Classification of large infrastructure projects involving both goods and services portions is a complex task. There has been a debate on classification of turnkey projects as composite supplies as against works contracts. The Hon’ble Authority for Advance Ruling, Maharashtra (‘AAR’) in the case of In Re: Ms/ Jalaram Feeds (GST-ARA-83/2018-19/B-03) vide order dated 8 January 2019 had an opportunity to examine such a factual situation.
On facts, the AAR ruled that the turnkey project should be classified as composite supply of naturally bundled goods and services and not as a works contract.
1. Facts of the case
- M/s. NR Energy Solutions Private Limited (‘Taxpayer’) is engaged in the business of manufacture, export and supply of Electrical Control Panels, Power System, protection, automation, flexible AC transmission system, HDVC transmission etc.
- The Taxpayer was awarded turnkey projects for certain Electrical components at various sites/ locations.
- The scope of work involved ‘Supply of Relay & Protection Panels and Substation Automation System (SAS), complete design, manufacture, packing, insurance, transport and delivery to sites, training, installation, testing and commissioning of protection panels with Substation Automation System compatible to IFC 61850 protocol, to control and operate the 220 K V, 132 KV & 33 KV feeders, Power Transformers and equipment”.
- The contract involved both service as well as supply portions.
- In the pre GST era, Taxpayer levied excise duty and central sales tax along with applicable cess on the value of supplies and also levied service tax on the value of installation, testing and commissioning charges.
- In the GST era, the Taxpayer had charged GST @ 28% under HSN 85372000 for the value of supplies and GST @ 18% under HSN 995461 on the value of services.
- As per the Taxpayer’s customer, GST should be levied @ 18% as the turnkey projects are essentially “works contract” involving erection and installation of goods into immovable property and transfer of ownership in goods during the course of execution of the contract.
2. Submissions of the Taxpayer
- As per Section 7(1) of the Central Goods and Services Tax Act (‘CGST Act’), “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
- In the case of the turnkey projects, the Taxpayer is under an obligation to:
- complete design, manufacture of equipment
- packing, insurance, transport and delivery of equipment to various sites
- installation, testing and commissioning of various equipment at Substation and thereafter render training.
- As per Section 2(119) of the CGST Act, “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
- The project undertaken by the Taxpayer makes the supplies into an immovable property. As per the principles of various judicial pronouncements, equipment and devices fastened to the earth, for its beneficial enjoyment will partake the character of “immovable property”.
- Hence, the turnkey project undertaken by the Taxpayer falls under the purview of execution of a ‘works contract’ and subject to GST @ 18% under HSN 995461.
3. Submissions of the GST authorities
- As per Section 2(30) of the of CGST Act, ‘composite supply’ means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply’.
- The turnkey project involved both supply of goods as well as services; the value of supplies comprises more than 97.5% of the project value and the rest 2.5% cost comprises services portion.
- Specific classification would prevail over general classification for the purpose of determining the applicable tariff.
- In order to conclude that the activity is in relation to an immovable property and a works contract, the construction element has to be taken into consideration.
- Hence, the transaction is covered under the composite supply and not under the works contract as claimed by the Taxpayer.
4. Ruling of the AAR
- The transaction would amount to a ‘works contract’ service if the same is in relation to any immovable property.
- As per the contract documents, the value of supplies of equipment is clearly distinct and separated from the value of services rendered.
- In addition to the demarcation, the supply and service portions have been naturally bundled and in conjunction with each other.
- Separate payments are received for the goods and service portions.
- The Taxpayer cannot render services without the goods as the goods and services are supplied bring as a combination and in conjunction and in the course of their business where the principal supply is supply of goods.
- There is no activity undertaken in relation to any immovable property involving transfer of property in goods (whether as goods or in some other form) in the execution of the turnkey contract.
- Hence, the transaction would not amount to ‘works contract’