertaken to fix the solar power Modules - It is evident from the said activities that the project has an element of permanence. But the applicant had taken a different stance by furnishing certain photographs of the project and stating that the solar modules/panels are merely fitted with nuts and bolts on mounting structure and claimed that it is a movable property. This presentation of the issue is in clever manner but not in bonafide manner in view of the fact that the very mounting structure is embedded permanently to the earth by civil foundation and support. In fact the solar modules are fixed on civil foundation and the degree/mode of annexation has the character of permanence and immovability. As it involves permanent beneficial enjoyment of the land to which the power plant is installed, it satisfies the condition of things embedded in the earth. The view of the applicant that the project is movable is incorrect - Thus the instant case satisfies the condition of “immovable property” and falls under the purview of works contract, which is essentially a service and rate of tax shall be determined in accordance with notification no 11/2017 CT (Rate) dt:28-06-2017 as amended from time to time. Issues Involved:1. Whether the activities carried out by the applicant under all 3 contracts for the establishment of Solar PV Power Project can be treated as Composite Supply.2. If yes, whether the said supply can be classified under SI. No.234 of Schedule I of Notification No.1/2017-Central Tax (Rate) and GST shall be paid at the rate of 5%.3. If not, whether GST can be paid on the value relating to the supply of solar modules alone at 5% as per SI. No.234 of Schedule I of Notification No.1/2017-Central Tax (Rate).Detailed Analysis:1. Composite Supply:The applicant entered into three contracts with APGENCO for the establishment of a 100MW Solar PV Power Project, namely, Supply Contract, Erection Contract, and Operation & Maintenance Contract. Each contract had separate considerations but were interlinked with a clause ensuring the indivisibility of the contracts. The contracts collectively obligate the applicant to provide end-to-end solutions, including design, procurement, supply, installation, testing, commissioning, and maintenance of the Solar PV Plant.The Authority for Advance Ruling (AAR) examined whether these activities constitute a Composite Supply under Section 2(30) of the CGST Act. The definition of Composite Supply involves two or more taxable supplies of goods or services that are naturally bundled and supplied in conjunction with each other in the ordinary course of business, with one being the principal supply. The AAR concluded that the activities of the applicant are naturally bundled and supplied in conjunction with each other, thus constituting a Composite Supply. However, the supply was also found to fall under the ambit of works contract as defined in Section 2(119) of the CGST Act, which involves construction, fabrication, erection, installation, etc., on immovable property.2. Classification and Tax Rate:The applicant argued that the principal supply in the Composite Supply is the supply of solar modules, which should be classified under SI. No.234 of Schedule I of Notification No.1/2017-Central Tax (Rate), attracting a GST rate of 5%. However, the AAR noted that the Solar PV Plant is fixed to the land, involving civil works, and therefore qualifies as immovable property. Consequently, the Composite Supply falls under the definition of works contract, which is treated as a supply of service under serial no.6, Schedule II of the CGST Act.The applicable rate for works contract services is specified under entry no. (ii) of S. No. 3 of Notification No. 11/2017-Central Tax (Rate), which is 18% (9% Central tax and 9% State tax). The AAR ruled that the supply cannot be classified under SI. No.234 of Schedule I of Notification No.1/2017-Central Tax (Rate) and is instead subject to the 18% GST rate.3. Separate GST Rate for Solar Modules:Given the ruling that the entire supply constitutes a works contract and is subject to an 18% GST rate, the question of applying a 5% GST rate solely on the supply of solar modules becomes irrelevant. The AAR confirmed that the amended rates effective from 01.01.2019, which provide clarity on the rate of taxation for Solar Power Plant Projects, are applicable. These amendments specify that if goods and services are supplied together, the material portion is deemed to be 70% of the gross consideration, and the remaining 30% is deemed to be the value of the taxable service.Rulings:1. The activities carried out by the applicant under all 3 contracts for the establishment of the Solar PV Power Project are treated as Composite Supply, which is a composite supply of works contract as defined under Section 2 of the CGST Act and APGST Act, 2017. This supply is treated as a supply of service under serial no.6, Schedule II of the CGST Act and APGST Act, 2017, and is classified under heading 9954, entry no. (ii) of S. No. 3 of Notification No. 11/2017-Central Tax (Rate). The applicable rate of tax is 18% (9% Central tax and 9% State tax).2. The amended rate of tax vide Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018 and Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018, which came into force from 01.01.2019, is applicable.3. The question of applying a 5% GST rate solely on the supply of solar modules is irrelevant in the context of the ruling that the entire supply is a works contract subject to an 18% GST rate.