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2020 (10) TMI 855 - AAAR - GSTClassification of supply - Pure Supply of goods or a Pure Supply of Services - Composite Supply of goods and services being a works contract or not - street lighting activity under the Energy Performance Contract dated 05.12.2016 - rate of tax - benefit of exemption under entry 3 or 3A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended - time of supply of services - Whether KEONICS is liable to tax only once the energy saved is certified by the energy auditor? Whether amount credited in joint ESCROW account can be termed as 'receipt' especially because the said amount is not under control of KEONICS until the conditions are met? - challenge to AAR decision. Whether the activity undertaken by the Appellant for the Thane Municipal Corporation amounts to a supply of goods or a supply or service or is it a composite supply involving both goods and service? - HELD THAT - A supply of goods does take place as part of the contractual terms although it is not during the during the course of the contract. The supply of goods takes place when the contract come to an end and therefore forms part and parcel of the contract. Thus, the supply under the ESCO contract is a composite supply involving both a supply of service as well as a supply of goods. The principal supply however is a supply of service as it is the operation, management and maintenance of the street lighting system which is the essence of the ESCO contract. The LED lights and other equipment like smart feeder panels are goods used for the rendering the service. Therefore, we disagree with the lower Authority's ruling that the principal supply is a supply of goods. Rate of tax applicable on the supply of service by the Appellant - HELD THAT - In this case, there is no doubt on the fact that the supply is made to a local authority (Thane Municipal Corporation) and the service supplied i.e the operation and maintenance of street lighting is in relation to a function entrusted to the Municipality under Article 243W of the Constitution. However, the ESCO contract involves the supply of goods albeit at the time of termination of the contract. Therefore, the first condition of it being a pure service is not fulfilled. A pure service must necessarily not involve a supply of goods - the Appellant is not eligible for the benefit of exemption as a pure service under entry No 3 of Notification No 12/2017 CT (R). Benefit of exemption under entry No 3A to the exemption Notf No 12/2017 CT (R) - HELD THAT - The entry 3A of the exemption Notification is unambiguous in laying down the condition that the value of the supply of goods should not exceed 25% of the total value of the supply. The burden of proving the eligibility to the exemption is on the Appellant to show that his case comes within the parameters of the exemption notification - this onus has not been adequately discharged by the Appellant. Therefore, the Appellants are not eligible for the benefit of exemption under entry 3A of the Notf No 12/2017 CT (R) as amended by Notf No 02/2018 CT (R). Applicable rate of tax in respect of the supply of service to TMC - HELD THAT - The scope of the work under the ESCO contract is undertaken in three phases. Phase I involves the preparatory work for installation of Smart Feeder Panels and LED light fixtures. Phase II involves the implementation of energy efficient lighting fixtures, brackets and junction box, underground cables and flexible cables. In Phase III the operation and maintenance of the street lighting system will be monitored upto the end of the contract period. As observed earlier, there is a significant usage of goods and materials for the provision of the service as per the contract - the service of street lighting is classifiable under Heading 999112. This heading is chargeable to tax at the rate of 9% CGST and 9% SGST which is specified under entry Sl.No 29 of Notification No 11/2017 CT (R) dated 28-06-2017. Time of supply - HELD THAT - The supply in this case is a composite supply involving the supply of both goods and services with the supply of service being the predominant supply, the provisions of Section 13 of the CGST Act relating to time of supply of services will apply. Thye decision of AAR set aside.
Issues Involved:
1. Classification of street lighting activity under the Energy Performance Contract. 2. Applicable tax rate and eligibility for exemptions under Notification No. 12/2017-CT (R). 3. Determination of the time of supply for the services provided. Issue-wise Detailed Analysis: 1. Classification of Street Lighting Activity: The primary issue was whether the street lighting activity under the Energy Performance Contract (ESCO contract) is a supply of goods, a supply of services, or a composite supply involving both. The Appellant argued that the activity is a supply of service, emphasizing that their performance is measured based on energy savings rather than the installation of LED lights. The Authority for Advance Ruling (AAR) initially ruled that the activity was a composite supply with the principal supply being goods. However, upon review, it was determined that the contract's essence is the operation, management, and maintenance of the street lighting system, making it a service-oriented activity. The LED lights and other equipment are considered business assets used to render the service. Therefore, the activity was classified as a composite supply with the principal supply being a service under Heading 999112. 2. Applicable Tax Rate and Eligibility for Exemptions: The Appellant claimed eligibility for exemption under entry 3 or 3A of Notification No. 12/2017-CT (R), arguing that their service qualifies as "pure service" or a composite supply with goods constituting less than 25% of the total value. The AAR ruled that the Appellant was not eligible for the exemption as the contract involved the supply of goods. The appellate authority upheld this decision, noting that the supply of goods occurs at the contract's termination, disqualifying it from being considered a pure service. Additionally, the Appellant failed to substantiate that the value of goods supplied would always be less than 25% of the total contract value, thus not meeting the criteria for exemption under entry 3A. The applicable tax rate for the service was determined to be 9% CGST and 9% SGST as per entry Sl.No 29 of Notification No. 11/2017 CT (R). 3. Determination of the Time of Supply: The time of supply for the composite supply of services was addressed under Section 13 of the CGST Act. The earliest of the following dates was considered the time of supply: a) Date of issue of the invoice to Thane Municipal Corporation (TMC) along with the energy savings report. b) Date on which the payment is entered in the books of account of the supplier. c) Date on which the payment is credited to the supplier's bank account. The time of supply of goods was deemed irrelevant as the transaction was classified as a supply of service. Conclusion: The appellate authority set aside the AAR's ruling, concluding that the street lighting activity under the ESCO contract is a composite supply with the principal supply being a service. The applicable tax rate is 9% CGST and 9% SGST, and the Appellant is not eligible for the exemptions under Notification No. 12/2017-CT (R). The time of supply is determined based on the earliest of the specified dates related to invoicing and payment. The appeal was disposed of on these terms.
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