Air conditioning and fire extinguishing system hiring services taxed at 18% under GST leasing provisions

The AAR, West Bengal ruled on hiring services of air conditioning and fire extinguishing systems. The Authority determined that installed systems lose their movable property character and become immovable, distinguishing them from the SC precedent in Solid Correct Engineering Works. Each supply attracts 18% tax under leasing/rental services rather than goods supply rates. Since it constitutes mixed supply, the highest rate of 18% applies. The applicant is eligible for input tax credit on hiring charges paid to supplier, subject to fulfilling conditions under section 16 of GST Act, as no restrictions apply under section 17(5).

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Issues Involved:
1. Classification of the supply received by the applicant.
2. Applicable tax rate for the supply.
3. Eligibility for input tax credit.

Summary:

Issue 1: Classification of the Supply

The applicant, a 100% Export Oriented Unit, entered into agreements for hiring various assets and fit-outs from TCGUIH. The applicant contended that the supply should be classified as "leasing or rental services concerning office machinery and equipment (except computers)" under SAC 997314, attracting 18% tax. The Authority examined whether the supply could be classified as composite or mixed supply. It was determined that the supply did not qualify as a composite supply since there was no predominant element. Instead, it was classified as a mixed supply, consisting of multiple independent supplies provided for a single price.

Issue 2: Applicable Tax Rate

The Authority analyzed the tax liability for mixed supplies under Section 8 of the GST Act, which states that a mixed supply is taxed at the highest rate applicable to any of its components. The supply included air conditioning systems and fire extinguishing systems, which are taxed at 28% and 18% respectively. However, the Authority noted that these systems, once installed, become part of the building and lose their character as movable property. Consequently, the supply was reclassified under serial number 17(viii) of Notification No. 11/2017-Central Tax (Rate), attracting an 18% tax rate.

Issue 3: Eligibility for Input Tax Credit

The applicant sought confirmation on the eligibility to claim input tax credit for the tax paid on the supply. The Authority confirmed that the applicant is entitled to avail input tax credit, provided all conditions under Section 16 of the GST Act are fulfilled and the credit is not restricted under sub-section (5) of Section 17.

Ruling

The supply received by the applicant, including hiring of electrical equipment, sprinkler systems, air conditioning systems, and DG set emergency power supply, attracts an 18% tax rate. The applicant is eligible to take credit of input tax charged by the supplier, subject to the fulfillment of all conditions under Section 16 of the GST Act.

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