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2021 (9) TMI 1287 - AAR - GSTLevy of GST - Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for supplying Tertiary Treated Water to Mahagenco by treating the Sewage Water supplied by NMC - Built Operate and Transfer basis (BOT basis) - forward charge mechanism or reverse charge mechanism - entitlement for input tax credit - HELD THAT - Applicable GST is being charged by the applicant and the NMC is paying the GST to the applicant. In addition the applicant also has been given the right by the NMC to sell the Treated Effluent/ Tertiary Treated Water to any person for non-potable purposes. The applicant supplies such Treated Effluent/ Tertiary Treated Water to the Maharashtra State Electricity Generating Co. Ltd. (hereinafter referred as MAHAGENCO) Maharashtra. The impugned product is called as Tertiary Treated Water (TTW) which is generated from the Sewage Treatment Plant (STP) and such TTW is sold by the applicant to Mahagenco for consideration - Applicant has entered into tri-party contract with the NMC and Mahagenco. As per the Agreement it is the applicant s responsibility to set up the Tertiary Treatment Plant; NMC has granted to the applicant a special right to sell the Treated Effluent/ TTW to any person for non-potable application subject to the payment of royalty to the NMC; the sale consideration of Treated Effluent/ TTW is to be deposited by the applicant in an ESCROW Account opened with the designated bank. The ESCROW Bank is Trustee for NMC the lenders representative and the concessionaire i.e. the Applicant. Entire sale proceeds generated out of sale (supply) of TTW is deposited by applicant in the trustee bank in the ESCROW Account. Liability of GST on royalty paid /payable by the applicant to NMC - HELD THAT - The amount deducted by NMC through ESCROW arrangement is not a consideration/royalty but it is a revenue sharing arrangement/ reduction in applicant s consideration for service to NMC - the applicant has stated that the amounts to be paid to NMC on account of sale of treated water is not payment against royalty services received from NMC. Rather it is a revenue sharing arrangement between the applicant and NMC. In the present transaction in hand it is observed that there is transfer of rights by NMC to sell the processed water. The supplier of services is NMC and the recipient of such service is the Applicant. It is further observed that against the transfer of such rights NMC is getting consideration in the form of royalty from the applicant. The term Royalty is defined in the agreement itself and its quantum is also to be decided as mentioned in Schedule 13 - the amounts to be paid to NMC by the applicant on account of treated water sold is nothing but amounts paid against Royalty services received from NMC. It is not a revenue sharing model because in lieu of the amounts to be received by the NMC against sale of treated water the fact is that NMC is reducing its payment to the applicant against such amounts receivable. The subject question raised by the applicant pertains to applicability of GST on payments made by it to NMC against licence given to them to sell the TTW which is termed as Royalty in the impugned agreement. Even though this can be considered as Pure Service it is seen that such services are not rendered by the applicant to a local authority. Rather the said service is rendered by the local authority to the applicant and is therefore out of the purview of the said Entry No. 3 - the consideration paid by the applicant to NMC against receipt of Royalty service is not exempt from GST. Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for purchase of license or right of supplying Tertiary Treated Water to Mahagenco by treating the Sewage Water supplied by NMC is liable to tax under the GST Act. Whether tax is to be paid by NMC or by the recipient (applicant) under reverse charge basis? - HELD THAT - As per N/N. 13/2017-Central Tax (Rate) dated 28.06.2017 it is found that Entry Serial No. 5 prescribed that services supplied by the Central Government State Government Union Territory or local authority to a business entity in that case the liability to pay tax is on the recipient of such service on RCM basis. Hence since NMC is a Local Authority the liability to pay tax is cast on recipient of the supply i.e. the applicant. Hence as per the aforesaid notification entry applicant would be liable to pay GST on reverse charge basis under section 9(3) of CGST Act. Whether the applicant would be entitled for Input Tax Credit (ITC) if tax is to be paid under Reverse Charge Mechanism? - HELD THAT - In the present matter applicant has supplied the taxable goods i.e. treated water to Mahagenco which is the applicant s outward supply on which GST is payable by the applicant. The subject supply of Royalty services is taxable under reverse charge mechanism in the hands of the applicant. Hence the applicant would be eligible for ITC as per the provisions of section 16 to 21 of CGST Act subject to fulfilment of conditions as mentioned under the GST Act. ITC is available when the inputs are used in course of business or furtherance of business when supplier is making outward taxable supply - Transfer of rights to sale of processed water is provided by NMC to the applicant on the basis of which the applicant is supplying the treated water to Mahagenco on payment of consideration. The applicant can avail the ITC as per the provisions of law on the subject transaction only if it satisfies the relevant conditions mentioned under the GST Act relating to availment of ITC. Whether the applicant satisfies the conditions depends on facts during the relevant period and the provisions applicable during that period for which no details or facts are provided in the present matter. Hence ITC would be available to the applicant subject to the conditions mentioned under the provisions of section 16 to 21 of CGST/MGST ACT 2017.
Issues Involved:
1. Tax liability on royalty paid by the applicant to Nagpur Municipal Corporation (NMC) for supplying "Tertiary Treated Water" (TTW) to Mahagenco. 2. Determination of whether the tax is to be paid by NMC under forward charge or by the applicant under reverse charge. 3. Entitlement of the applicant to Input Tax Credit (ITC) if tax is to be paid. Detailed Analysis: Issue 1: Tax Liability on Royalty The applicant, M/s. Nagpur Waste Water Management Private Limited, operates a Sewage Treatment Plant (STP) under a contract with NMC and supplies TTW to Mahagenco. The applicant pays royalty to NMC for the right to sell TTW. The applicant contends that this royalty is not liable to GST as it is a reduction in consideration payable by NMC, constituting a revenue-sharing model. However, the authority finds that the royalty paid is for the right to sell treated water, which is a taxable supply of services under GST. The royalty is a consideration for the license granted by NMC to the applicant to sell TTW. The supply of such rights is a service provided by NMC to the applicant, and the royalty paid is based on the quantity of TTW sold. Therefore, the royalty is liable to GST under the GST Act. Issue 2: Payment of Tax under Forward Charge or Reverse Charge The authority refers to Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, which specifies that services supplied by the Central Government, State Government, Union Territory, or local authority to a business entity are subject to tax under the reverse charge mechanism (RCM). Since NMC is a local authority, the liability to pay tax on the royalty lies with the applicant under RCM, not with NMC. Issue 3: Entitlement to Input Tax Credit (ITC) The applicant inquires about the eligibility for ITC if the tax on royalty is paid under RCM. The authority refers to Sections 16 to 21 of the CGST Act, which govern the conditions and eligibility for ITC. The applicant, being a recipient of services in the form of rights transferred by NMC, is liable to pay tax under RCM and can avail ITC subject to the fulfillment of conditions specified in the GST Act. The ITC is available if the inputs are used in the course or furtherance of business and the supplier is making outward taxable supplies. Conclusion: Order: 1. The royalty paid by the applicant to NMC for supplying TTW to Mahagenco is liable to tax under the GST Law. 2. The tax on the royalty is to be paid by the applicant under the reverse charge mechanism (RCM). 3. The applicant is entitled to Input Tax Credit (ITC) subject to the fulfillment of conditions under Sections 16 to 21 of the CGST/MGST Act, 2017.
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