APPELLATE ADVANCE RULINGS IN GST ON SOLAR PLANTS

[Dr. Sanjiv Agarwal]

The orders of Appellate Advance Ruling Authority (AAAR) have started pouring in. In this article, to recent Appellate advance rulings on solar power plants and works contracts in relation thereto are discussed.

Appellate advance ruling on works contract and rate of GST (AAR ruling affirmed )

M/s. Fermi Solar Farms Private Ltd. (Appellant) is engaged in operation of renewable energy power plant projects. These typically include operation of solar power plants set up across India for generation and distribution of electricity generated. The appellant is emerging as a leading builder of renewable energy projects.

The Appellant filed an Application for Advance Ruling for seeking clarification basis the draft contracts of the Appellant, in view of the provisions of 'composite supply' and the rate of tax provided for Solar Power Generating System under GST. The Appellant sought clarification in respect of the following:

1. Whether in case of separate contracts for supply of goods and services for a solar power plant, there would be separate taxability of goods as 'solar power generating system' at 5% and services at 18%.
2. Whether parts supplied on standalone basis (when supplied without PV modules) would also be eligible to concessional rate of 5% as parts of solar power generation system.
3. Whether benefit of concessional rate of 5% of solar power generation system and parts thereof would also be available to sub-contractors.

The appellant argued that the agreement is for supply of SPGS as a whole because the responsibility of the supplier also includes execution and implementation of the project and as such rate of tax should be five percent. The Advance Ruling Authority passed the following order:

1. The agreement tendered in support of the transaction reveal that the impugned transaction is for setting up and operation of a solar photovoltaic plant which is in the nature of a 'works contract' in terms of clause (119) of Section 2 of the GST Act, and hence, should be taxable at the rate of 18%
2. In the absence of any documents, the AAR was not able to deal with the question regarding applicability of concessional rate of tax on parts of solar power generating system in the present proceedings.
3. With regard to the question whether benefit of concessional rate of 5% of SPGS and parts thereof would be available to sub-contractors, it was held that no documents were provided and hence this question was not dealt with in the proceedings.

Being aggrieved by the advance ruling, the Appellant preferred the appeal before AAAR belatedly as the AAAR was not constituted. The AAAR condoned the delay.

It was ruled that the agreements tendered in support of this question are for setting up and operation of a solar photovoltaic plant and are in the nature of a 'works contract' in terms of clause (119) of section (2) of the GST Act. Schedule II ( Activities to be treated as supply of goods or supply of services) treats 'works contract' u/s 2 (119) as supply of services .Depending upon the nature of supply, intra-state or inter-state , the rate of tax would be governed by the entry no 3(ii) of the Notification No 8/2017-Integrated Tax (rate) under the Integrated Goods and Services Tax Act, 2017 (IGST Act) or the Notification no 11/2017 Central Tax/State Tax (Rate)under the CGST Act and MGST Acts. The rate of tax would be 18% under the IGST Act and 9% each under the CGST Act and the MGST Act, aggregating to 18% of CGST and MGST Act. The AAAR did not opined on other issues for want of documents. [ IN RE: M/S. FERMI SOLAR FARMS PRIVATE LIMITED  (2018) 9 TMI 1339 (AAAR, Maharashtra)]

Appellate advance ruling on supply of turnkey Engineering, Procurement and Construction ('EPC) Contract for construction of a solar power plant (AAR ruling modified)

Appellant entered into contracts with various Developers who desired to set up and operate solar photovoltaic plants for supply of power generated. In various cases, the Appellant also is a Project developer wherein it is engaged in operation of renewable energy power plant projects.

Typically, a contract is entered into by the Appellant to do end to end setting up of a solar power plant which includes supply of various goods (such as modules, structures, inverter transformer etc.) as well as complete design, engineering and transportation, unloading, storage and site handling, installation and commissioning of all equipments and material, complete project management, civil works/construction related services for setting up of a functional solar power plant.

In the instant case, the contract entered into by the Appellant included end to end activities i.e. supply of various goods and services and hence is for the supply of solar power generating system.

The intent of the contract is that the entire contract would be undertaken by the Appellant for supply and setting up of the solar power plant which includes supply of both goods and services as well as setting up of transmission lines for transmission of the electricity generated up to the storage or the GRID. There may be a single lump sum price for the entire contract for supply of both goods and services and payment terms may be defined depending on agreed milestones.

It sought advance ruling on whether contract for supply of/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 Central Goods and Services Tax Act, 2017 and rate thereof. The advance ruling stated that it was a case of works contract and taxable @ 18 percent (9% CGST and 9% SGST) or 18% IGST.

Being aggrieved, applicant filed appeal before the AAAR belatedly. The delay was condoned.

The AAAR observed that the contract fulfills the condition of composite supply. There is a supply of goods and services. They are naturally bundled in the sense that the goods and services may be required to fulfill the intention of the buyer in giving the contract. The supply of goods and services are provide as a package and the different elements are integral to flow of supply i.e. one or more is removed, the nature of the supply would be affected. Thus, from a reading of the entire contract as well as from the definition of composite supply what can be easily gathered is that the buyer has given a contract for setting up Solar Power Generating Supply to the appellant and therefore, it is single composite supply of goods and services and installation thereof.

The contract for providing the design, procurement, supply, development, testing and commissioning of the plant which includes the supply of both goods and services is a composite supply as per the definition in the Act. There are two taxable supplies- one of goods and the other of services and they both are naturally bundled and it is natural and also a practice to expect that the contractor who will supply the goods will also supply the services alongwith it. In the business of contracts for the Solar Power Generating System, it is a practice to provide a Plant as a whole along with the supply of services. The AAAR differed with the order of the Advance Ruling Authority in this respect. However, the case as per agreement is for erection of solar power generating system.

The AAAR thus, ruled that the Engineering, Procurement and Construction contract falls within the definition of 'composite supply' as found in the GST Act. The question is answered in the positive as supply of the said turnkey EPC contract is a 'composite supply' u/s.2(30) of the CGST Act, 2017.The said composite supply falls within the definition of works contract u/s.2 (119) of the CGST Act, 2017.

As the AAAR treated the transaction as a 'Composite supply' and a works contract falling u/s. 2(119) of the CGST Act, 2017 and Para 6 of SCHEDULE II [ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES] treats "works contracts" u/s 2(119) as supply of 'services', there was no occasion to go into the issue of 'principle supply'. IN RE: GIRIRAJ RENEWABLES PRIVATE LIMITED  [(2018) 9 TMI 1183 (AAAR, Maharashtra)]