Case study # 14 GST AR of Kailash Chandra
Case study # 14 GST AR of Kailash Chandra
GSTCase-14-Kailash Chandra 2018 AAR- RAJASTHAN) Tax Rate on Single Indivisible Contract for installation, commissioning, operation and maintenance of bore well water pumping systems, Reverse osmosis plant.
1. Query
Query 1: The applicant sought whether activity of Operation & Maintenance of Fluoride control project awarded on ESCO Model and O & M work is supply of goods or supply of services.
Query 2: What shall be the rate of GST on the contract.
2. Fact
The applicant intended to bid for tender floated by the PHED, a unit of Government of Rajasthan for designing, providing, installation, commissioning, operation and maintenance of solar energy based bore well water pumping systems, Reverse osmosis plant and operation and maintenance of Fluoride Control project on ESCO and O&M contract.
3. Observation:
Query 1: The contract is for improvement of the pumping system under the Fluoride control project, wherein transfer of property in goods in the form of new pumping machinery and mechanical /electrical equipment shall be involved in the execution of such contract. Relying on the definition of Immovable property under General Clauses Act and CBEC circular number 58/1/2002-CX dated 15/1/2002, AAR observed that properties for which improvement works has been assigned like pump houses, storage tanks, headworks campus etc. cannot be moved from one site to another. All the components of the pumping system are erected at the prescribed location and permanently attached to the earth and they cannot be dismantled and reassembled as such dismantling may cause substantial damage to the system and its components. Therefore, activities undertaken by applicant were held to be culminating into works contract services.
Coming to the of whether the O & M activities would also form part of the single indivisible contract and considered as part of works contract service. AAR observed that activities under ESCO model and O&M contract are so closely linked in a manner that they form a single indivisible supply. The critical factors were like single tender being floated for O & M of Fluoride Control Project on ESCO Cum O&M Contract, preamble of scope specifies that the contract combines ESCO model and O&M work, initial activities under ESCO model is the main service and the other services under O&M contract combined with such service are in the nature of ancillary services which help in better operation of main activities under ESCO model and make the model successful.
Query 2: Entry 3A of Notification No 12/2017-CT (Rate) dated 28.06.2018, provides that in case of composite supply of goods or services provided to State Government or a local authority and the supply is by way of an activity in relation to functions entrusted to Municipality under Article 243W of the Constitution; if the value of supply of goods does not exceeds 25% of the total value of supply and service then no GST is applicable. The contract in question was relating to water supply for domestic, industrial and commercial purposes which falls under the domain of Municipality.
4. Held:
Query 1: Contract of ESCO and O & M shall be a single supply and cannot be treated as distinct supplies. Since all the conditions of composite supply are satisfied, it is a composite supply.
Query 2: In the given contract if the value of supplied goods is below 25% of the total value of the composite supply, then the rate of tax would be Nil and if contract applicant crosses benchmark of 25% value of goods then rate of tax will shift from Nil to 12%.
5. Comment:
In the instant case, there was contract for Installation and Commissioning alongwith Operation and Maintenance. One of the issues before AAR was whether activity of operation and maintenance would be considered as separate supply or would be considered as a single indivisible supply along with the installation and commissioning. AAR considering the facts that both activities were closely linked, single tender was floated for both of them, preamble of scope combines ESCO model and Operation & Maintenance work, Operation and maintenance activity helps in better operation of main activity under ESCO model and makes the model successful held Installation and Commissioning alongwith Operation and Maintenance as a single indivisible supply of works contract service. This judgement would be helpful in cases wherein a combined work order for Installation and commissioning is allotted with operation and maintenance.
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