2023 (5) TMI 964 - AAR - GST

Two separate contracts under single bidding document are independent transactions, not composite supply under CGST Act 2017

The AAR-Telangana ruled that two separate contracts under a single bidding document constitute independent transactions rather than a composite supply. ... Levy of GST of advances received - time of supply - supply of goods and supply of services of works contract - composite supply or principal supply - requirement to pay GST on initial advance of 5% and interim advance of 7.5% on Ex works value of goods supplied under First Contract Agreement dated 9th February, 2022. Whether the entire supply which involves two separate contracts however a single bidding document, has to be treated as a composite supply of which the principal supply is the second contract which is a works contract or both the contracts have to be treated as separate transactions for which the time of supply and rate of tax to be levied would differ as per the provisions of the CGST Act 2017? HELD THAT:- As stated by applicant that his responsibility under the first contract completes with making goods (ex-works) available and loading them on to the mode of transport. That the moment he raises tax invoice for the supply of goods, endorse and dispatch the documents, the title of the goods passes on to SCCL. This makes the first contract under category of supply of goods to the recipient as the recipient holds the title of goods before they reach his premises as stated by the applicant - It is supply of goods under First contract if the recipient holds the title of goods before the Second contract is initiated which involves inland transportation for delivery at site, inland transit insurance, unloading, storage, handling at site, installation, insurance covers other than inland transit insurance, testing and commissioning including carrying out guarantee tests in respect of all the plants and equipment supplied under the ‘First Contract’. If there is no transfer of title until completion of Second contract then the entire scope of supply would come under category of ‘works contract’. An insight is provided by CBIC Circular No 47/21/2018-GST dated 8-6-2018 relating to how servicing of cars involving both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately, is to be treated under GST - In the said Circular, it is clarified that, “the taxability of supply would have to be determined on a case to case basis looking at the facts and circumstances of each case. Where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.” There are number of judgments wherein Hon’ble Supreme Court has observed that there can be two separate contracts, that is one for sale and another for Works Contract as in the present case the value of goods sold, property of which in goods has already been passed on, cannot form part of the value of the second contract i.e. Works Contract. The scope of works/supply undertaken under the individual contracts are entirely independent and specific to that contract and are not associated with other contract.  Contract agreement document itself, in this case, had put a condition that there are two separate contracts that need to be entered into i.e. one for supply of service and other for supply/sale of goods. Therefore, both the contracts are separate and cannot be clubbed together. The supply under the second contact commences with service of transportation of the said goods supplied under first contract. Since the transfer of property in the goods supplied under first contract is not taking place during the execution of the Works Contract under second contract, the value thereof cannot be included in the Works Contract. Thus the supply/ service under second contract commences commences only on completion of all the milestone activities of first contract. Therefore, it is evident that each Contract is independent and every milestone supply made from the individual contract is, an independent transaction. Thus, the applicant is eligible for the benefit of Notification No. 66/2017 Central Tax, dated 15th November, 2017 and accordingly the tax liability on sale of goods, as per First Contract, will arise as specified in clause (a) of sub-section (2) of section 12 of the said Act i.e. at the time of supply, which is the date of issue of invoice by the taxpayer or the last date on which he is required, under section 31, to issue the invoice with respect to the supply. Issues Involved:1. Whether GST is payable on 'initial advance' of 5% and 'interim' advance of 7.5% on Ex-works value of goods supplied under the First Contract Agreement.Summary:Issue 1: GST on Initial and Interim Advances under the First Contract Agreement1. Facts and Contracts: - The applicant, M/s. PES Engineers Private Limited, entered into two separate contracts with Singareni Collieries Company Limited (SCCL) for the supply and installation of a Fuel Gas Desulphurisation (FGD) system. - The First Contract involves the sale of goods ex-manufacture/ex-works, while the Second Contract covers services including transportation, insurance, unloading, storage, erection, civil works, and commissioning.2. Applicant's Contention: - The applicant argued that each contract should be independently assessed for GST purposes, with the First Contract being a pure sale of goods. - They claimed eligibility for the benefit of Notification No. 66/2017 Central Tax, which allows tax on goods to be paid at the time of supply (date of invoice) rather than on receipt of advance payments.3. Authority's Analysis: - The Authority examined whether the contracts should be treated as a composite supply or as separate transactions. - It was noted that the First Contract involves the supply of goods, with ownership transferring to SCCL upon loading and endorsement of dispatch documents. - The Second Contract involves works contract services, including various activities from transportation to commissioning of the supplied goods.4. Legal Provisions and Precedents: - Section 12(2)(a) of the CGST Act states that tax liability on goods arises at the time of supply, which is the date of invoice issuance. - The Authority referred to CBIC Circular No 47/21/2018-GST and various judicial precedents, including the CESTAT judgment in C.C.E. & S.T., AHMEDABAD-III Versus KALPATARU POWER TRANSMISSION LTD., to emphasize that multiple contracts can be treated separately if they are not naturally bundled.5. Conclusion: - The Authority concluded that the two contracts are independent and not naturally bundled, meaning they can be executed separately. - Therefore, the applicant is eligible for the benefit of Notification No. 66/2017 Central Tax, and the tax liability on goods supplied under the First Contract will arise at the time of supply (date of invoice) and not at the time of receiving advance payments.Ruling:- The applicant is not required to pay GST on the 'initial advance' of 5% and 'interim' advance of 7.5% on Ex-works value of goods supplied under the First Contract Agreement. The tax liability will arise at the time of supply, which is the date of issue of the invoice by the taxpayer or the last date on which the invoice is required to be issued under section 31 of the CGST Act.