Solar Power based Sprinkler System used in Lift Irrigation Project is a Works Contract of Composite Supply: AAR

AAR, Rajasthan has pronounced judgment on 16.2.2021, in the case of Zuberi Engineering Company, Jaipur (2021) 36 J.K.Jain’s GST & VR 419, that;

 “EPC contract based sprinkler system based irrigation project including the installation of Solar Power units involving the activities of supply, design, installation, commissioning of irrigation project as per tender document floated by Water Resources Department is a Works Contract of Composite Supply. Since this supply is undertaken for a unit of Govt. of Rajasthan, it shall attract GST @12% under Heading 9954”

Background:

The tender document issued by Water Resources Department of Govt. of Rajasthan for awarding EPC contract for pressurized Irrigation (Sprinkler System) including Construction of Intake well, Pump House, Panel Room and Supply, Erecting/Laying, Testing Commissioning Submerge V.T. Pumps, Rising Mains, Distribution network of Pipe Line at Chaks, Os&M for Eight years including installation of Solar Power unit of 5×100 KW capacity, EPC contract on turnkey(sic. turnkey basis).

Findings by ARA:

The applicant has contended that the lift irrigation project is required to be completely operated by Solar Power to be generated by the Solar power unit to be installed by the applicant at site and hence, it is a “Solar power based device” and falls under S.No.234 of Schedule I of notification No.01/2017-CT(R) dated 28.6.2017 as inserted vide notification No. 24/202018-CT(R) dated 31.12.2018 and S.No.38 of notification No.11/2017-CT(R) dated 28.6.2017 as inserted vide notification No.27/2018-CT(R) dated 31.12.2018. According to the explanation to the said S.No. the project should be taxable @ 5% on Goods portion and 18% on Service portion. The relevant portions of the said notification are reproduced below:–

Now the question arises whether the supply to be made by the appellant (sic. applicant) would be covered under the term “Solar power devices” or otherwise. Solar power device has not been defined under GST law.

A device means an object. The oxford dictionary defines ‘device’ as ‘an object or a piece of equipment that has been designed to do a particular job.’

Further, Solar power device means:–Device which uses solar energy directly as heat or convert it into electricity, i.e., solar cooker, solar lamp, solar dryer etc.

Whereas, as per tender documents floated by water resources Department Govt. of Rajasthan the applicant has to undertake a Supply of a complete irrigation Project starting from survey, investigation designing & details planning including land acquisition (private & forest) for Ambapura lift irrigation scheme for pressurized Irrigation (Sprinkler System) including Construction of Intake well, Pump House, Panel Room and Supply, Erecting/Laying, Testing Commissioning Submerge V.T. Pumps, Rising Mains, Distribution network of Pipe Line at Chaks. O & M for eight year including installation of Solar power unit of 5*100 KV EPC contract on turnkey basis.

From the above, it is clear that the applicant is neither manufacturing renewable energy devices & parts thereof nor providing Service by way of construction or engineering or installation or other technical services in relation of setting up of renewable energy. The tender is for supply of the lift irrigation project as a whole and not only for solar power generating system. The applicant will be undertaking the construction of a lift irrigation project for irrigation (Sprinkler system) in various villages of Banswara district, where solar power would be used only for power, which is a small fraction of the whole project. Whereas the applicant has claimed that the whole project system is a “solar power device” which is incorrect and contrary to their own contention made in their application. The applicant has categorically admitted in their application that the construction and installation of solar power unit is a part of the EPC contract and the irrigation system is to be operated on solar power. Thus Solar power unit is a part which functions for ‘power generation’ only. The whole irrigation project cannot be called as a “Solar Power device”. From the definition of the Solar power device & the nature of work to be undertaken by the applicant, it cannot be classified as solar power device, resultantly would not be covered under the entry 234 of Schedule I of the notification No.1/2017 & entry no. 38 of notification No.11/2017-CT(R) dated 28.6.2017.

Analysis by ARA:

As per the tender documents, the contractor has to complete the task of setting up of entire Irrigation Project broadly ranging from Survey, investigation designing, planning, land acquisition, construction of intake wells, Pump House, Panel Room and Supply, Erecting/Laying, Testing Commissioning Submerge V.T. Pumps, Rising Mains, Distribution network of Pipe Line at Chaks, O & M for eight year including installation of Solar power unit of 5*100 KV EPC contract on turnkey basis.

Thus, the tender is primarily for setting up of the sprinkler system based irrigation Project as a whole, various goods and services are involved in setting of the project. The contractor has to start from the scratch and bring into existence a fully operational irrigation project. The execution of the project would also involve the transfer of property in goods.

In light of these fact, we examine the definition of work contract as provided u/s 2(119), CGST Act 2017 which reads as under:–

(119) “works contract” means a contract for 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 such contract;

The tender is for the engineering, procurement and commissioning of the sprinkler system based irrigation project including the installation of Solar Power units and what would be transferred is the entire irrigation project including the Civil work and land involved in project. Private and forest land would be acquired, civil structure would be created and various equipment would be installed.

The said project cannot be shifted anywhere, it is essentially of the nature of immovable property. The project after completion at the time of transfer will be an immovable property. Further the maintenance and other related service are also part of the tender documents and involve the project as a whole. It is thus, we are of the considered view that the work specified in the tender documents qualifies as “work contract” and will be taxed accordingly.

According to S.8 of CGST Act, 2017, the tax liability on a composite or a mixed supply shall be determined in the following manner, namely:–

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and (b) …………………………..

As per S.2(30), “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Further as per 2(90), “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

Further, as per Para 6 of Schedule-II, the following composite supplies shall be treated as a supply of services, namely:–

(a) works contract as defined in clause (119) of section 2;

However, since composite supply of works contract has been explicitly classified as supply of service under Schedule II, the concept of works contract follows that:–

1. Works contract in itself is a composite supply in which construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning etc. are involved along with transfer or property in goods.
2. Under GST, as per definition of works contract service if construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning is for immovable property, only then it will be classified as works contract.

Further, the ARA observed that the activity proposed to be undertaken is a composite supply of works contract, the rate of tax in given service shall be determined in accordance with the notification No.11/2017-CT(R) dated 28.6.2017, as amended from time to time.

The relevant portion of the S.No.3 (Heading 9954) (iii) of the notification No.11/2017-CT(R) dated 28.6.2017 (as amended) is as under:–

Conclusion by ARA:

Therefore, the ARA found that as per tender document the setting up the irrigation project including Construction of Intake well, Pump House, Panel Room and Supply, Erecting/Laying, Testing Commissioning Submerge V.T. Pumps, Rising Mains, Distribution network of Pipe Line at Chaks, O&M for Eight years including installation of Solar Power unit of 5×100 KW capacity, EPC contract on turnkey basis by the applicant is a Works Contract of Composite Supply. This composite supply is a mixed of goods and services. Since this supply is undertaken for a Water Resources Department, a unit of Govt. of Rajasthan, hence shall attract GST @12% (6% CGST and b% SGST) under S.No.3 (Heading 9954) (iii) of notification No.11/2017 dated 28.6.2017.

Ruling by ARA:

Based on above discussion and finding the ARA ruled as under:–

The activities of supply, design, installation, commissioning of irrigation project as per tender document floated by Water Resources Department, a unit of Govt. of Rajasthan shall attract GST @12% (6% CGST and 6% SGST).

For further details, refer the magazine (2021) 36 J.K.Jain’s GST & VR 419.

CA Om Prakash Jain s/o J.K.Jain, Jaipur

Tel:9414300730