GST levied on Capital Subsidy for Green Field Public Street Lighting System

ODISHA AUTHORITY FOR ADVANCE RULING

It was submitted that the applican is engaged in the business of executing Greenfield street lighting project. The Government of Odisha, through the Housing and Urban Development Department, the Urban Infrastructure Development Fund and the Directorate of Municipal Administration has decided to develop an energy efficient street lighting system covering new and upcoming road stretches in Greenfield areas across 21 Urban Local Bodies (ULBs), including in the cities of Balasore, Bhadrak, Jajpur, Baripada on a Public Private Partnership basis.

For this purpose, the Odisha Urban Infrastructure Development Fund issued a Request for proposal based on an open bidding process. The Applicant has madea successful bid for the said tender and has consequently entered into an agreement on 29.12.2018 for design, supply, installation, operation, maintenance and transfer of the energy efficient Greenfield Public Street Lighting System and the Centralized Control & Monitoring System with the Government of Odisha represented by the Directorate of Municipal Administration (“the Authority”) and the ULBs. The Agreement provides that the initial term of the Agreement shall be 7 years. Under the Agreement, the Applicant undertakes to supply and install equipment such as LED Luminaire, feeder panels, poles, outreach arms, cables/wires with holding arrangement for overhead supply cables, in respect of both, the Greenfield Public Street Lighting System as well as the Centralized Control & Monitoring System.

It was submitted that for such installation, the Applicant is entitled to receive a consideration, in the form of Capital Subsidy, being 90% of the total capital expenditure incurred by the Applicant in supplying, installing and commissioning of the equipment. The balance 10% of the total capital expenditure along-with O&M fees is receivable as ‘Annuity fees’, and is recovered by the Applicant by raising quarterly invoices on the ULBs. After the Greenfield Public Street Lighting System has been commissioned, the Applicant is required to undertake the Operation and Maintenance of the system till the end of the term of the Agreement.

The Applicant submited that 90 per cent of Project Capital Expenditure received as capital subsidy is not “consideration” as defined in Section 2(31) of the CGST Act. Under Paragraph 13.1(a) ) of the Agreement, both the Authority and the ULBs have jointly agreed to provide the Applicant with the consideration, being 90% of the total capital expenditure incurred for the project. As per Para 1.3 of Escrow Agreement, the ultimate responsibility for depositing the Capital Subsidy in Escrow Account shall be with the Authority (Odisha Government). Hence Odisha Government is responsible for depositing Capital Subsidy equal to 90 per cent of amount received by the Applicant.

The Applicant submitted that they are not liable to pay GST on capital subsidy (90 % of the total capital expenditure ) amount received in terms of SIOM Agreement and Escrow Agreement as per the discussion held with the authority which awarded the work.

It was also submitted that the applicant has fulfilled all the conditions of works contract service (WCSs). Therefore, the supply made by the applicant qualifies as a supply of works contract services. Further, it was submitted that the Greenfield Street Lighting System along with the Centralized Control & Monitoring System is an immovable property. In the present case, the streetlight poles, with the overreach arms, LED Luminaires, feeder panels, etc. attached thereto, are erected along the roadways by burying the same up to 1.8 meters underground depth. The street light poles have to be attached to the earth in sucha manner that they should be capable of withstanding wind speeds of 150 km/h. Further, each pole is connected (underground) to an earthing electrode attached to every fifth pole. It is submitted that the said poles cannot be dismantled and reassembled without substantial damage to the entire paraphernalia. Thus, the Greenfield Street Lighting System qualifies as an immovable property.

The applicant has submitted that the entire contract shall be treated as a contract for the composite supply of works contract involving a supply of goods and services. In support of its claim, the applicant cited the decision of (i) Super Wealth Financial Enterprises (P) Ltd. reported in 2019 (20) GSTL 505 (AAR-GST).

Some of the Discussion & Findings

• We find that the questions before us essentially pertain to classification of supply of goods/services and the rate of GST applicable on supply of such goods/service, particularly the applicability of concessional rate of tax in terms of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017. We, therefore observe that the issue before us is squarely covered under Section 97(2) of the CGST Act, 2017 and therefore we admit the application for consideration.
• It has been argued by the applicant, through the written submission and also at the time of personal hearing, that the impugned supply is a supply of ‘works contract service’ which is being supplied to Government of Odisha represented by the Directorate of Municipal Administration’ and the “Urban Local Bodies’. It has also been argued that Capital Subsidy (90% of Project Capital Expenditure) received as per SIOM Agreement and Escrow Agreement from Odisha Government/ULBs for executing the Green Field Public Street Lighting System is not liable to GST. Further, the applicant submitted that 10% of the Project Capital Expenditure would merit entitlement for concessional rate of GST@ 12% [CGST 6% + SGST @ 6%] in terms of Serial Number 3(vi) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 (as amended).
• We find that the questions before us to answer are (a) Whether Capital Subsidy (90% of Project Capital Expenditure) received by the Applicant for execution of the Green Field Public Street Lighting System is liable to GST or not, if liable to GST, then at what rate of GST? (6) What shall be the applicable rate of GST for the balance 10% of the Project Capital Expenditure and 0&M Fees received as Annuity Fee (c) What shall be the time for raising GST Invoices for Capital Subsidy and Annuity Fee and (d) what would be the the rate of GST on the supplies by the sub-contractor to the Applicant in the instant case.
• Before proceeding to answer the aforesaid questions, it is essential for us to examine whether in the present case, the supply being undertaken or proposed to be undertaken by the applicant would qualify to be a supply of ‘composite supply ‘or works contract’. Therefore, we need to discuss all the provisions relating to composite supply’ and ‘works contract’ under GST Act.
• On perusal of the SIOM agreement (supply, installation, operation and maintenance) & Equipment Price Schedule for Cluster C, we see that the contract value for cluster C( urban Local Bodies in Balasore, Bhadrak, Jajpur, Baripada) is Rs. 42.35cr and the contract pricing is different for Equipment of Materials and O&M Fee (operation and maintenance fee). Out of Rs.42.35 cr, the price of Equipments is Rs.38.23 Cr and the price for 0&M Fee is Rs.4.12Cr only. Thus the contract price has clearly bifurcated the contract into a supply of goods and supply of services. Further clause No. 13 of the agreement deals with TERMS OF PAYMENTS. The said clause of the agreement envisages that separate payment for capital subsidy & 0&M Fee. There appears to be a clear bifurcation in the agreement with respect to price of Equipments and O&M Fees.

The Question and Ruling as follows :

Question 1 : Whether Capital Subsidy (90 per cent of Project Capital Expenditure) received by the Applicant as per SIOM Agreement and Escrow Agreement from Odisha Government / ULBs for the Green Field Public Street Lighting System in the State of Odisha is not liable to GST and if liable to GST, then at what rate of GST?

Answer : Capital Subsidy (90 per cent of Project Capital Expenditure) received by the Applicant is liable to GST. The GST will have to be paid on the goods at the appropriate rate after classification under the appropriate heading.

Question 2 : What shall be the GST rate for the balance 10% of Expenditure the Project Capital and O&M Fees received as Annuity Fee over the period of 7 years by the Applicant as per SIOM Agreement considering the SI. No. 3(vi) of the notification No. 11/2017 Central Tax (Rate), dt. 28-06-2017 as amended by Notification No. 31/2017 Central Tax (Rate), dt. 13-10-2017 and corresponding notifications of Odisha State Tax Rate as amended.

Answer : The supply being undertaken or proposed to be undertaken by the applicant would qualify to be a supply of ‘composite supply’ in terms of definition under Section 2(119) of the Central Goods and Services Tax Act, 2017, where the principal supply is ‘ supply of goods’ not supply of service’. Therefore, question of the applicability of concessional rate of tax in terms of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 and as amended does not arise. The GST will have to be paid on the goods at the appropriate rate after classification under the appropriate heading.

Question 3 : What shall be the time for raising GST Invoices for Capital Subsidy and Annuity Fee (consisting of 10% of Project Capital Expenditure and O&M Fee) payable in 7 years?

Answer : Since in the subject case there is a ‘composite supply’ where the predominant supply/principal supply is ‘supply of goods’, we are of the opinion that the applicant should raise invoice as per the provisions of Section 31 of the CGST Act, 2017.

Question 4 : Whether the rate of tax on the supplies by the sub-contractor to the Applicant shall be 12 % GST ( 6% CGST and 6 % SGST) in terms of serial no. 3 (ix) of Notification No.11/2017-Central Tax(Rate) dated 28.6.2017 as amended by Notification No.1/2018-Central Tax (Rate) dated 25.01.2018/ Odisha State Tax (Rate) dated 28.06.2017 as amended.

Answer : Notification No.11/2017-Central Tax(Rate) dated 28.6.2017 as amended is applicable for ‘supply of service’. In the instant case, the supply being undertaken or proposed to be undertaken by the applicant would qualify to be a supply of “composite supply’ in terms of definition under Section 2(119) of the Central Goods and Services Tax Act, 2017, where the principal supply is supply of goods’ not supply of service’. Therefore, the said notification is not applicable to the applicant.