2022 (1) TMI 304 - AAR - GST

Tax treatment of water management contract: clarity on composite supply vs. works contract services

In Re: M/s. Suez India Private Limited

The case involved determining the tax treatment of a contract for water loss management with Kolkata Municipal Corporation, covering construction and ... Classification of supply - Works contract - divisible supply or not - agreement entered between the applicant and KMC, Establishment of District Meter Areas, Construction Works and Operation & Maintenance - agreement entered between the applicant and KMC be treated as single contract for composite supply of DB and O&M or not - taxability under GST regime - input tax credit - HELD THAT:- It appears that the scope of work includes inter alia supply, laying, installation and commissioning of distribution network with HDPE pipe (noted in para 2.6) along with operation and maintenance. The contract has been divided into two phases i.e., (i) Design & Construction Phase and (ii) O&M Phase. However, completion of first phase of the contract i.e., Design & Construction Phase shall entitle the contractor to apply for certificate of sectional completion only as referred to in clause 32.1 of the GCC - the instant contract is to be treated as a single contract for composite supply of DB and O&M which qualifies as ‘works contract’ as defined in clause (119) of section 2 of the GST Act. Further, as per Para 6 (a) of Schedule II to the GST Act, works contracts as defined in clause (119) of section 2 shall be treated as a supply of services. So, the instant supply shall be treated as supply of services. Taxability of supply - HELD THAT:- The applicant has made the instant composite supply of works contract to Kolkata Municipal Corporation which is a local authority in terms of definition under clause (69) of section 2 of the GST Act. Further, the works contract, as it appears from the scope of work, involves installation and maintenance of pipeline for water supply. We therefore find that the instant composite supply of works contract gets covered under entry serial number 3(iii) of the Notification No. 20/2017- Central Tax (Rate) dated 22.08.2017 and therefore shall attract tax @ 12%. The instant contract shall be treated as an indivisible single contract thereby the O&M contract cannot be held to be independent of DB supply. Moreover, though the term ‘pure services’ has not been defined under the Act, a bare reading of the description of services as specified in the aforesaid entry denotes that supply of services which does not involve any supply of goods can be regarded as pure services - the O&M contract, if it were treated to be an independent supply, wouldn’t qualify as pure services rather the same shall be held as works contract as defined in clause (119) of section 2 of the GST Act. Issues Involved:1. Whether the agreement between the applicant and Kolkata Municipal Corporation (KMC) for Establishment of District Meter Areas, Construction Works, and Operation & Maintenance (DB and O&M) should be considered as divisible supplies under GST Laws.2. If not divisible, whether the agreement should be treated as a single contract for composite supply of DB and O&M and its taxability under GST.3. If divisible, whether O&M would be regarded as a pure services contract falling under clause (b) of para 5 of Schedule II to The CGST Act, 2017.Issue-wise Detailed Analysis:1. Divisibility of Supplies under GST Laws:The applicant entered into a performance-based contract with KMC for water loss management, including construction of water distribution networks and operation & maintenance. The applicant contends that although two separate contracts were signed for DB and O&M phases, they were awarded for a single lump sum amount and should be treated as a single indivisible contract due to their interdependence. The applicant argues that the contract's nature and the sequence of activities, where O&M follows DB, imply that both phases are naturally bundled and supplied in conjunction with each other, making them composite supplies under GST.2. Composite Supply of DB and O&M:The Authority for Advance Ruling (AAR) observed that the contract is divided into two phases: Design & Construction (DB) and Operation & Maintenance (O&M). Despite separate agreements, the contract is treated as a single contract for composite supply of DB and O&M, qualifying as a 'works contract' under clause (119) of section 2 of the GST Act. The AAR ruled that the contract is an indivisible single contract for composite supply of works contract services, involving both construction and maintenance of water distribution networks.3. Taxability under GST:The AAR determined that the composite supply of works contract to KMC, a local authority, falls under entry serial number 3(iii) of Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017, attracting CGST and SGST @ 6% each. For the period from 01.07.2017 to 21.08.2017, the supply is taxable @ 18% (Central Tax @ 9% + State Tax @ 9%) as per entry serial number 3(ii) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.4. Pure Services Contract:The applicant contended that if the O&M contract is independent of DB supply, it should be considered a pure services contract, exempt under Entry 3 of Notification no. 12/2017-Central Tax (Rate) dated 28.06.2017. However, the AAR did not consider this question, as they ruled the contract as an indivisible single contract. Additionally, they noted that the O&M scope includes activities involving the transfer of materials, which would not qualify as pure services but as a works contract.Ruling:The AAR concluded that the contract for water loss management with KMC, including construction of water distribution networks and operation & maintenance, is an indivisible single contract qualifying as a works contract under clause (119) of section 2 of the GST Act. The composite supply of works contract is covered under entry serial number 3(iii) of Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017, attracting a tax rate of 12% (Central Tax @ 6% + State Tax @ 6%) from 22.08.2017. For the period from 01.07.2017 to 21.08.2017, the supply is taxable at 18% (Central Tax @ 9% + State Tax @ 9%).