ADVANCE RULING ON LEVY OF GST ON FREIGHT CHARGES ON COMPOSITE CONTRACTS

[Dr. Sanjiv Agarwal]

Many a times composite or works contracts involve service activities which may relate to one or more services. In some contracts, transportation is also involved which makes it necessary for the contractor to recover freight charges on such transportation with or without issuance of consignment note. Whether such freight charges will be exempt from levy of GST or not has been dealt with by Authority of Advance Ruling in the case of Siemens Ltd.

In the instant case, assessee was dealing in technology solutions for intelligent (smart), sustainable cities, smart grid, building technologies, mobility and power distribution. The Applicant has a contract with one of the major Public Sector Undertakings in the State of Haryana (Customer). In terms of the said contract, the Customer has placed an order through their “Notification of Award” (NOA) vide reference No. CC-CS/698-SR2/HVDC-3249/7/610/R/NOA-V/7217 dated 22 03-2017 for voltage source converters (VSC) based HVDC Terminals between Pugalur and North Trichur. This involves supply of equipment and services both on off-shore as well as on-shore basis.

The scope of the contract is divided into six contracts covering specific and detailed nature of supply of various goods and services. The ‘On shore service contract (VSC part)” (Service Contract) needs to be executed by the Applicant as JV’s Associate.

The query is related to the ‘service activities’ involved in their ‘fifth contract’ termed as “On shore service contract (VSC part) (NOA-V)”. The scope of work under this contract is as follows:

1. Local transportation, insurance and other incidental services
2. Installation charges
3. Training charges

The applicant sought advance ruling on the following questions:

(1) Whether the freight charges recovered by the Applicant under the aforesaid contract from the customer without issuance of consignment note will be eligible for exemption from CGST as prescribed in Serial no. 18 of Notification No. 12/2017 - Central Tax (Rate) F. No. 334/1/2017, dated 28 June 2017?

(2) Whether the freight charges recovered by the Applicant under the aforesaid contract from the customer without issuance of consignment note will be eligible for exemption from SGST as prescribed in S.No. 18 in Notification No. 12/2017-State Tax (Rate)  No. MGST 1017/C.R.103 (11)/ Taxation-1 dated 29 June 2017.

The AAR, vide order dated 19.12.2018 ruled as under:

1. The freight charges recovered by the Applicant under the aforesaid contract from the customer without issuance of consignment note will not be eligible for exemption from CGST as prescribed in S.No. 18 of Notification No. 12/2017 - Central Tax (Rate) F. No.334/1/2017, dated 28 June 2017.
2. The freight charges recovered by the Applicant under the aforesaid contract from the customer without issuance of consignment note will not be eligible for exemption from SGST as prescribed in S.No. 18 in Notification No. 12/2017 - State Tax (Rate) No. MGST 1017/C.R.103 (11) Taxation-1 dated 29 June 2017.

[IN RE: M/S. SIEMENS LIMITED - 2019 (4) TMI 1623 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA].

Being aggrieved by the ruling, assessee preferred an appeal u/s 100 of the CGST Act, 2017 before the AAAR, Maharashtra on the following grounds:

1. Exemption Notification is applicable to the Appellant.
2. The Appellant has entered into separate contracts for supply of goods and supply of services and the same does not constitute a composite supply.
3. Contracts entered into by the Appellant are not composite supply of services as work contract.
4. The on-shore contract for supply of goods is an ex-works supply, thus the place of supply is Appellant’s premise.

The AAAR noted that the appellant has entered into separate contracts for supply of goods and supply of services and the same does not constitute a composite supply. After going through the terms of contracts it is seen that though there are two contracts one for supply of goods and other for supply of services, in fact these two contracts are not separate or independent contracts as envisaged by the appellant but are parts of the one whole contract which are separated by the appellant for the reason known to him - All the contracts are interdependent. Further, the contracts are covered by the cross fall breach clause which means breach of one will be deemed as breach of other. The work of Taking Over/Time for Completion of the project and handing over to the Employer upon successful completion is to be completed within 38 months.

From the terms of the contract it is crystal clear that the transportation services provided by appellant which are the part of Fifth service contract is not only integrally connected with Third contract of supply of goods but it is also connected with the other contracts (First, Second, Fourth and Sixth contracts) which are performed by the JV partners other than the appellant. The appellant is entrusted with the work mainly for their expertise in erection and installation of the plant and the execution of turnkey project. The function relating to the supply of material and the rendering of services of erection and installation are integrally connected and interdependent. The terms of supply clearly show that the implementation schedule is not only for supply but also for erection, testing and commissioning of the project.

Further, the supply of the goods and the supply of services are inextricably linked with each other. The contract awarded in substance and essence is a composite contract as defined in section 2 (30) of the C.G.S.T. Act, 2017 for supply of goods and services. The entire transaction of providing the goods and the services is naturally bundled and hence this is clearly a case of composite supply of goods and supply of services.

On the issue that the contracts entered into by the Appellant are not composite supply of services as work contract and Services provided by the Appellant are not in relation to immovable property, the AAAR observed that it is seen from the nature of contract which envisages installation, which involves civil works to erect the structure for execution of the project in its entirety. It is an entire system comprising of a variety of different structures which are installed after a lot of prior work which involves detailed designing, ground work. Appellant has also submitted few photographs of the project which clearly shows that the structure is attached to the earth with the help of civil work. The photographs indicate the magnitude of the work done. Further foundations in cement concrete, cement concrete walls as well as cement concrete structures are constructed during the execution of the project. The mode of annexation shows that the groundwork, being the necessary foundation, is an important part of the project. The object of annexation, as said earlier, cannot be to make it movable from one place to the other. Hence, considering the scope of the work and the facts revealed by the photographs, it can be very well said that completion of the installation, erection of the total project is resulting into immovable property. Hence, the total project assigned to the appellant is nothing but composite supply of works contract as envisaged u/s 2 (119) of GST Act.

The AAAR held that :

1. The agreement for setting up for + 320KV, 2 X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala) is a composite works contract as defined u/s 2(119) of GST Act and taxable @ 18%.
2. Transportation services provided by the appellant being part of the whole works contract will be taxable @ 18% as works contract services and will not be eligible for the exemption as provided in Serial no. 18 of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017 and Notification No. 12/2017-State Tax (Rate) dated the 29th June, 2017.

The AAAR, thus  upheld and confirmed the impugned Advance Ruling. [IN RE: M/S. SIEMENS LIMITED - 2020 (4) TMI 667 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA].