[Rajat Gupta is a lawyer based in Haryana and deals with GST matters. He may be reached at gupta.rajat853@gmail.com.]
On May 11, 2018, the West Bengal Authority for Advance Ruling (Competent Authority) decided on the issue whether, in a works contract, a person would be charged to tax on separate freight bills drawn on the recipient.
The applicant had a contract with M/s Power Grid Corporation of India for construction of electricity towers which was fragmented into two parts i.e. one for supply of construction material (First Contract) and another for associated services like survey, erection of towers and commissioning of transmission lines (Second Contract), including inland transportation, in-transit insurance, loading/unloading of material at the recipient’s site, and storage. The two contracts had different considerations and, therefore, were to be subjected to tax differently. Additionally, separate bills were issued for freight.
The applicant sought an advance ruling from the Competent Authority with regard to the taxability of consideration under the Second Contract for transportation and insurance services. An advance ruling enables suppliers to seek clarification on specific matters relating to supply of goods, services or both and plan out their activities even before the liability to pay tax arises. Section 97(2) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) provides certain cases in which advance rulings may be sought. Clause (e) of the said section provides for an advance ruling for determination of the liability to pay tax on goods, services or both. Approaching under this provision, the applicant pleaded before the Competent Authority that it should not be subjected to tax on transportation charges in light of entry 18(a) of the Notification No. 12/2017 – Central Tax (Rate) dated June 28, 2017, which exempts services of transportation of goods by road by any person which is not a Goods Transporting Agency. This plea failed since the applicant was a recipient of such services and not the supplier thereof as it hired a transporter for the same. Similarly, it did not provide insurance services for goods during transit; rather, it undertook to insure those goods from an insurance company. This does not make it the supplier of transport and insurance services.
Nature of the Contracts
Deciding on the tax liability of the applicant, The Competent Authority opined that the parties had purposely fragmented the contract into two parts so as to minimize their tax liability by showing that both the contracts are separate and unrelated to each other and thus would be subjected to different rates of tax. The applicant alone was responsible for the execution of both the contracts. Further, it was provided in the contract that any breach in the First Contract would be treated as a breach of the Second Contract. Thus, on examination of both the contacts, the Competent Authority ruled that the same were not independent in nature but were, in fact, related. Consequently, the transaction would amount to a composite supply of works contract. On a bare reading of the definition of “works contract” under section 2(119) of the CGST Act, 2017, it is clear that a works contract includes both sale of goods and supply of services in relation to an immovable property. Construction, erection, installations, repair and maintenance are few elements of such a contract. The Act provides for composite supply[1] which includes two or more taxable supplies of goods or services or any combination of both which are related to each other and are provided in the ordinary course of business. The Competent Authority combined the consideration of both the contracts and taxed it at 18% in light of entry 3(ii) of the Notification No. 11/2017 – Central Tax (Rate) dated June 28, 2017 which states that a composite supply of works contract is to be charged at 18%.
Comments
It appears that the parties intended to manipulate the tax authorities by dividing the contract into two parts; the Competent Authority, however, stifled their act by looking at the true nature and content of the two contracts which was, in fact, a composite supply of works contract. Further, transportation and insurance services are mere components of a works contract and not separate activities; therefore, these will also be included in the total value of supply for computation of the tax liability. Issuing separate bills does not make them separate from the contract. At the same time, however, it must be noted that this ruling is only with respect to a composite supply of works contract for construction of electricity towers and commissioning of transmission lines. It might not be a precedent for other construction contracts as it totally depends on the nature of the principal supply which will determine whether other activities are associated or not.
[1] The CGST Act, 2017, section 2(30).