AAR rules on classification of Turnkey project under GST – Composite supply vs Works Contract

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 related to the Turnkey Project

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’