TAXABILITY OF EPC CONTRACTS FOR SOLAR PLANT

[Dr. Sanjiv Agarwal]

Typically a solar EPC contract is entered into by the Appellant to do end to end setting up of a solar power plum 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 as well as civil works/construction related services for setting up of a functional Solar Power Plant. The contract entered into by the parties includes end to end activities i.e. supply of various goods and services and hence is for the supply of Solar Power generating System.

In Re: RFE Solar Pvt. Ltd. 2019 (3) TMI 920 - APPELLATE AUTHORITY FOR ADVANCE RULING, RAJASTHAN; ,  supplier was engaged in executing 'Engineering Procurement, and Commissioning’ -EPC contracts for Solar Power Generating Systems commonly known as 'Solar Power Plants'.

It sought advance ruling on the following issues:

1. Whether contract for Erection. Procurement and Commissioning of Solar Power Plant shall he classifiable as Supply of Hoods or Supply of Services under the provisions of the Central Goods and Services Tax Act. 2017 and Rajasthan Goods and Services Tax Act, 2017.
2. If it is supply of Goods, then what will be its HSN classification and rate of tax in terms of the Notification No. 1/2017 - Central Tax (Rate) dated 28.06.2017.
3. If it is supply of Services, then what will he its HSN classification and rate of tax in terms of the Notification No. 11/2017 -Central Tax (Rate) dated 28.06.2017.

The AAR vide ruling dated 01.07 2018 IN RE: RFE SOLAR PVT LTD. 2018 (9) TMI 693 - AUTHORITY FOR ADVANCE RULING, RAJASTHAN, ruled that the scope of work in respect of "Turnkey EPC Contract" includes civil works procurement of goods and erection and commissioning. Accordingly, "Turnkey EPC Contract" do not get covered under supply of ‘Solar Power Generating System' under Entry 234 of Schedule I of the Notification No.   1/2017 - Integrated Tax (Rate), Entry 234 of Schedule I of the Notification No. 1/2017 - Central Tax (Rate) both dated 28 June, 2017 and Entry 234 of Schedule I of the Notification No 1/2017 - State Tax (Rate) dated 29 June, 2017.  EPC Contract for Solar Power plant comes under the purview of Works Contract as per Section 2(119) of GST Act.

Further, the contract for Erection, Procurement and Commissioning of Solar Power Plant falls under the ambit  “Works Contract Services" (SAC 9954 ) of Notification  No. 11/2017 Central Tax (Rate) dated 28 June, 2017 and attracts 18% rate of tax under IGST Act, or 9% each under the CGST and SGST Acts, aggregating to 18%.

Being aggrieved, an appeal was preferred by the applicant before the AAAR, Rajasthan on the same grounds.

The AAAR observed that when machines are embedded with no visible intention to  dismantle them and they are intended to be used for a fairly long period of time, they are considered as 'Immovable property'.

Since in this case, applicant entered into a contract to set up a solar power plant which includes supply of various goods as well as complete design, engineering and transportation, unloading, storage and site handling, installation and commissioning of all equipments and material, for setting up of a functional Solar Power Plant and since in setting up of Solar Power Generating System, plant is provided as a whole along with supply of services, said contract is a composite supply under section2(30). Said composite supply falls within definition of ‘Works contract’ under section 2(119) and attracts 18 percent GST. Further, since it was ruled that it is a case of works contract, the issue of what is principal supply becomes irrelevant.

The appeal was thus dismissed and AAR ruling affirmed holding that EPC contract for Solar Power Plant is a works contract and is taxable @ 18 percent GST.

Discussions to this article

[OmPrakash jain]

[1. See contrary judgment of Hon’ble Appellate Authority in Giriraj Renewables Pvt. Ltd., Basavana Bagewadi, Dist Karnataka 2018 (9) TMI 1341 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA.

2. The Hon’ble AAAR have wrongly relied upon the clarificatory order No.58/1/2002-CX dated 15/1/2002 which was issued u/s 37B of the Central Excise Act, 1944. This Order was issued for the purpose of ascertaining the excisability of plant and machinery assembled at site including other goods used for erection. It is difficult to understand that how a clarification issued on excisability of a product, by the Order under the then Excise Act has been made applicable to decide the issue of Immovable property and applying it under the GST regime, ignoring;

a) Latest clarification issued by Ministry of New and Renewable Energy (MNRE), vide Circular No. F.No. 283/11/2017/GRID SOLAR dated 3.4.2018, which categorically stated that;

“‘structurals’ as such, do not qualify as immovable property and hence are outside the domain of works contract.”

No comments/observations have been written by the Hon’ble AAAR over the above Clarification dated 3.4.2018 of the Ministry (MNRE).

The ‘structurals’ constructed for effective functioning/installation of Solar panel and its allied construction have been treated as immovable property by the Hon’ble AAAR.

(b) S.3(26), General Clauses Act, 1897.

3. It is worth mentioning that CBEC has prescribed different rates on Installation of Solar Power Generating System, on 31.12.2018, w.e.f. 1.1.2019 bifurcating Material and Labour component in the ratio of 70:30 (Refer notfn No.30/2018-CT(R) & 27/2018-CT(R). The CBEC has nowhere specified that Installation of Solar Power Generating System will be a works contract.

4. When the Supply & Installation of ‘Solar Power Plant’ has been treated by the Hon’ble AAAR as Composite supply u/s 2(30), CGST Act, 2017, then in our views, its tax liability is required to be determined u/s 8(a), CGST Act, 2017 read with recent notfn as mentioned above