Tax rate for LED street lights supply under Energy Performance Contract determined at 12%

The street lighting activity under the Energy Performance Contract was classified as a composite supply with the principal supply being goods (LED street lights). The applicable tax rate was determined to be 12% (6% CGST and 6% SGST), and the applicant was not eligible for exemption under Notification No.12/2017-Central Tax (Rate). The time of supply was established as the date of invoice issuance for the supply of goods.

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Issues Involved:
1. Classification of the street lighting activity under the Energy Performance Contract as supply of goods or services.
2. Applicable rate of tax and eligibility for exemption under Notification No.12/2017-Central Tax (Rate).
3. Time of supply if treated as supply of services.
4. Time of supply if treated as supply of goods.

Detailed Analysis:

1. Classification of Street Lighting Activity:
The primary issue is whether the street lighting activity under the Energy Performance Contract (ESCO contract) is a supply of goods or services. The applicant, a Karnataka State Government Entity, is responsible for the installation, operation, and maintenance of LED street lights and related equipment for Thane Municipal Corporation (TMC). The contract involves removing existing lights, installing new LED lights and smart feeder panels, and maintaining these systems for seven years. The applicant contends that their activity is a pure service, emphasizing that the dominant object is street lighting and energy saving, not the supply of LED lights. However, the contract's nature involves multiple taxable supplies, including the supply of LED lights, installation, and maintenance, which are naturally bundled in the ordinary course of business. Therefore, the transaction is classified as a composite supply, with the principal supply being the supply of goods (LED street lights).

2. Applicable Rate of Tax and Exemption Eligibility:
The applicant argues that their activity qualifies as pure service under Entry No.3 of Notification No.12/2017-Central Tax (Rate) and should be exempted from GST. Alternatively, they claim eligibility under Entry No.3A if the supply is considered composite. However, since the principal supply is the supply of goods, the exemption under Notification No.12/2017 does not apply. The applicable GST rate for LED lights and fixtures, classified under Chapter Heading 9405, is 12% (6% CGST and 6% SGST), as per Sl. No. 226 of Schedule II to Notification No.1/2017-Central Tax (Rate).

3. Time of Supply if Treated as Supply of Services:
If the transaction were treated as a supply of services, it would be considered a continuous supply of services under Section 2(33) of the CGST Act 2017, as the contract exceeds three months. The time of supply would be determined by the earliest of the following: the date of issue of the invoice, the date of provision of service if the invoice is not issued within 30 days, or the date of receipt of payment. The applicant contends that the time of supply is 30 working days from the date of submission of the approved energy savings report, as payments are released only after this verification.

4. Time of Supply if Treated as Supply of Goods:
For supply of goods, the time of supply is the earliest of the date of issue of the invoice or the date of receipt of payment. The consideration is received monthly based on energy savings, and the goods are handed over at the end of the contract. Therefore, the time of supply of goods is the date of invoice issuance. The consideration includes the value attributable to the supply of goods, and the GST rate is 12%.

Ruling:
1. The street lighting activity under the Energy Performance Contract is a composite supply where the principal supply is that of goods.
2. The applicable rate of tax is 12% (6% CGST and 6% SGST). The applicant is not entitled to the benefit of exemption under Entry 3 or 3A of Notification No.12/2017-Central Tax (Rate).
3. The question regarding the time of supply if treated as a supply of services is redundant as the transaction is a composite supply with goods as the principal supply.
4. The time of supply is the date of invoice, and the consideration is equal to the invoice value, with the GST rate being 12%.

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