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2020 (8) TMI 526 - AAAR - GSTClassification of services - services provided to Electricity Supply Companies (wholly owned Government of Karnataka undertakings) by way of construction, erection, commissioning, installation, completion, etc. - exemption under entry 3(vi)(a) to Notification No.8/2017-Integrated Tax (Rate) - decision of AAR challenged - HELD THAT - The transmission and distribution system in the state was under the control of the Government of Karnataka (then Mysore) till year 1957. In the year 1957, MSEB was formed and the private distribution companies were amalgamated with Karnataka Electricity Board. Till the year 1986, KEB was a profit-making organisation. To improve the performance of the power sector and in tune with the Reforms initiated by Government of India, the Government of Karnataka came out with a general policy proposing fundamental and radical Reforms in the power sector. Accordingly, an Act, namely the Karnataka Electricity Reforms Act was passed by the Karnataka Legislature. The main object of incorporating the above companies was to carry out the business of distribution of electricity. The distribution of electricity by the incorporated companies is a commercial activity. Electricity is a concurrent list subject at Entry 38 in List III of the seventh Schedule of the Constitution of India. In India s federal governance structure, this means that both the central government and India s state governments are involved in establishing policy and laws for the electricity sector. This requires the central government and individual state governments to enter into memoranda of understanding to help expedite projects in the individual states. While these incorporated companies are set up with major funding from the State Government and are considered as Government Entities, they are not the Government per se since they do not have the sovereign power which resides with the State Government - the Appellant s argument is rejected on this count and it is held that the electricity distribution companies like BESCOM, MESCOM and HESCOM though being Government Entities, do not qualify as State within the meaning given in Article 12 of the Constitution. For availing the benefit of Sl.No 3(vi)(a) of Notification No. 08/2017-IT(Rate), dated 28-6-2017 as amended, the pre-condition is that the services being provided by the Applicant to BESCOM, MESCOM and HESCOM by way of construction erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a civil structure or any other original works must predominantly be for use other than for commerce, industry, or any other business or profession. This effectively means that for availing the aforesaid benefit of tax rate of 12%, it is of paramount importance that the services under taken/work done by the Appellant for the above electricity distribution companies must necessarily be for use which is non-commercial in nature - From the information available on public domain, it is clear that the principal/primary and foremost aim of these companies are predominantly commercial in nature and more over these electricity distribution companies generally work for the efficient and economic management of Electric power and optimum utilization of available resources. Since the nature of activities of BESCOM, MESCOM and HESCOM are principally and predominantly, commercial in nature, we come to the considered conclusion that the Appellants are not eligible for the benefit of 12% GST in terms of entry Sl.No 3 (vi)(a) of Notification No 08/2017 IT (R) dated 28-06-2017 as amended. Decision of AAR upheld.
Issues Involved:
1. Classification of services under Chapter Heading 9954. 2. Determination of applicable GST rate for works contract services provided to electricity distribution companies. 3. Definition and scope of "State" under Article 12 of the Constitution of India. 4. Eligibility for reduced GST rate under entry 3(vi)(a) of Notification No. 08/2017-Integrated Tax (Rate). Issue-wise Detailed Analysis: 1. Classification of Services under Chapter Heading 9954: The Appellant, engaged in civil construction and electrical infrastructure projects, sought to classify their services under Chapter Heading 9954. The lower Authority did not dispute this classification, acknowledging that the services provided by the Appellant to electricity distribution companies (BESCOM, MESCOM, HESCOM) fall under this heading. 2. Determination of Applicable GST Rate for Works Contract Services: The core issue was whether the services provided by the Appellant to electricity distribution companies qualify for a reduced GST rate of 12% under entry 3(vi)(a) of Notification No. 08/2017-Integrated Tax (Rate). The lower Authority held that the services are subject to an 18% GST rate, as they are predominantly used for commercial purposes. The Appellant argued that their services should attract a 12% GST rate, contending that the electricity distribution companies are "Government Entities" and the services provided are in the nature of original works. 3. Definition and Scope of "State" under Article 12 of the Constitution of India: The Appellant argued that electricity distribution companies qualify as "State" under Article 12 of the Constitution, thus entitling them to the reduced GST rate. They cited various Supreme Court judgments to support their claim that these companies are instrumentalities of the State, given their government ownership, financial assistance, monopoly status, and deep state control. 4. Eligibility for Reduced GST Rate under Entry 3(vi)(a) of Notification No. 08/2017-Integrated Tax (Rate): The lower Authority and the Appellate Authority examined whether the electricity distribution companies' activities are predominantly non-commercial. The Appellate Authority concluded that these companies, despite being government-owned, operate commercially. Therefore, the services provided by the Appellant do not qualify for the reduced GST rate of 12% under entry 3(vi)(a) of the said Notification. Conclusion: The Appellate Authority upheld the lower Authority's ruling, confirming that the services provided by the Appellant to BESCOM, MESCOM, and HESCOM are subject to an 18% GST rate. The appeal was dismissed on all counts, affirming that the electricity distribution companies, although government entities, do not qualify as "State" under Article 12 for the purpose of availing the reduced GST rate.
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