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2018 (9) TMI 1341 - AAAR - GSTSupply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of a solar power plant - Composite supply - natural bundling of services - rate of GST - Benefit of Concessional rate of duty - Nature of supplies made by sub-contractors. Whether supply of turnkey Engineering, Procurement & Construction (EPC) Contract for construction of a solar power plant wherein both goods and services are supplied can be construed to be a composite supply in terms of Section 2(30) of the CGST Act, 2017? If yes, whether the principal supply in such case can be said to be of Solar Power Generating System , which is taxable at 5% GST? Whether, benefit or concessional rate of 5% on Solar Power Generation System and parts thereof would also be available to sub-contractors? Held that - In the instant case there is no dispute that the contract in question involves a supply of both goods and services. However in order for the supply to be termed as a composite supply , what is required is that the supply of the goods and the services should at least be bundled, more specifically be naturally bundled and supplied in conjugation with each other. The term naturally bundled has not been defined in the GST Act - the concept of composite supply under the GST law is similar to the concept of naturally bundled services that prevailed under the service tax regime, and the same was understood to refer to those transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction. The supply of PV module is a distinct transaction by itself and Cannot be said to be naturally bundled with the supply of the remaining parts required for setting up the Solar Power Plant. The contract itself makes it abundantly clear that the term equipments does not cover free issue equipment . Therefore, the Contract itself recognises the supply by the owner as a distinct transaction which is separate from the supply of the other equipments and components by the contractor - the concept of natural bundling does not apply to the instant envisaged supply of the PV module in terms of the draft contract in question. Once the contract in question is that of a multistage supply as already discussed, having been already vivisected into the supply of the PV module by the owner as free issue to the Appellant, what remains to be executed by the Appellant is undertaking the supply of the remaining equipments and components and parts of the Solar Power Plant and supplying the services of design, erection, installation and commissioning of the Solar Power Plant - the supply of this remaining portion of the contract in question (involving the supply of the balance components and parts as well as the service portion) can still be termed as a composite supply in terms of Section 2(30) of the CGST Act, 2017 since the supply of these components and parts as well as the services of erection, installation and commissioning appear to be naturally bundled. If the dominant nature of the remaining portion of the contract in question which is executed by the Appellant is principally a supply of services of design, erection, installation and commissioning, then the tax rate will the rate as applicable to the services if they form the principal supply of the remaining portion of the contract. Benefit of concessional rate of 5% GST on the supply of solar power generating systems and its parts to sub-contractors - Held that - The supplies made by the sub-contractor to the Appellant are independent supplies. If the supply by the sub-contractor to the Appellant is of goods which can be termed as parts of the Solar Power Generating System, then the rate applicable will be 5% in terms of Sl. No. 234 of Notification No. 01/2017 Integrated Tax (Rate) dated 28.06.2017. However, if the supply by the sub-contractor to the Appellant is a composite supply, then the rate applicable to the dominant nature of the supply will prevail. Ruling - The supply of the PV module which is the major component of the Solar Power Plant is not naturally bundled with the supply of the remaining components & parts of the Solar Power Plant and the supply of the services of Erection, Installation and Commissioning of the Solar Power Plant. The supply of PV module is a distinct transaction from the supplies in contract in question as it is the owner whose responsibility it is to procure and supply the PV module. This PV module is to be supplied as free issue material over and above the plant being supplied by the contractor. The owner is responsible for transportation of the PV module from the point of origin till plant site and he bears the other risks and rewards of ownership. The PV module which is procured by the Project owner on High Sea Sale basis and imported by availing Customs duty exemptions and later supplied to the Appellant as a free issue for use in the setting up of the Solar Power Plant. The supply of the remaining portion of the contract in question by the Appellant Which involves the supply of the balance components and parts of the Solar Power Plant and the supply of services of Erection, Installation and Commissioning of the Solar Power Plant is viewed as a composite supply as the supply of goods and services are naturally bundled. The tax liability on this portion of the contract in question (other than PV module) which is termed as a composite supply will be determined in terms of Section 8 of the CGST Act, 2017 wherein the rate applicable to the dominant nature of the supply will prevail.
Issues Involved:
1. Whether the supply of turnkey Engineering, Procurement & Construction (EPC) Contract for constructing a solar power plant is a composite supply under Section 2(30) of the CGST Act, 2017. 2. Whether the principal supply in such a case can be said to be of “Solar Power Generating System” taxable at 5% GST. 3. Whether the benefit of the concessional rate of 5% on the Solar Power Generation System and parts thereof is available to sub-contractors. Detailed Analysis: Issue 1: Composite Supply under Section 2(30) of the CGST Act, 2017 The Appellant argued that the contract for the supply and setting up of a Solar Power Generating System (SPGS) should be considered a composite supply, with the principal supply being the SPGS itself. They contended that the contract included various components such as modules, structures, inverter transformers, and services like civil construction, which are ancillary to the provision of goods. The Authority for Advance Ruling (AAR) observed that the PV module, constituting 60-70% of the project, is imported and directly transferred to the owner by way of High Sea Sale. The owner files the Bill of Entry and makes the PV module available to the contractor. This separation indicated that the PV module could not be construed as part of a composite supply by the contractor. The Appellate Authority upheld the AAR's view, noting that the supply of the PV module is a distinct transaction and not naturally bundled with the supply of other components and services. The contract itself distinguished between "equipment" supplied by the contractor and "free issue equipment" (PV module) supplied by the owner. Therefore, the supply of the PV module cannot be considered part of a composite supply. Issue 2: Principal Supply and Tax Rate The Appellant argued that the principal supply should be the SPGS, which is taxable at 5% GST. They cited the Ministry of New and Renewable Energy (MNRE) Circular, which suggested that if the supplies under the contract are treated as a composite supply with SPGS as the principal supply, then the entire contract should be taxed at 5%. The AAR held that since the PV module is procured by the owner, it cannot be construed as the principal supply by the contractor. The Appellate Authority agreed, stating that the supply of the remaining components and services can be considered a composite supply. However, the tax rate for this composite supply would depend on the dominant nature of the supply. If the dominant nature is the supply of services, then the applicable GST rate for services would prevail. Issue 3: Concessional Rate for Sub-contractors The Appellant contended that the concessional rate of 5% GST should also apply to sub-contractors supplying goods or services for the SPGS. They argued that Notification No. 01/2017 Integrated Tax (Rate) does not specify the eligible persons for the concessional rate. The AAR held that supplies made by sub-contractors are independent supplies, and the appropriate GST rate should be applied based on the specific nature of each supply. The Appellate Authority upheld this view, stating that if the sub-contractor's supply can be termed as "parts" of the SPGS, the rate would be 5%. However, if it is a composite supply, the rate applicable to the dominant nature of the supply will prevail. Conclusion: 1. The supply of the PV module is not naturally bundled with the supply of other components and services and is a distinct transaction. 2. The remaining portion of the contract, involving the supply of balance components and services, can be considered a composite supply. The tax rate will depend on the dominant nature of this composite supply. 3. The concessional rate of 5% GST applies to sub-contractors only if their supply can be termed as "parts" of the SPGS. Otherwise, the rate applicable to the dominant nature of the supply will prevail. The appeal was disposed of in the above manner.
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