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TMI Blog2021 (9) TMI 1287X X X X Extracts X X X X X X X X Extracts X X X X ..... by the applicant to Mahagenco for consideration - Applicant has entered into tri-party contract with the NMC and Mahagenco. As per the Agreement, it is the applicant s responsibility to set up the Tertiary Treatment Plant; NMC has granted to the applicant, a special right to sell the Treated Effluent/ TTW to any person for non-potable application subject to the payment of royalty to the NMC; the sale consideration of Treated Effluent/ TTW is to be deposited by the applicant in an ESCROW Account opened with the designated bank. The ESCROW Bank is Trustee for NMC, the lenders representative and the concessionaire i.e. the Applicant. Entire sale proceeds generated out of sale (supply) of TTW is deposited by applicant in the trustee bank in the ESCROW Account. Liability of GST on royalty paid /payable by the applicant to NMC - HELD THAT:- The amount deducted by NMC through ESCROW arrangement is not a consideration/royalty but it is a revenue sharing arrangement/ reduction in applicant s consideration for service to NMC - the applicant has stated that the amounts to be paid to NMC on account of sale of treated water is not payment against royalty services received from NMC. Rather it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CGST Act. Whether the applicant would be entitled for Input Tax Credit (ITC), if tax is to be paid under Reverse Charge Mechanism? - HELD THAT:- In the present matter, applicant has supplied the taxable goods i.e. treated water, to Mahagenco which is the applicant s outward supply on which GST is payable by the applicant. The subject supply of Royalty services is taxable under reverse charge mechanism in the hands of the applicant. Hence, the applicant would be eligible for ITC as per the provisions of section 16 to 21 of CGST Act, subject to fulfilment of conditions as mentioned under the GST Act. ITC is available when the inputs are used in course of business or furtherance of business when supplier is making outward taxable supply - Transfer of rights to sale of processed water is provided by NMC to the applicant on the basis of which, the applicant is supplying the treated water to Mahagenco on payment of consideration. The applicant can avail the ITC as per the provisions of law on the subject transaction only if it satisfies the relevant conditions mentioned under the GST Act, relating to availment of ITC. Whether the applicant satisfies the conditions depends on facts duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of management of sewage system for the city of Nagpur for which, it has set up and is operating the Sewage Treatment Plant (STP) located at Bhandewadi, Nagpur for reuse of Sewage Effluent/Water. NMC thereafter decided to augment and expand capacity of existing SWP and for that has appointed the applicant, under PPP contract basis, for Implementing, Designing, Engineering, Developing in Financing, Procurement, Supply, Install, Construction, Augmentation, Testing and Commissioning of all Civil, Electrical, Mechanical and Instrumentation works consisting of Intake works and Raw Sewage Pumping station, Transmission pipelines from Intake works to existing STP, Augmentation of existing STP, Treated Sewage Pumping station and Tertiary Treated facility (if any) along with operation and maintenance of the entire plant for treatment of sewage water for a period of 30 years, under a contract, to set up and operate the Sewage Treatment Plant (STP) located at Bhandewadi, Nagpur on Build Operate and Transfer basis (BOT basis). As a consideration for setting up and operating of STP, the applicant is being paid by NMC on the basis of agreed capital expenditure (CAPEX) and operating expenses (OP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as per Schedule-13 is termed as royalty payable by the applicant to NMC (see Clause 4 of Schedule 8 of the Agreement). Therefore, royalty payment is nothing but reduction in total consideration payable by NMC to applicants. It may be noted that the responsibility of continuous supply of Sewage Water to the applicant is of NMC. There is no new supply by NMC to applicant for sale of treated water/effluent. 2.4 Maharashtra State Electricity Generating Company Ltd (Mahagenco) is a Limited Company registered under the Companies Act. NMC, Mahagenco and the applicant have entered into tripartite agreement dtd.29.12.2017 for supply of TTW by the applicant to Mahagenco on daily basis. Under the agreement, the applicant is required to set up a Tertiary sewage treatment plant (TTP) to further treat water from STP at Bhandewadi and supply the TTW to Mahagenco through pipeline set up by the applicant from its Bhandewadi TTP to Mahagenco's Koradi and Khaperkheda Thermal Power Plant. As per agreement the applicant in exchange of supply of treated water to Mahagenco will raise bill at pre-decided rates on per CUM basis. This pre-decided rate is inclusive of Royalty to be paid by applicant to NM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding services to NMC of Treating Sewage Water which is primary responsibility of the NMC under Article 243W of Constitution and therefore, on consideration received by applicant tax is exempt under Notification No.12/2017 dtd.28.06.2017. The applicant is of the view that for supply of this services of Treating Sewage Water consideration is received by two ways (a) by way of direct consideration from NMC (b) by way of right to sale Treated Water. (ii) The NMC has basically given a right to process Natural Sewage Water. Water is goods and its processing by applicant is service. Since the service is to process the goods i.e. Natural Sewage Water, the service provided by applicant is tax free under Notification 12/2017 dtd.28.06.2017 as goods processed are tax free. (iii) No consideration is payable by the applicant to NMC for acquiring right to sale TTW. Under the contract primary arrangement is to provide service by the applicant to NMC and for that NMC will pay consideration to the applicant. However, if treated water is sold then the consideration payable by NMC will reduce. The amount though termed as royalty in fact is reduction in consideration payable by NMC to applicant as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low: - SL.No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (%) Condition (1) (2) (3) (4) (5) 99 2201 Water [other than aerated, mineral, purified, distilled, medicinal, ionic, battery, de-mineralized and water sold in sealed container] Nil Nil The combined reading of entries in, Notification No.1/2017 C.T. dtd.28.06.2017 Notification No.2/2017 C.T.(Rate) dtd.28.07.2017, make it clear that the Natural Water is exempt from tax. The applicant is receiving Sewage Water which is flowing in the city, and therefore, it is a Natural Water. Thus, the water supplied by NMC to the applicant is exempt from tax. 3. Under Notification No. 12/2017 Central Tax (Rate) dtd.28.06.2017 supply of certain services are exempt from tax. The entry-3 of the said notification is produced below: - Sr. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (%) Condition (1) (2) (3) (4) (5) 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 Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consideration to the NMC, on the contrary the NMC is paying to the applicant for setting up sewage treatment plant and operating the same on the basis of CAPEX for capital expenditure and OPEX for operating expenditure. In addition, if, applicant sets up Tertiary Treatment Plant and operate the same, the right to sale the treated water is given to applicant. Thus, as additional consideration for supply of this service, special right is given to applicant for sale of TTW with a rider that entire sale proceeds would be deposited in ESCROW account and from that account part of amount will be paid by NMC to applicant. 6. The transfer of right to use any goods for any purpose is a supply of service covered by Heading No. 9971 and the same would be taxable at the same rate of Central Tax as applicable to supply of like goods. The applicant got right to procure natural sewage water, subject the same to Tertiary Treatment and thereafter sell the TTW. Even assuming that applicant is paying royalty to NMC same is paid for right to process natural sewage water. The amount of this right is termed as Royalty and quantified with reference to the quantity of TTW sold. The applicant believes th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both. Notification to this effect has been issued by the Government of India. Notification no. 13/2017-Central Tax (Rate) dated 28.06.2017 (relevant extract) is reproduced below: Sl.No. Category of Supply of Services Supplier of Service Recipient of Service (1) (2) (3) (4) 5 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, - (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers. Central Government, State Government, Union territory or, local authority Any business entity located in the taxable territory In view of the above, the applicant believes that in such an event the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer basis (BOT). 3.2 Maharashtra State Electricity Company Ltd (MAHAGENCO), NMC & applicant has entered into tripartite agreement on 29.12.2017 for supply of TTW on daily basis. Under this agreement, the applicant is required to set up a Tertiary Treatment Plant (TTP) to further treat water from STP at Bhandewadi, Nagpur & supply the Tertiary treated water to MAHAGENCO. 3.3 Applicant supplies TTW to MAHAGENCO and received consideration for that supply. With reference to this sale/ supply of tertiary treated water to MAHAGENCO, the applicant is required to pay royalty to NMC. This activity not covered under article 243W of constitution. Royalty charge by NMC is supply, as per sub section (1) section 7 of the GST Act., 2017, which is narrated as under. (1) For the purposes of this Act, the expression "supply" includes- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; Therefore, payment of royalty is for license to further supply to Mahagenco and the amount of royalty paid is based on the quantum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer Shri Harish Chandra Shelke AC (D-008), Nagpur Division also attended and made oral and written submissions. 4.3 We heard both the sides. 05. DISCUSSIONS AND FINDINGS: 5.1 We have perused the records on file and gone through the facts of the case and the submissions made by the applicant as well as the department. The matter is related to applicability of GST on Royalty paid by the applicant to the Nagpur Municipal Corporation (NMC) and consequent claim of ITC in the hands of applicant under the GST Act. 5.2 The applicant viz. M/s. Nagpur Waste Water Management Private Limited is awarded a contract to set up and operate the Sewage Treatment Plant (STP) on Built Operate and Transfer basis (BOT basis) by the Nagpur Municipal Corporation (NMC), for which the applicant is raising its bills in respect of CAPER on quarterly basis and bills of OPEX on monthly basis at the pre-decided rates agreed to between the parties to the contract. Applicable GST is being, charged by the applicant and the NMC is paying the GST to the applicant. In addition, the applicant also has been given the right, by the NMC, to sell the Treated Effluent/ Tertiary Treated Water to any person for non-pota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ater (i.e. output of the Plant), on which GST is being paid by the applicant. Also, there is an amount to be paid as royalty to NMC for the right received regarding sale of treated water to Mahagenco. The question of the applicant is whether consideration amount payable to NMC (which is in the nature of 'royalty') is taxable or not under GST Act and if taxable, whether the said tax is required to be paid under reverse charge mechanism. The applicant has submitted that no consideration is payable by the applicant to NMC for acquiring right to sale TTW ; the contract arrangement is for provision of service by the applicant to NMC for which it receives consideration from NMC ; if treated water is sold then the consideration payable by NMC will reduce and this amount though termed as royalty in fact is reduction in consideration payable by NMC to applicant; the arrangement between NMC and the applicant is of a revenue sharing model for sale of TTW/reduction in consideration. Therefore, the amount deducted by NMC through ESCROW arrangement is not a consideration/royalty but it is a revenue sharing arrangement/ reduction in applicant's consideration for service to NMC. 5.5.2 Thus the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant on account of treated water sold is nothing but amounts paid against Royalty services received from NMC. It is not a revenue sharing model because in lieu of the amounts to be received by the NMC against sale of treated water, the fact is that, NMC is reducing its payment to the applicant against such amounts receivable. 5.5.6 To answer the question whether the 'royalty' paid by applicant is taxable or not it is to be noted that the transfer of rights is a covered under "supply of services" which are provided by local authority (NMC) to the business entity (Applicant). As per the provisions of GST laws, the services of 'Royalty' are actually in the form of a licence and licence is taxable event under GST. In the subject issue, the Applicant is a business entity who is recipient of services. The payment of royalty is for licence to further supply to 'Mahagenco' and the amount of royalty paid is based on the quantum of tertiary treated water supplied. Actually the treated water belonged to NMC (or citizens of Nagpur). NMC gave the right/license to the applicant regarding sale/supply of treated water to Mahagenco. 5.5.7 Applicant has referred to Entry No. 3 of Exemption Notifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no merit in the contention of the applicant because the basic service which is liable to tax is act of grant of license. As per the provision of GST Act, royalty is service and "transfer of the right to use any goods for any purposes (whether or not for a specified period) for cash, deferred payment or other valuable consideration" is covered under taxable services under chapter heading No. 9973. Hence royalty received against supply of transfer of rights would also be taxable under GST Act. The views of jurisdictional/Nodal officer are also considered and found appreciable in this matter. 5.5.11 Further, in the FAQs issued by the Directorate General of Taxpayer Services, a similar issue regarding payment of GST amount on the form of royalty or any other form paid/payable to the Government for assigning the rights to use of natural resources has been answered. The same is reproduced as under:- Question 30: Whether an amount in the form of royalty or any other form paid/payable to the Government for assigning the rights to use of natural resources is taxable? Answer: The Government provides license to various companies including Public Sector Undertakings for exploration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to such conditions and restrictions as may be prescribed and in' manner specified in section 49, the entitled to take credit of input tax charged of any supply goods or services or both to him which are used or intended to be used in course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person". Section 17 (2) of CGST Act, reads as below. (2) "Whether the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rate supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rate supplies". The provisions of Section 17(5) of the CGST Act puts restrictions on availability of ITC in certain situations. As per this section ITC is not available on few categories of supplies mentioned in sub clause from (a) to (i). 5.7.3 In the present matter, applicant has supplied the taxable goods i.e. treated water, to Mahagenco which is the applicant's outward supply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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