Appellate authority rules street lighting under Energy Performance Contract a composite service. Tax rate 9% CGST/SGST.

The appellate authority concluded that the street lighting activity under the Energy Performance Contract is a composite supply with the principal supply being a service. The applicable tax rate is 9% CGST and 9% SGST, and the Appellant is not eligible for exemptions under Notification No. 12/2017-CT (R). The time of supply is determined based on specific invoicing and payment dates. The appeal was disposed of accordingly, setting aside the initial ruling by the Authority for Advance Ruling.

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Issues Involved:
1. Classification of street lighting activity under the Energy Performance Contract.
2. Applicable tax rate and eligibility for exemptions under Notification No. 12/2017-CT (R).
3. Determination of the time of supply for the services provided.

Issue-wise Detailed Analysis:

1. Classification of Street Lighting Activity:
The primary issue was whether the street lighting activity under the Energy Performance Contract (ESCO contract) is a supply of goods, a supply of services, or a composite supply involving both. The Appellant argued that the activity is a supply of service, emphasizing that their performance is measured based on energy savings rather than the installation of LED lights. The Authority for Advance Ruling (AAR) initially ruled that the activity was a composite supply with the principal supply being goods. However, upon review, it was determined that the contract's essence is the operation, management, and maintenance of the street lighting system, making it a service-oriented activity. The LED lights and other equipment are considered business assets used to render the service. Therefore, the activity was classified as a composite supply with the principal supply being a service under Heading 999112.

2. Applicable Tax Rate and Eligibility for Exemptions:
The Appellant claimed eligibility for exemption under entry 3 or 3A of Notification No. 12/2017-CT (R), arguing that their service qualifies as "pure service" or a composite supply with goods constituting less than 25% of the total value. The AAR ruled that the Appellant was not eligible for the exemption as the contract involved the supply of goods. The appellate authority upheld this decision, noting that the supply of goods occurs at the contract's termination, disqualifying it from being considered a pure service. Additionally, the Appellant failed to substantiate that the value of goods supplied would always be less than 25% of the total contract value, thus not meeting the criteria for exemption under entry 3A. The applicable tax rate for the service was determined to be 9% CGST and 9% SGST as per entry Sl.No 29 of Notification No. 11/2017 CT (R).

3. Determination of the Time of Supply:
The time of supply for the composite supply of services was addressed under Section 13 of the CGST Act. The earliest of the following dates was considered the time of supply:
a) Date of issue of the invoice to Thane Municipal Corporation (TMC) along with the energy savings report.
b) Date on which the payment is entered in the books of account of the supplier.
c) Date on which the payment is credited to the supplier's bank account.
The time of supply of goods was deemed irrelevant as the transaction was classified as a supply of service.

Conclusion:
The appellate authority set aside the AAR's ruling, concluding that the street lighting activity under the ESCO contract is a composite supply with the principal supply being a service. The applicable tax rate is 9% CGST and 9% SGST, and the Appellant is not eligible for the exemptions under Notification No. 12/2017-CT (R). The time of supply is determined based on the earliest of the specified dates related to invoicing and payment. The appeal was disposed of on these terms.

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