NO GST ON ROAD CONSTRUCTION UNDER DBOT MODEL

[Dr. Sanjiv Agarwal]

The issue of taxability of road construction under Design, Build, Operate and Transfer (DBOT) model was recently examined by the Authority for Advance Ruling (AAR), Rajasthan in Re: Nagaur Mukundgarh Highways Pvt. Ltd. 2018 (10) TMI 1146 - AUTHORITY FOR ADVANCE RULING, RAJASTHAN

In the instant case, the Appellant i.e. M/s. Nagaur Mukundgarh Highways Pvt Ltd. is a company incorporated as Special Purpose Vehicle (SPV) under the provisions of Companies Act, 2013 for the purpose of undertaking two laning/intermediate laning of sections of State Highway (Project) on DBOT (design, built, operate and transfer) basis. The Appellant has been engaged as a ‘Concessionaire’ wherein the Public Works Department (PWD), Government of Rajasthan has granted concession to construct, operate and maintain the project during :

1. the Construction Period which shall commence from the appointed date and will end on Commercial Operation Date (COD), and
2. a period of 10 years from the COD (O&M period).

The work of Operation and Management (O & M) was also given for a period of 10 years. It was to receive 50% of project cost as annuity with interest, i.e., the Appellant shall receive 50% of the project cost(i.e. cost of construction) which shall be paid to the applicant in five equal instalments during the construction period on the basis of achievement of milestones i.e. achieving specified percentage of physical progress. The Appellant shall receive the balance 50% of the project cost in bi-annual instalments over the O & M period along with the interest (hereinafter referred to as ‘Annuity Payments’). The first instalment shall be due and payable from the 180th day of COD.

The Appellant had sought advance ruling as to whether they are eligible to:

1. claim full ITC pertaining to procurement of goods and services for construction of the project during the Construction Period, as the entire revenue received during the said period is subject to GST; and

2. claim ITC pertaining to procurement of goods and services during the O & M period after reversal of ITC as per Section 17(2) of the Central Goods and Services Tax Act, 2017 read with Rule 42 of the Central Goods and Services Tax Rule, 2017 as Annuity Payment received during the said period is exempt whereas O&M payments received are subject to GST.

AAR ruled the activities involved are that of works contact for construction of road. Applicant was liable to pay applicable GST on full value during two years of construction period. GST shall be paid at the time of issue of invoices or receipt of payment of tax, whichever is earlier. In case of annuity, entry No. 23A of Notification No. 12/2017-CT (Rate) dated 28.06.2017 pertains to SAC 9967 which is for support services of transport services whereas the services provided by the applicant is classifiable under SAC 9954 which is liable to tax at the applicable rate of GST. In the given circumstances the applicant has to pay GST on full value of cost of project during the period of construction. The annuity received by the applicant is already GST paid during the construction period for which they are also paid interest by the Government.

For the purpose of input tax credit (ITC), eligibility and conditions for taking ITC have been prescribed in section 16 to 21 of CGST Act, 2017. It was held that since the applicant is rendering taxable services liable to GST, it is entitled to claim full input tax credit as per section 16(1). It is also entitled to claim ITC on supply of goods and services procured for use in outward supply of O & M services.

It agreed that applicant is entitled to claim full ITC during the construction period. The applicant is paying applicable GST on full value of the project and they are not supplying any exempted goods and services during the construction period of two years. Therefore, they are entitled to claim full ITC paid on all eligible goods and services.

Further, the annuity received by them for the construction of road and bridges is classifiable under SAC 9954 and liable to tax at the applicable rate of GST. If they are not supplying any exempted goods and services during the O & M period, the provision of section 17(2) of the CGST Act, 2017 are not applicable upon the applicant. The annuity received by the applicant is a payment of the remaining 50% of cost of the project in biannual equal installments on which the applicant would be paying GST during the construction period. As the annuity so received by the applicant is taxable, there is no need to take apportioned credit under section 17(2) of the CGST Act, 2017.

Therefore, the Applicant was entitled to claim ITC on supplies of goods and services or both procured for use in outward supply of O & M service purpose, as they are paying GST on 100 per cent of the amount received on account of O & M of the Project.

The AAR, Rajasthan therefore, ruled as under:

• The applicant is rendering taxable services during the construction of roads which is liable to tax and as such, it is entitled to claim full input tax credit under the provisions of section 16(1) of CGST Act, 2017.
• The applicant is entitled to claim input tax credit on supplies of goods and services or both procured for use in outward supply of O & M services, as it is paying GST on 100 per cent of the amount received on account of O & M of the project.

Being aggrieved, an appeal was preferred before Appellate Authority of Advance Ruling, Rajasthan (AAAR) on the following grounds :

1. AAR has erred in concluding that the project works undertaken by the Appellant under the aegis of the said Concession Agreement is a works contract by failing to appreciate the Employer’s object and purpose in awarding the Project Works by means of the said Concession Agreement. By equating said Concession Agreement with an arrangement for construction services simplicitor, AAR has not considered the fundamental difference between toll and annuity. 
2. AAR has wrongly applied composite supply u/s 2(30) of CGST Act, 2017. In the instant case, principal supply can not be a works contract.
3. AAR has failed to appreciate that but project work remains the property of applicant for 10 years. Project works are not ‘supplied’ by the Appellant to the employer under the said Concession Agreement until lapse of ten (10) years.
4. AAR has failed to examine the scope and applicability of “Heading 9967 - Supporting services in transport” under Notification 12/2017-Central Tax (Rate) dated 28 June, 2017 as amended (Exemption Notification). 
5. ‘Support services for transport’ is the accurate classification applicable to such concession arrangements.
6. AAR has erred  in ruling that input tax credit is fully available under O&M and Annuity leg of the project as full exemption is available to Annuity by way of “Heading 9967 - Supporting services in transport” under Sl.no.23A under Exemption Notification, wherein “Services by way of access to a road or a bridge on payment of annuity” are fully exempt from GST with effect from 13 Oct, 2017.

The AAAR observed that following amendment was made in Notification No. 12/2012-CT (Rate) dated 28.06.2017 vide Notification No. 32/2017-Central Tax (Rate) dated 13.10.2017 –

Sl. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent.)	Condition
1	2	3	4	5
23A	Heading 9967	Service by way of access to a road or a bridge on payment of annuity.	Nil	Nil

The AAAR, for annuity, observed that annuity payments are exempt from GST. For the purpose of ITC, annuity payments (exempted supply) are to be taken into consideration for taking proportionate ITC during Construction leg of the project and not during O&M leg of the project. When such is the case, full ITC of the tax paid on the inputs and input services used in the O&M phase is available to the Appellant if they are having no other outward supply during this phase.

The AAAR thus allowed the appeal and ruled that :

1. Annuity payments are exempted by virtue of Entry No. 23A of the notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. However, only 50% ITC of the GST paid on the Input and Input service used in the construction phase is available to the Appellant subject to the provisions of Section 17(5) of the Central GST Act, 2017.
2. Full ITC of the GST paid on the inputs and input services used in the O&M phase is available to the subject to the provisions of Section 17(5) of the Central GST Act, 2017.

[In Re: Nagaur Mukundgarh Highways Pvt. Ltd. 2019 (3) TMI 1076 - APPELLATE AUTHORITY FOR ADVANCE RULING, RAJASTHAN].