The Maharashtra Authority of Advance Ruling (AAR) has recently ruled that Work Contracts are applicable on immovable property, where the value of goods and services are not distinct.
Facts of the Case:
The Applicant, Prasa Infocom & Power Solutions Private Limited is engaged in the business of providing data center construction and contracting services.
M/s Cray Inc. has entered into a contract with the Indian Institute of Tropical Meteorology (IITM) for the supply of high-performance computing solutions (including its maintenance) and preparation and maintenance of Data Center.
Cray has subcontracted the portion related to the preparation of the Data Center (including its maintenance) to the Applicant vide contract for the center project for the Ministry of Earth Sciences at Pune.
Before supplying and subsequently commissioning the equipment , Applicant is also required to undertake civil and mechanical works, namely construction of civil structure to house the equipment. Applicant also undertook supply and installation of other ancillary equipment necessary in a civil structure and batteries , fire alarm system etc. All such activities undertaken by the Applicant were required to set up data center , as a whole.
Issue on which ruling was sought:
Whether the supply of goods and service by Prasa Infocom & Power Solutions Private Limited to Cray Inc. (Cray) qualifies as a “works contract” as defined under Section 2(19) of the Central Goods and Services Tax Act, 2017.
Order of Maharashtra AAR: Deliberations and Ruling
- From the documents submitted by applicant we find that the agreement is considering a clear demarcation of goods and services to be provided by the applicant but such supplies are naturally bundled and in conjunction with each other.
- Without supply of goods the services cannot be supplied by the applicant anfd therefore we find the goods and services are supplied as a combination and in conjunction and in the course of their business where the principal supply is supply of goods.
- We find that there is a composite supply in the subject case but there is no building, construction , fabrication , completion, erection, installation, fitting out, improvement, modification, repair maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of the contract. Therefore there is no works contract involved in the subject case.
- The value of Civil Construction shown is insignificant , as compared to the value of goods / services. the major portion in this project is of sale of equipment / machinery / other various appratus.
- The jurisdictional officer has also submitted that the definition of Works Contract under the GST Law, it is clear that works contract is applicable only in immovable properties for GST purpose and where the value of goods and services are not distinct and in the subject case, perusal of the copy of agreement/documents submitted by the applicant reveals that the value of goods/equipment is clearly distinct and separated from the value of services. Therefore, their project work is not classifiable under the Works Contract.
- The jurisdictional officer has submitted that, on going through the list of goods and services most of the items are in nature of machine/ instruments / equipment and are all replaceable and hence cannot be said to be of ‘immovable’ nature. We agree with the observation by the jurisdictional officer.
In view of above the Maharashtra AAR consisting of members A.A. Chahure and P. Vinitha Shekhar held that the supply of goods and service by the applicant to Cray Inc. does not qualify as “works contract” as defined under Section 2(19) of the CGST Act.
Our view:
The major change in the definition of the works contract under GST law when compared with erstwhile service tax law was that under GST law the contracts relating to immovable property can only be regarded as works contract. Thus in case any contract in respect of construction etc of an immovable property such a contract cannot be treated as a works contract as per the definition given under Section 2(119) of the CGST Act,2017.
The works contract is treated as supply of services as per Schedule II of the CGST Act,2017 and taxed accordingly. However in case of a composite supply which is not a works contract, such a contract will be taxed as supply of principal supply.
Further in the instant case the jurisdictional officer has argued that where the value of goods and services are not distinct it cannot be regarded as works contract and in the subject case, perusal of the copy of agreement/documents submitted by the applicant reveals that the value of goods / equipment is clearly distinct and separated from the value of services.
In this regard it is stated that under GST Law as per Schedule II, works contract is a composite supply but deemed to be supply of services. Further as per definition of composite supply (Section 2(30) of the CGST Act and works contract (Sec 2(119) of the CGST Act) there is no requirement that value of goods and services should be distinct and the only requirement is that such supplies should be naturally bundled. Thus in our view even in case price break up is available in a supply , it shall be taxed as composite supply if such supplies are naturally bundled and principal supply can be identified.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
