2019 (11) TMI 1365 - AAR - GST

GST Ruling: EPC Contract for ICET Facility Deemed Works Contract

In Re: M/s. Tata Projects Limited

The supply of an Engineering, Procurement & Construction (EPC) contract for the establishment of an Integrated Cryogenic Engine & Stage Test ... Classification of supply - supply of Engineering, Procurement & Construction (EPC) contract for establishment of Integrated Cryogenic Engine & Stage Test facility (ICET) - composite supply or not - natural bundling of services - Establishment of Fluids Servicing System (FSS) - principal supply or not - taxable at 5% GST vide notification No. 45/2017 -Central Tax (Rate) dt 14th November, 2017 or not - If Principal Supply taxable at 5%, whether the entire transaction in the contract is taxed as per the rate applicable to Principal Supply? HELD THAT:- The applicant is awarded contract by IPRC to Establish Integrated Cryogenic Engine & Stage Test Facility at Mahendragiri in the capacity of Prime Contractor - it is seen that the applicant supplies Goods and Services as required in the contract. It is to determine if the supply of goods and services by the applicant under contract to IPRC can be considered as a composite supply. In the case at hand, the applicant supplies civil electrical and Air conditioning system, structural and Mechanical system, Facility Fluid System, safety and Fire protection system, Instrumentation, control and data acquisition system - the whole contract for 'Establishment of an Integrated Cryogenic Engine & Stage Test Facility' at ISRO Propulsion Complex (IPRC), Mahendragiri is a composite contract as various supplies of goods and services are naturally bundled together. In the case at hand, the applicant has a contractual obligation to supply the materials and also to erect the civil electrical and Air conditioning system, structural and Mechanical system, Facility Fluid System, safety and Fire protection system, Instrumentation, control and data acquisition system. Such erection and installation is to be done to the Integrated Cryogenic Engine & Stage Test Facility' by means of civil works. It involves the transfer of ownership of these equipment, instruments, consumables, civil and electrical goods involved in the erection, construction and installation of these systems. The Integrated Cryogenic Engine & Stage Test Facility itself is an immovable structure erected at the site in Mahendragiri. Hon'ble Supreme Court in the case of COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD VERSUS SOLID & CORRECT ENGINEERING WORKS & ORS. [2010 (4) TMI 15 - SUPREME COURT] has held that the machine is fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth but because a foundation was necessary to provide a wobble free operation to the machine. An attachment of this kind without the necessary intent of making the same permanent cannot, in our opinions constitute permanent fixing, embedding or attachment in the sense that would make the machine a part and parcel of the earth permanently. Applying the above to the case at hand, the erection of the Systems at site makes the system a permanent fixture, i.e. immovable property. Thus it is clear that in the case at hand, the applicant supplies materials and in conjunction provides the service of erection of the Systems into at the Integrated Cryogenic Engine & Stage Test Facility making all the systems together as an immovable property - Therefore, the whole contract for 'Establishment of an Integrated Cryogenic Engine & Stage Test Facility' at ISRO Propulsion Complex (IPRC), Mahendragiri at ISRO Propulsion Complex (IPRC), Mahendragiri is also a 'Works Contract'. The present supply is a composite supply to be treated as a supply of services. As it is a supply of service, Notification No.45/2017-Central Tax (ate) dated 14.11.2017 and corresponding SGST notification G.O. (MS) No. 161, dated 14.11.2017 which provides for concessional rate of tax for a supply of goods is not applicable. The applicable rate of tax for this supply which is a supply of service will be the rate of tax of applicable for this supply of works contract. Issues Involved:1. Whether the supply of Engineering, Procurement & Construction (EPC) contract for the establishment of Integrated Cryogenic Engine & Stage Test Facility (ICET) can be construed as a Composite Supply under Section 2(30) of CGST Act, 2017.2. Whether the Principal Supply in such a case can be said to be 'Establishment of Fluids Servicing System (FSS)' and taxable at 5% GST as per Notification No. 45/2017-Central Tax (Rate) dated 14th November 2017.3. If the Principal Supply is taxable at 5%, whether the entire transaction in the contract is taxed as per the rate applicable to the Principal Supply.Detailed Analysis of the Judgment:Issue 1: Composite SupplyThe first issue is whether the supply of EPC contract for the establishment of ICET can be construed as a Composite Supply under Section 2(30) of CGST Act, 2017. The applicant is responsible for the overall project management, including the review of design, detailed engineering, supply of materials, installation, testing, and commissioning of various systems such as civil, electrical, air conditioning, structural, mechanical, facility fluid, safety, and fire protection systems. The contract's nature involves the supply of both goods and services, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business. The contract price is a single lump-sum amount, indicating that the supply of goods and services is indivisible. Therefore, the supply under the contract qualifies as a Composite Supply as defined in Section 2(30) of CGST Act, 2017.Issue 2: Principal Supply and Applicability of 5% GSTThe second issue is whether the Principal Supply can be said to be the 'Establishment of Fluids Servicing System (FSS)' and taxable at 5% GST as per Notification No. 45/2017-Central Tax (Rate) dated 14th November 2017. The applicant argued that the principal supply is the provision of goods, constituting 82% of the contract value, and hence should be taxed at 5% GST. However, the judgment clarifies that the entire contract involves the supply of goods and services, which are naturally bundled together, and the supply of services is predominant. As per Section 2(119) of CGST Act, a works contract is a composite supply of services. Therefore, the supply under the contract is a works contract and not merely the supply of goods. Consequently, Notification No. 45/2017-Central Tax (Rate) dated 14th November 2017, which provides a concessional rate of tax for the supply of goods, is not applicable.Issue 3: Tax Rate for the Entire TransactionThe third issue is whether the entire transaction in the contract is taxed as per the rate applicable to the Principal Supply. Since the supply under the contract is a works contract, which is a composite supply of services, the entire transaction is taxable at the rate applicable to the supply of works contract services. The applicable rate of tax for this supply of works contract will be as per the relevant GST provisions for works contracts.Conclusion:1. The supply specified in the contract between the applicant and ISRO Propulsion Complex Mahendragiri for the establishment of ICET, wherein both goods and services are supplied, is a Composite Supply under Section 2(30) of CGST Act, 2017.2. The supply is a Works Contract under Section 2(119) of CGST and TNGST Act 2017, and hence Notification No. 45/2017-Central Tax (Rate) dated 14.11.2017 is not applicable.3. The entire transaction is taxable at the rate applicable to the supply of works contract services.