O&M of electric pole is not a pure service

O&M of electric pole is not a pure service:

This is very important ruling for all government contractors. Notification no. 12/2017 CTR is issued under section 11 of CGST Act. This notification lists the exempted services in GST. Entry no. 1.3 of Notification no. 12/2017 exempts pure services. The pure services are the services not involving goods.  The services should be provided to Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity. Only then they will qualify for this exemption. Also the services shall be in relation to activities entrusted to a Panchayat or municipality under article 243G and 243 W of Constitution of India. This ruling is very important.

These kind of services were exempted earlier. The drafting of law has been changed now. You will have to be careful while deciding taxability. It will definitely help you in reaching at the conclusion.It is helpful for all contractors. It is relevant for all suppliers making any supply to Panchayat or local authority.

Facts: 

Facts related to activity of applicant:

In the current case the applicant , namely M/s Super wealth financials Pvt Ltd. is engaged in a supply to BMC. Their contract is for O&M of electric poles. The applicant was providing O&M services to BMC. There was no instant transfer of goods in this case.

Applicant’s understanding of provisions of Act:

• The activity of company is not a supply of goods under Sl. no. 1(c) of Schedule II of CGST Act.
• During the tenure of 10 years, the applicant would be making a supply of services only. That service is supply of providing light services to BMC. It will be provided using energy saving infrastructure installed by the applicant.
• There is no transfer of property in goods for a period of 10 years.This supply will qualify as pure services and hence will be eligible for exemption.
• Even after 10 years the supply of goods by way of transfer of ownership of poles its value will be nil. The applicant explained the provision of section 18(6) for transaction value. The section provide that when a capital goods or plant & machinery is supplied the tax shall be higher of:
  • ITC taken in respect of those capital goods or plant & Machinery reduced by such percentage point as may be prescribed. Rule 40(a) of CGST Rules has prescribed such rate at 5%.
  • Tax on transaction value 

The applicant pleaded that in both of above cases it will be nil.  

Here the important question is whether pure services can involve supply of goods also. The entry clearly mention that supply of goods should not be there.

Query:

The issue raised by the applicant was about the exemption of O&M services provide by them.

Observation:

The authority observed the following transaction flow:

• The factory of taxpayer is in Nashik and goods were transferred from Nashik to Bhubaneshwar.
• BMC was paying a fixed amount calculated at a fixed rate determined for each energy saving equipment installed in lieu of saving of the O&M cost.
• The energy performance contract provide for
  • Installation of energy saving equipment and its day to day management.
  • Operation and maintenance of said equipment. The said activities collectively constitutes the supply providing lighting services to BMC.
• Following three aspects are important to understand to fix the eligibility of exemption.
  • There is supply of pure service ,i.e. there is no composite supply including supply of goods or supply is not in the nature of works contract.
  • Supply is made to a local authority.
  • The supply is made for one of the constitutional function of the local authority.

Ruling: O&M of electric pole is not a pure service

It is envisaged that at the end of period of 10 years the applicant is bound to hand over the lighting system in working condition. This implies that the total business assets of the applicant will be transferred to BMC without any extra consideration. In other words the consideration payable to the applicant includes the cost of acquisition of business assets i.e ” The energy efficient street light infrastructure.” 

Such transfer is not covered by clause (C) of para 1 of schedule II of the CGST/OGST Acts. But rather covered in para 4 of Schedule II which reads as follows.

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.

Thus it is not a case of pure service but rather a case of supply with substantial use of Goods. It was held that O&M of electric pole is not a pure service.

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