Interpretation of Goods Supply in Construction Contracts: Exclusions & Inclusions

The Authority for Advance Ruling held that the explanation to Entry No. 234 of Notification No. 1/2017 - Central Tax (Rate) does not apply to the supply of works contract service for the construction of a 33/220 kV Pooling Substation. Goods supplied under a Turnkey Contract should not be included in the value of the works contract unless they are part of and made in the execution of the works contract. The supply of equipment and materials for Sub-Stations, Feeder Bays, and Transmission Lines under the contract should not be included in the value of the works contract for Civil Work for Substations and Feeder Bays.

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Issues Involved:

1. Applicability of explanation to Entry No. 234 of Schedule I to Notification No. 01/2017 - Central Tax (Rate) for the construction of a 33/220 kV Pooling Substation and associated works.
2. Taxability of goods supplied under the contract independent of the Works Contract being executed.

Issue-wise Detailed Analysis:

1. Applicability of explanation to Entry No. 234 of Schedule I to Notification No. 01/2017 - Central Tax (Rate):

The applicant, M/s Vihan Enterprises, engaged in the construction of a 33/220 kV Pooling Substation at Badwar, Rewa, under a turnkey contract, questioned whether the explanation to Entry No. 234 of Schedule I to Notification No. 01/2017 - Central Tax (Rate) applies to their project. The concerned officer opined that the explanation to Entry No. 234 does not apply to the supply of the said Works Contract Service.

The applicant argued that their contract involves the supply of goods and services, and they believed that the explanation in Entry No. 234 is not applicable to their supplies. They emphasized that the goods supplied under their contract do not fall under the items listed in Entry No. 234, which include bio-gas plants, solar power-based devices, solar power generating systems, wind mills, waste-to-energy plants, solar lanterns, and ocean wave energy devices.

The Authority for Advance Ruling (AAR) analyzed the provisions and found that the explanation to Entry No. 234 applies only when the goods listed in Entry No. 234 are supplied along with services specified in Entry No. 38. The contract in question involves the construction of infrastructure for the evacuation of power generated by renewable energy plants, but it does not include the supply of renewable energy devices or their parts listed in Entry No. 234. Therefore, the explanation to Entry No. 234 does not apply to the applicant's contract.

2. Taxability of goods supplied under the contract independent of the Works Contract being executed:

The applicant's contract is a Turnkey Contract with distinct parts, where the value of each activity is clearly defined and segregated. The contract includes the supply of equipment for Sub-Stations and Transmission Lines, Erection Testing and Commissioning, and Civil Work for Substations and Feeder Bays.

The AAR observed that the contract identifies goods that form part of the works contract and those that do not. The supply of equipment for Sub-Stations and Transmission Lines is not considered part of the works contract, while the supply of goods during Erection Testing and Commissioning and Civil Work for Substations is considered part of the works contract.

The AAR concluded that the supply of equipment and materials for Sub-Stations, Feeder Bays, and Transmission Lines under the contract should not be included in the value of the Works Contract for Civil Work for Substations and Feeder Bays. The supply of goods independent of the works contract should be taxed at the rates applicable to the goods, while the supply of goods as part of the works contract should be taxed as service.

Ruling:

1. The explanation to Entry No. 234 of Notification No. 1/2017 - Central Tax (Rate) does not apply to the supply of works contract service in the construction of the 33/220 kV Pooling Substation at Badwar, Rewa.
2. Goods supplied under a Turnkey Contract, where there are multiple independent contracts, should not be included in the value of the works contract unless such supply is part of and made in the execution of a works contract.
3. The supply of equipment and materials for Sub-Stations, Feeder Bays, and Transmission Lines under the contract should not be included in the value of the works contract for Civil Work for Substations and Feeder Bays.

This ruling is valid subject to the provisions under section 103(2) until declared void under Section 104(1) of the GST Act.

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