2022 (9) TMI 512 - AAR - GST

MBSIRDA road construction gets 6% GST but utility services face 18% GST rate

In Re: M/s ITL-KCPL JV,

AAR Gujarat ruled on classification of composite supply involving design and construction of roads and utility services on EPC basis. The Authority held ... Classification of supply - Composite Supply of Works Contract - supply of design and construction of Roads and Services of TP-1 Area Under Cluster-A of MBSIR on EPC Basis wherein both goods and services are supplied - Section 2(119) and section 2(30) of the CGST Act, 2017 - whether the Principal Supply in this case will be the “Construction of Roads” and attract rate of 6% as per Notification No. 11/2017-CT(Rate) dated 28.06.2017) as amended)? - HELD THAT:- The subject Service order is for supply of design and construction of roads and utility services on EPC Basis. The said supply includes construction of Roads and other utility service and not exclusively for construction of Road. The contract/ work order is for construction of Road and other utility services and not only for Road. The construction of road and other utility services involves goods and service, are covered under the definition of work contract service. In the instant case construction of road involves component of goods and services and therefore covers under the category of composite supply of work contract. Further, construction of TP-1 Road covers under this entry - under the entry No. 3(iv) of Notification only work contract service of construction of Road is covered and attracts concessional rate of GST @ 6%. The design and construction of utility service includes goods and service supply by the applicant is composite supply of work contract. Hence first condition is satisfied. The applicant has submitted that Mandal Becharaji Special Investment Regional Development Authority (MBSIRDA) is a local authority and in support of argument has submitted the screen shot of TAN wherein it is mentioned that “Sub-category- local authority' also submitted another screen shot wherein mentioned “Constitution of Business- local authority'. The applicant has not submitted any documents of State Govt. Authority by which it can be established that MBSIRDA is a local authority. Further even at the time of filing the Advance Ruling Application, the applicant itself was not aware that they are local authority as such applicant has put forth this argument during the Personal Hearing only. This facts shows that the applicant was aware that they do not fulfil the criteria of being local authority otherwise they should aware of this facts. MBSIRDA is constituted under Sub-section (1) of Section 8 and every Regional Development Authority constituted under sub-section (1) of Section 8 shall be a body corporate in terms of Sub-section (2) of Section 8. Thus, it is evident that MBSIRDA do not cover under the ambit of a local authority as defined under Section 2(69) of CGST Act, 2017. Hence Second condition is not satisfied. Therefore, the applicant supply of work contract services of utility do not cover entry No. 3 (iii) of Notification is not applicable in this case. The supply of construction of Road of TP-1 area is work contract service and covers under Entry No. 3(iv) of Notification and is liable to GST @ 6% from 1-7-2017 to 17-7-2022 - with effect from 18-7-22 supply of construction of roads under the present contract attracts GST @18% - The applicant service of construction of other Utility Service viz. Potable Water Supply system, Recycled Water Supply, Sewerage Collection System, Industrial Effluent Collection System, Storm Water Drainage Network involves components of goods and services, therefore covers under the category of Work Contract service and is liable to GST @18%. Issues Involved:1. Whether the supply of design and construction of Roads and Services of TP-1 Area under Cluster-A of MBSIR on EPC Basis can be construed as a Composite Supply of Works Contract under Section 2(119) and Section 2(30) of the CGST Act, 2017.2. If yes, whether the Principal Supply will be the 'Construction of Roads' attracting a rate of 6% [CGST and SGST each] as per Notification No. 11/2017-CT(Rate) dated 28.06.2017 (as amended).Issue-wise Detailed Analysis:1. Composite Supply of Works Contract:The applicant, a consortium formed for the design and construction of roads and services on an EPC basis, received a contract from MBSIRDA. They argued that the scope of work, which includes road network, water supply systems, stormwater systems, sewerage, and other utility services, falls under the definition of a 'composite supply' as per Section 2(30) of the CGST Act. The applicant contended that the predominant element of the project is the 'Construction of Roads,' constituting 53.35% of the total contract price. As per Section 8 of the CGST Act, the tax rate applicable to the principal supply would be applicable to the entire composite supply.Findings:The Authority for Advance Ruling (AAR) noted that the design and construction of roads and utility services on an EPC basis involve both goods and services, qualifying as a works contract under Section 2(119) of the CGST Act. However, the AAR found that the construction of roads and other utility services are not naturally bundled and do not constitute a composite supply. Each service is independent and involves components of goods and services, thus falling under the category of works contract services.2. Principal Supply and Applicable Tax Rate:The applicant argued that the construction of roads should be considered the principal supply, attracting a concessional tax rate of 6% [CGST and SGST each] under Entry 3(iv) of Notification No. 11/2017-CT (Rate). They also claimed that MBSIRDA is a local authority, which would make the entire contract eligible for a 6% tax rate under Entry 3(iii) of the same notification.Findings:The AAR examined the contract and found that it includes various independent services, such as potable water supply, recycled water supply, stormwater systems, and sewerage systems. These services are not naturally bundled with the construction of roads and do not qualify as a composite supply. Consequently, the AAR ruled that the construction of roads alone falls under Entry 3(iv) and attracts a 6% tax rate from 1-7-2017 to 17-7-2022. However, from 18-7-2022 onwards, the tax rate for road construction under the present contract is 18% {9% CGST + 9% SGST} due to the omission of Entry 3(iv) by Notification No. 3/2022-CT (Rate).Regarding the claim that MBSIRDA is a local authority, the AAR found insufficient evidence to support this. MBSIRDA is constituted under the Gujarat Special Investment Region Act, 2009, and is a body corporate, not a local authority as defined under Section 2(69) of the CGST Act. Therefore, the applicant's supply of works contract services does not qualify for the concessional tax rate under Entry 3(iii).Ruling:1. The supply of design and construction of Roads and utility Services of TP-1 Area does not constitute a composite supply.2. GST rate on the supply of construction of Road Service:- From 1-7-2017 to 17-7-2022: 12% {CGST 6% + SGST 6%}- From 18-7-2022 onwards: 18% {CGST 9% + SGST 9%}3. GST Rate on the supply of construction of all utility services as per the Service Order attracts GST @18% {CGST 9% + SGST 9%}.