GST Works Contracts – Case Studies & Case Laws on Solar Power Generating Systems

GST Works Contracts – Case Studies & Case Laws on Solar Power Generating Systems to practically understand, whether a contract would qualify as ‘works contract’

1. Case Study – Solar Power Generating System

A solar power generation system, generally, has been understood to include a solar panel/module (array), controller, batteries, inverters and lighting load. The electric power produced in the solar panel (consisting of an array of solar modules) is first supplied to the solar inverter which in turn charges the battery bank or supplies directly to the low voltage DC equipment such as laptops and LED lighting system. The inverter converts the stored DC power to high voltage AC for running larger electrical equipment such as washing machines, televisions and kitchen appliances. Typically, the solar power generating system is mounted on a superstructure attached to the land.The question that arises for consideration in such a scenarios is whether such solar power generating system mounted on a superstructure attached to the land may be qualified as an immovable property. This distinction is necessary because, while, solar power generating systems have been subjected to GST at 5%, it needs to be analyzed whether such solar power generating system would be treated as goods or the construction of such system would qualify as a works contract of immovable property and thereby be treated as a supply of services leviable to GST at 18%. Guiding principles for determination of immovable property which have evolved over time:

1. The mere fact of a system being attached to the earth does not lead to the conclusion that the property is so attached that, by the very fact of its attachment, it becomes an immovable property. Such attachment of a system must be seen in the backdrop of the degree or intendment of the attachment and the object or intention behind the attachment.
2. The degree and the intendment of the attachment – A system so attached to the earth, that it cannot be removed without structural damage would lend credence to the conclusion that such attachment is intended to be annexed in perpetuity to the land. Thus, where the outside portions of the spray paint booth structure were embedded to the earth and could not have been dismantled without damaging the system so the system was held to be an immovable property.¹ Further, where a solar fence system had been grouted into the earth, then it was held to be forming part of an immovable property.²
3. The object or intention behind the attachment – If a system is attached so as to permanently benefit from the land to which it is so attached, then it would be treated to be an immovable property. Thus, a petrol tank resting on its own weight and without being fixed to the earth by nuts and bolts has been held to be an immovable property since it was erected with an intention of permanency.³ The main exceptions to the above test of immovable properties are as follows:-
4. When the attachment is such that it can be dismantled without damage to the system itself and is for the beneficial enjoyment of the system and not the land to which it is attached, then such attachment has been held to be goods.⁴ Thus, an engine mounted on a cement base attached to the earth was held to be goods⁵.
5. If the system is embedded in the earth for operational efficiency and is capable of being sold or shifted without dismantling, but is actually dismantled into its components/parts for ease of transportation then it would still be held to be a good.⁶ Similarly, an X-ray equipment comprising of tube stand, X-ray generators, high voltage cables, etc. even though fixed to the earth has been held to be a good.⁷

Thus, whether in a particular case, a solar power generating system amounts to being an immovable property or not would need to be tested on the anvil of the aforementioned tests and their exceptions.

In the advance ruling in case of Giriraj Renewables Pvt. Ltd.; Karnataka AAR (2018 VIL 36 AAR dated 21.03.2018), the applicants, seeking to contend that a solar power plant is not an immovable property, submitted that:

1. The solar power plants supplied by the Applicant is commissioned and installed only for the purpose of better functioning of the plant and are capable of being removed and transferred from one place to another. Hence, the fact that the plant is firmly but not permanently attached to the land means that the same is not an immovable property.
2. The contract envisaged shifting/transferring the plant to another location in certain circumstances. Reliance was also placed on a Chartered Engineer Certificate which clearly provided that solar power plant, if required, can be shifted to another location and is highly movable.

Unfortunately, the Karnataka Authority for Advance Ruling completely sidestepped the above arguments and did not document any finding dealing with the foregoing. The authors feel that the above are strong arguments and are likely to succeed before a High Court. The above advance ruling is discussed in greater detail in Chapter 28.

2. Case Study – Operation and Maintenance of a Power Plant

A company enters into an agreement for the operation and maintenance of a power plant. The scope of work of such contract provides that the Contractor shall perform all day-to-day operations of the power plant for generation of electricity and undertake any maintenance services and shall also undertake safety and security of the power plant.
Nature of Supply under GSTIn such a contract, it is relevant to examine whether the same would qualify as a supply of ‘works contract service’ or a composite supply or ‘mixed supply’ consisting of supply of goods and services.Thus, the Contract primarily consists of two kinds of supply of services:

1. Operation of the power plant; and
2. Maintenance of such power plant

The supply of maintenance service would qualify as a ‘works contract’ since the power plant is an immovable property and maintenance of immovable property is included specifically in the definition of ‘works contract’. However, the operation services would qualify as a pure supply of services.

It is a settled position in the industry that operation and maintenance services are naturally bundled in the ordinary course of business, and thus the same should qualify as a composite supply. In order to determine the taxability of the composite supply, it is relevant to determine the supply which qualifies as a ‘principal supply’.

On a plain reading of a typical O&M scope of work, it is likely to emerge that the principal supply would be the supply of operation services as the Contractor has been primarily engaged for day to day operation services. Resultant, such contract would be leviable to GST as a supply of ‘operation services’ by the contractor and not as a works contract service.

However, it must be noted that conclusions on principal supply will vary depending upon the contractual terms and there may indeed exist O&M contracts where the emphasis is greater on the maintenance aspect in which case, such a contract may qualify as an ‘works contract’.

Dive Deeper:
Consideration under the Indian Contract Act, 1872

3. Advance rulings relevant to this chapter

1. 1. Sreepati Ranjan Gope (2018 VIL 13 AAR)
      Question Raised: The Applicant was involved in providing maintenance related services in respect of railway tracks which involved cleaning, surface preparation and painting of rails, welding of joints, fabrication of guard rails, etc. The applicant contended that the services provided by it were in the nature of composite supply of works contracts involving predominantly earth work (that is constituting more than 75% of the value of services provided, inter alia, to Central Government) and thus leviable to GST at 5%.
      Held: The Authority held that work to be executed in respect of maintenance of railway tracks undertaken by the Applicant involves repair, maintenance and fitting of immovable property viz. railway tracks and also transfer of property in goods in course thereof and therefore, is a “composite supply” of labour and goods in the nature of works contract. Accordingly, it was held to be in the nature of a works contract leviable to GST at 18% rejecting applicant’s claim of applicability of 5% GST stating that only a minor fraction of work involved what could actually be described as earth work.
   2. Skilltech Engineers (TS-198-AAR-2018)
      Question Raised: The Applicant was engaged in execution of works for construction of power lines, erection of transmission towers and transformers for Karnataka Power Transmission Corporation Limited (‘KTPCL’). There was a single contract between the Applicant and KTPCL which had three connected agreements for supply of materials, erection and civil work respectively. The question before the Authority was whether such contract was a divisible contract for supply of goods and services or a single indivisible works contract. Further, Applicant also sought clarification on whether it was entitled to GST at the concessional rate of 12% inasmuch as it was providing services to the State Government.
      Held: The Authority held that the contract entered between the Applicant and KTPCL was a single indivisible works contract for the following reasons:-
      1. The Applicant was supplying the material as also providing civil works and erection of tower services.
      2. Further, the three connected agreements had been awarded to the Applicant in response to a single tender notification and the general terms and conditions were commonly applicable to all the three agreements.

      It was further observed that KTPCL was a regulatory body which albeit created by the State Government could not be regarded as the Government or a local authority for the purposes of concessional rate of GST at 12% under the notification. Accordingly, it was held that the Appellant was not eligible for benefit of concessional GST rate under the relevant notification.

   3. Allied Digital Services Ltd. (TS-914-AAR-2018-NT)
      Question Raised: The Applicant had entered into a contract for setting up of a comprehensive CCTV based city surveillance system for the city of Pune with the Government of Maharashtra. The question before the Authority was whether the same was a works contract leading to creation of an immovable property and thus leviable to GST at 18%.
      Held: On a perusal of the contractual terms, the AAR noted that the contract contemplated supplies of goods and services both and the liability of the Applicant did not end with the supply of goods but continued up till the successful commissioning of the entire system.Further, the AAR held that CCTV cameras are permanently fastened to the street lightening poles and are not intended to be removed but to provide continuous surveillance to police authorities on a real time basis to control criminal activities or to gather evidence for prosecution of offenders. If at all they have to be re-located to another place the cameras and the related equipment have to be dismantled for re-erection elsewhere. Thus, applying the principles that since the system cannot be shifted without first dismantling it for re-erecting it at another site, the AAR held that the contract in question was a works contract leviable to GST at 18%.Further, even though the works contract services are being provided to the Government, the AAR denied benefit of concessional rate of 12% on the basis that the Applicant was not engaged in performing ‘original works’. It is worthwhile to note that the AAR has not given any finding as to why original works are not being performed by the Applicant.
   4. Yogiraj Powertech Private Limited (2019-VIL-31-AAR)
      Question posed: The question before the AAR was whether a contract for supply, erection, commissioning of transformer substation, overhead line and cabling for metro rail project was a works contract. If yes, whether such contract was a contract for original works leviable to GST at the concessional rate of 12%.
      Held: On a detailed perusal of the subject contract, the AAR concluded that the same was in the nature of a works contract for construction of immovable property. The aforesaid conclusion rested on the terms of the contract which included:—
      1. Providing cement concrete foundation for pump which is attached to the foundation with nuts and bolts. The cement concrete foundation is permanently attached to the earth.
      2. Supplying and erecting of main units and sections over the foundation.
      3. Supplying and laying of cables in RCC Pipes beneath the road/ground surface. This clearly satisfies the condition of being attached to earth.

      Further, the Applicant in its submissions had admitted that its scope of work was not construction of the metro rail project but shifting of existing utilities obstructing the railway path and providing supply and installation of new underground cables with accessories. On the basis of the admission that there was shifting of existing utilities, the AAR summarily concluded that there were no original works involved in as much as there is no new construction coming into place. Consequently, it was held that the contract was leviable to GST at the standard rate of 18% and not for the beneficial rate of 12%.

   5. Sterlite Technologies Limited (2019-VIL-161-AAR)
      Questions raised: The applicant was engaged in manufacture of telecom products such as optic fiber, cable, etc and laying these optic fiber cables (either underground or hung overhead) to create a network. Further, the applicant would also be required to set up control centers, installation of equipment necessary to operate the network for desired purpose, commissioning of network and any other ancillary activity that may be necessary for creation of network infrastructure for its customers in telecom industry.The question before the AAR was whether the supplies of goods and services would constitute a works contract for ‘Original Works’ and thus be eligible for reduced GST rate of 12%?
      Held: The AAR held that the proposed contract would lead to the construction of an immovable property and as such was a works contract.Further, the AAR held that the term ‘original works’ as defined in Notification No. 12/2017, for which reduced GST rate of 12% has been provided, covers activities in the nature of erection, commissioning or installation of machinery or structure. It was observed that scope of the subject proposed contract necessitates the applicant to build structures in the form of buildings, roads, etc. and undertake the activity of installing the equipment therein. However, the equipments which are installed by the applicant are first supplied by them. Thus, the applicants cannot be said to be involved only in erection, commissioning or installation of machinery belonging to some other person but in fact are installing and commissioning the equipments supplied by it.Hence primarily what the applicant would be doing would be supplying goods i.e. equipments. Thus, the AAR held that the works to be undertaken by the applicant could not be considered as “original work” and the applicant was liable to pay GST at 18%.
   6. NR Energy Solutions India Pvt. Ltd. (2019 VIL 168 AAR)
      Questions raised: The applicant was awarded a turnkey project by AP Transco for supply, installation, testing and commissioning of relay and protection panels with sub-station automation system, at various sites and locations. The question before the Authority was whether the same constituted a works contract.
      Held: The AAR observed that as per the terms of the contract, the applicant was under the obligation to:-
      1. Complete design and manufacture of equipments
      2. Packing, insurance, transport and delivery of equipments;
      3. Installation, testing and commissioning of various equipment at sub-station

      The AAR further observed that in all the three POs submitted by the applicant the major part of the contract is supply of goods for which the applicant received separate payment from its recipients. Further, the goods were being used by the applicant to provide services installation, testing and commissioning of the sub-stations. Without these goods, the services cannot be supplied by the applicant and therefore it was held that the goods and services were supplied as a combination and in conjunction with each other where the principal supply is supply of goods. Given the aforesaid, the AAR held that the subject contract was not a works contract as there was no creation of immovable property but a composite supply where the principal supply was the supply of goods.

   7. Prasa Infocom & Power Solutions Pvt. Ltd. (Maharashtra AAR No. GST-ARA- 26/2019-20/B- 43)
      Questions raised: The applicant was engaged as a sub-contractor for construction and preparation of data centre for a data centre project of the Ministry of Earth Sciences at Pune. The question raised by the applicant was the appropriate classification to be adopted in respect of the contracts for setting up of the data centre project which involve the supply of various equipment along with installation, testing and commissioning thereof at site.
      Held: The applicant contended that since the scope of work included the complete design of the data centre, supply, transport, delivery, installation of equipment, etc. was in the nature of works contract, leviable to GST at the rate of 18%. The applicant further argued that since the equipment installed became a part of the data centre room, it was in the nature of immovable property. However, upon a detailed perusal of the contract documents, the authority held that the subject contract did not qualify as a works contract on account of the following reasons:-
      1. The authority noted that there was a separate contract pricing for different equipment/materials, installation and maintenance activities and concluded that there appeared to be a clear bifurcation in the contract documents between supplies of goods and supplies of services.
      2. The authority further held that the data centre was a space/room where the equipment/material/apparatus was installed. Further, major part of the contract was for the supply of goods and the services of installation as also civil works were quite insignificant in value in comparison to the value of equipment supply. Thus, this was a composite supply with principal supply being supply of goods (where the services of installation were ancillary) and which did not result in creation of an immovable property.
      3. Given the separate pricing structure for goods and services, the raising of separate invoices and the fact that the goods/equipment were replaceable and therefore not immovable, it was held that the subject contract was not in the nature of a works contract.

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