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TMI Blog2020 (10) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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 inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. At the outset we would like to make it clear that the provisions of CGST, Act 2017 and SGST, Act 2017 are in pari materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act. 2. The present appeal has been filed under section 100 of the Central Goods and Service Tax Act 2017 and Karnataka Goods and Service Tax Act 2017 (herein after referred to as CGST Act, 2017 and SGST Act, 2017) by M/s Karnataka State Electronics Development Corporation Limited, 2nd Floor, TTMC A Block, BMTC Complex, K H Road, Shanthinagar, Bengaluru - 560 027(herein after referred to as Appellant) against the advance Ruling No. KAR/ADRG 07/2020 dated: 10th March 2020 = 2020 (3) TMI 1041 - AUTHORITY FOR ADVANCE RULING, KARNATAKA. Brief Facts of the case: 1. The Appellant, a Karnataka State Government Entity, is engaged into providing street lighting services, under the Energy Performance Contract (ESCO contract) to the Thane Municipal Corporation (TMC), Thane for a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AAR vide its order dated 10th March 2020 = 2020 (3) TMI 1041 - AUTHORITY FOR ADVANCE RULING, KARNATAKA gave the following ruling: i. The street lighting activity under the Energy Performance Contract dated 05.12.2016 amounts to composite supply where the principal supply is that of supply of goods. ii. The rate of tax applicable on this transaction is 12% (CGST-6% & SGST-6%), in terms of Sl. No. 226 of Schedule II to the Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, as amended. Further, the applicant is not entitled to the benefit of exemption under entry 3 or 3A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, as the impugned supply is not that of pure services. iii. The instant transaction amounts to a composite supply, with supply of goods being principal supply and hence the impugned question is redundant. iv. The time of supply is the date of invoice and the consideration is equal to the value of the invoice, the GST rate being 12%. 4. Aggrieved by the said ruling, the appellant has filed this appeal on the following grounds. * The activity of the Appellant as per the contract is dependent on the quality and duration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that 25% is for the total value of the composite supply (although there is a periodic billing cycle); that it is impossible to meet this 25% criteria with every month's billing; that this would defeat the purpose of the entry itself. He drew attention to the advance rulings given in the case of M/s YashaswiniEntp and Kailash Chander wherein the authorities had given the benefit of 25% of material cost to the entire contract value and extended the benefit of entry 3A of the Notf. He however, sought permission to give detailed submissions on this aspect. 5.5. As regards the time of supply, the authorised representative submitted that, assuming, but not admitting that it is a supply of goods as held by the AAR, then the time of supply has been held as the time when the invoice is raised. However, the Authority has failed to address the issue as to when the invoice should be raised when there is a continuous supply. He submitted that in their case, the supply happens only at the end of the contract period and anything received before that has to be in the form an advance receipt. 5.6. In view of the above submissions he pleaded that the appeal be allowed. The Authoris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n energy savings. The Contractee would provide the baseline energy consumption before implementation of the contract and the energy savings would be computed taking into consideration the baseline energy savings. There is a clause in the contract which states that in case any pole or street light is removed, the contractor would not be entitled to Energy Savings for the pole which is removed. There is a specific clause defining the Lux Levels and its measurements placing the responsibility on the Contractor to ensure that the minimum Lux Levels are maintained depending on the type and nature of the streets where the lighting fixtures are being placed. No extra payment would be made for repair, replacement and installation of any faulty lights, wires, cables, etc during the tenure of the project. Contractor would not be entitled to any revenue if there are no energy savings despite installation of the street lights. In case of deficiency in promised energy savings, the contractor would be penalized. There is no assured fee to the contractor even after installation of the street lights. Operation, maintenance and replacement of the street lights for the entire contract period is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the activity was chargeable on per transaction basis. The AAR ultimately held that this is entitled to exemption in the very same exemption entry. 5.10. The Appellant also contended that assuming without admitting that the contract is a composite supply, the contract falls within exemption Entry-3A of Notification 12/2017-CT. The Appellant contends that not more than 25% of the value of the composite supply of goods/ services is supply of goods; that this project requires a onetime installation and operation and maintenance which would continue for 7 years; that with a projected revenue of approx. 22 crores, the appellant has subcontracted a major portion of the installation, operation / maintenance activity. The appellant clearly expects that the material component would be significantly lesser than 25% mark. They submitted that the subject contract is a single indivisible contract for street lighting for a period 7 years. The said contract would probably be covered as a continuous supply of services. In terms of section 31 (5), the payment obligations on a monthly basis would be the time within which the invoices would be raised. It is submitted that the 25% calculation shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract period in which case it establishes that the appellant is not being paid for the supply of the materials component of this indivisible contract. This clearly makes the value of supply of material below the 25% threshold and the exemption entry stands satisfied. They further submitted that the Ld AAR erred in holding that the consideration is being received for the supply of LED lights ignoring the specific formular which clearly depicts that the consideration is being received for the energy savings and nothing else; that the Ld AAR erred in concluding that a value can be attributed to the supply of goods in such contracts without providing any legal provision under which such attribution can take place; that in the absence of a legal provision for attribution of a value in composite supply, the Ld AAR has incorrectly concluded that monthly consideration under the contract includes amounts attributable towards value of supply of goods; that the Ld AAR erred in concluding that the time of supply of such activity would be at the time of raising the invoice despite acknowledging that the title in goods is vested only on termination of the contract; that the Ld AAR erred in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of existing electric meters, pies, earthing, conductors, underground cables, etc for exiting feeder panels. Liaison with DISCOM to replace defective meters, reduce/increase contract demand and stream line electricity bills. * Phase II - Implementation of energy efficient lighting fixtures, brackets and junction box, underground cables and flexible cables. In this phase the Appellant is required to submit the implementation plan and LED street light design and smart feeder panel design to TMC for approval. After the approval, they are required to start replacement of light fixtures, brackets, underground cables, wires, junction boxes, earthing, etc. The smart feeder panels will be implemented, and the central control room will be established. After the LED installation work is completed, feeder panel-wise street lighting system will be handed over to ESCO for maintenance. Completion certificate of ESCO project on all roads under the project will be issued. * Phase III -Operation and maintenance upto the end of the contract period. 8. The ownership of the assets under this contract is as follows: * TMC shall be the owner of the land and the existing lighting infrastructure fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCO contract evidences that it is basically an energy performance contract i.e an Operation and Maintenance contract wherein the main objective of the contractor (Appellant) is to implement energy conservation measures in the 12000 street lighting fixtures located in Thane Municipal Corporation. As part of implementing the energy conservation measures, the Appellant is required to install LED street lights and smart feeder panels on the existing street lighting infrastructure. If any existing infrastructure is not compatible for the installation of LED lights, then the Appellant is required to undertake the necessary modifications and alterations. During the contract period, the Appellant is required to operate and maintain the street lighting system and ensure that there is a reduction in the energy consumption. The performance of the Appellant is measured in terms of the quantum of energy saved which is the difference between the energy consumption before the LED lights were fitted (Energy Baseline) and the actual energy consumed after the energy conservation measures were implemented. In consideration for the performance of this activity, TMC will pay the Appellant a fee called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rendering the service. Therefore, we disagree with the lower Authority's ruling that the principal supply is a supply of goods. 12. We now come to question of the rate of tax applicable on the supply of service by the Appellant. It is the claim of the Appellant that they are rendering pure service to TMC and hence are eligible for the benefit of exemption under entry no 3 to exemption Notification No 12/2017 CT (R) dt 28-06-2017. The relevant entry of the said Notification is reproduced below: Sl.No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of goods Rate (Percent) Condition 3 Chapter 99 Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution. NIL NIL For the applicability of the above-mentioned entry, the following requirements need to be fulfilled: a) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section, Heading, Group or Service Code (Tariff) Description of goods Rate (Percent) Condition 3A Chapter 99 Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent. of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution. NIL NIL Here again, to be eligible for the above entry, there are three requirements to be fulfilled viz. a) The supply must be a composite supply of goods and services and the value of the goods supplied should not exceed 25% of the value of the entire composite supply. b) The composite supply must be made either to Central Govt or State Govt or Union Territory or a Local Authority or a Governmental Authority or a Government Entity. c) The composite supply must be in relation to any function entrusted to a Panchayat under Article 243G or entrusted to a M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benchmark of 25% value of goods then the rate of tax will shift from Nil to 12%. This prompted us to ask the Appellant during the personal hearing, to clarify how, in their case, they can substantiate that at any given point of time during the period of the contract, the value of the goods component will be less than 25%. In response, the Appellant submitted that 25% is for the total value of the composite supply (although there is a periodic billing cycle); that it is impossible to meet this 25% criteria with every month's billing; that this would defeat the purpose of the entry itself. We are not convinced with this explanation. 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. We rely on the decision of the Constitution Bench of the Supreme Court in the case of Commissioner of Customs (Import) Mumbai Vs. Dilip Kumar & Co & Ors. = 2018 (7) TMI 1826 - SUPREME COURT in this regard. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Works Contract under the GST laws. The electric poles are attached to the earth, however the LEDs and fixtures which are installed can be removed without damaging the poles. It is the responsibility of the Appellant as per the contract to replace the LED lights and other fixtures if they do not function at any time. Just because the LED lights and the fixtures are fitted on to the electric poles which are attached to the earth, they do not become immovable property. An analogy can be made to the fixing of lights and ceiling fans to civil structures. While the civil structures are undoubtedly immovable property, the lights and ceiling fans do not assume the character of immovable property just by the act of affixing them to an immovable property. Further, we also find that there is no transfer in property of goods during the execution of the ESCO contract. Therefore, the impugned contract does not qualify to be classifiable as a "works contract". 16. In the Explanatory Notes to the scheme of classification of services, which is a guiding tool for classification of services, service code 999112 is extracted below: 999112 - Public administrative services related to the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistrative services related to national, regional or local festivities and the maintenance and running of religious institutions (Emphasis supplied) 17. As can be seen from the above extract of the explanatory notes, 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. The said entry in the rate Notification is reproduced below: Sl.No Chapter, Section, Heading, Groupor Service Code(Tariff) Description of goods Rate (Percent) Condition 29 Heading 9991 Public administration and other services provided to the community as a whole; compulsory social security services. 9 - 18. We now address the question regarding the time of supply. Since we have 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. The said Section is reproduced here below: 13. Time of supply of services:- (1) The liability to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows:
i. The street lighting activity under the Energy Performance Contract dated 05-12-2016 is considered as a composite supply of goods and services with the supply of service being the predominant supply. The service is classified under Heading 999112.
ii. The rate of tax applicable on the above supply is 9% CGST and 9% SGST as per entry Sl.No 29 of Notification No 11/2017 CT (R) dated 28-06-2017. The Appellant is not eligible for the benefit of exemption under entry 3 or 3A of exemption Notification No 12/2017 CT (R) dated 28-06-2017.
iii. The time of supply of services is the earliest of the following dates:
a) Date of issue of the invoice to TMC along with the Energy savings report; or
b) Date on which the payment is entered in the books of account of the supplier;
or
c) Date on which the payment is credited to his bank account.
iv. The time of supply of goods is not relevant as the transaction is held to be a supply of service.
The appeal filed by M/s Karnataka State Electronics Development Corporation Limited, 2nd Floor, TTMC A Block, BMTC Complex, K H Road, Shanthinagar, Bengaluru - 560 027 is disposed off on the above terms. X X X X Extracts X X X X X X X X Extracts X X X X
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