2019(02)LCX0110(AAAR)
AAAR-RAJASTHAN
M/s Nagaur Mukangarh Highways Pvt. Ltd.
decided on 13/02/2019
RAJASTHAN AUTHORITY FOR ADVANCE
RULING
GOODS AND SERVICES TAX
KAR BHAWAN, AMBEDKAR CIRCLE,
NEAR
RAJASTHAN HIGH COURT
JAIPUR - 302005 (RAJASTHAN)
Proceedings under Section 101 of the Central GST Act, 2017 and Rajasthan GST Act, 2017
Before the Bench of
1. Sh. Rakesh Kumar Sharma, Member (Central Tax)
2. Dr. Preetam B. Yashvant, Member (State Tax)
ORDER NO.RAJ/AAAR/06/2018-19 DATED 12.2.2019
Name and address of the applicant | : |
M/s Nagaur Mukundgarh Highways Pvt. Ltd., 80A, Shahi Complex, Hiran Magri, Sector 11, Udaipur, Rajasthan 313002. |
GSTIN of the applicant | : | 08AAFCN4743H1ZC |
Clause(s) of Section 97(2) ofCGST/SGST Act, 2017, under which the question(s) raised | : |
(b) Applicability of a notification issued under the provisions of this Act; |
Date of Personal Hearing | : | 05.02.2019 |
Present for the applicant | : | Sh. Jatin Harjai, CA |
Details of Appeal | : |
Appeal No. RAJ/AAAR/APP/06/2018-19 dated 16.11.2018 against Advance Ruling No. RAJ/AAR/2018-19/17 dated 15.09.2018 |
Proceedings
(Under Section 101 of the Central GST Act, 2017 and Rajasthan GST Act, 2017)
At the outset we would like to
make it clear that provisions of both the Central GST Act, 2017 and Rajasthan
GST Act, 2017 are same except for certain provisions. Therefore, unless a
mention is specifically made to such dissimilar provisions, a reference to the
Central GST Act would also mean a reference to the same provisions under
Rajasthan GST Act.
2. The present appeal has been filed under Section 100 of the Central GST Act,
2017 (hereinafter also referred to as 'CGST Acf) and Rajasthan GST Act, 2017
(hereinafter also referred to as 'RGST Act) by M/s Nagaur Mukundgarh Highways
Pvt. Ltd. against the Advance Ruling No. RAJ/AAR/2018-19/17 dated 15.09.2018.
Brief facts of the Case
3. The Appellant i.e. M/s. Nagaur
Mukundgarh Highways Pvt Ltd. having Goods and Service Tax (GST) Registration
Number 08AAFCN4743H1ZC is a company incorporated as Special Purpose Vehicle (SPV)
under the provisions of Companies Act, 2013 for the purpose of undertaking two
laning/intermediate laning of sections of State Highway (Project) on DBOT
(design, built, operate and transfer) basis . The Appellant has been engaged as
a Concessionaire wherein the Public Works Department (PWD), Government of
Rajasthan has granted concession to construct, operate and maintain the project
during :
1. the Construction Period which shall commence from the appointed date and will
end on Commercial Operation Date (COD) and
2. a period of 10 years from the COD (O&M period).
4. The Appellant shall receive 50% of the project cost(i.e. cost of
construction) which shall be paid to the applicant in five equal instalments
during the construction period on the basis of achievement of milestones i.e.
achieving specified percentage of physical progress.
5. The Appellant shall receive the balance 50% of the project cost in bi-annual
instalments over the O & M period along with the interest (hereinafter referred
to as Annuity Payments). The first instalment shall be due and payable from
the 180th day of COD.
6. The Appellant shall also receive bi-annual payments towards O & M expenses
calculated at a specified percentage of the project cost during the O & M
period.
7. The Appellant had sought advance ruling as to whether they are eligible to:
(a) claim full ITC pertaining to procurement of goods and services for
construction of the project during the Construction Period, as the entire
revenue received during the said period is subject to GST; and
(b) claim ITC pertaining to procurement of goods and services during the O & M
period after reversal of ITC as per Section 17(2) of the Central Goods and
Services Tax Act, 2017 read with Rule 42 of the Central Goods and Services Tax
Rule, 2017 as Annuity Payment received during the said period is exempt whereas
O & M payments received are subject to GST.
Findings of the Authority for Advance Ruling (AAR)
8. These supplies are in relation to construction of immovable property like
roads and bridges and it can be termed as Works Contract in terms of Section
2(119) of CGST Act, 2017 which is 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;¯
9. Contention of the Applicant that the annuity is exempted under Entry No. 23A
of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 is not
tenable as the Entry pertains to SAC 9967 which is for support services of
transport services whereas the services provided by the Appellant is
classifiable under SAC 9954. Hence the Applicant has to pay GST on full value of
cost of project during the period of construction. The annuity received by the
applicant is already GST paid during the construction period for which they are
also paid the interest by the Government.
10. We agree with the contention of the Applicant for the first question that
they are entitled to claim full ITC during the construction period. The
applicant is paying applicable GST on full value of the project and they are not
supplying any exempted goods and services during the construction period of 2
years, therefore they are entitle to claim full ITC paid on all legible goods
and services.
11. We are not agree with the contention of the applicant in respect of second
question that they are entitle to claim ITC on procurement of goods and services
after reversing the ITC under Section 17(2) of the CGST Act 2017 read with Rule
42 of the Central Goods and Services Tax Rule, 2017 as Annuity Payment received
during the period O & M period is exempted and payments received for O&M is
subject to GST. The annuity received by the applicant is payment of remaining
50% of cost of the project in biannual equal installments on which the applicant
paid GST during the construction period. As the annuity so received by the
applicant is taxable, there is no need to take apportioned credit under Section
17(2) of the CGST Act, 2017.
Grounds of Appeal
12. The Ld. Rajasthan AAR has erred in concluding that the Project Works
undertaken by the Appellant under the aegis of the said Concession Agreement is
a works contract by failing to appreciate the Employers object and purpose in
awarding the Project Works by means of the said Concession Agreement. By
equating said Concession Agreement with an arrangement for construction services simplicitor, the Impugned Advance Ruling has brushed aside the fundamental
difference between the two forms of project execution - Toll and Annuity. The
nature of concession is for the concessionaire to raise funds and invest in
construction as well as maintenance of the State Highways under a Public-Private
Partnership Annuity Project.
13. Ld. Rajasthan AAR has erred in applying the principles of composite supply
under section 2(30) of the CGST Act. On a careful examination of Article 3, more
particularly 3.1.2(b) of the Concession Agreement, it would be immediately
evident that the principal supply cannot by any stretch of imagination be works contracts. In fact, the principal supply is clearly and unmistakably
to finance and construct the Project.
14. Ld. Rajasthan AAR has proceeded to determine the principal supply involved
in the composite supply in the said Concession Agreement de hors the framework
under the Rajasthan State Highways Act, 2014 read with the Standard Conditions
of Bid, wherein the Project Works remains the property of the Appellant until
lapse of ten (10) years from COD. It is evident from the said framework that
Project Works are not supplied by the Appellant to the Employer under the said
Concession Agreement until lapse of ten (10) years.
15. The Impugned Advance Ruling has failed to examine the scope and
applicability of Heading 9967 - Supporting services in transport¯ under
Notification 12/2017-Central Tax (Rate) dated 28 Jun, 2017 as amended
(Hereinafter referred as Exemption Notification¯). Attention ought to be given
to Explanatory Notes published by the Government of India for purposes of
interpretation of the scope of the Annexure to Classification of Services
appended to the Rate Notification but that has been completely ignored. It is
submitted that the said Rate Notification is aligned with international practice
contained in Central Product Classification (CPC) Version 2.1 published by
Department of Economic and Social Affairs of the United Nations Secretariat.
16. Further, the Impugned Advance Ruling operates in isolation of judicial
authorities about the nature of property involved in Annuity-based Projects and
the event of transfer being subject to registration under section 17 of
Registration Act, 1908.
Upon Termination, the Concessionaire shall comply with and conform to the
following Divestment Requirements¦.
(vi) executes such deeds of conveyance, documents and other writings as the
Authority may reasonably require for conveying, divesting, and assigning all the
rights, title and interest of the Concessionaire in the Project Asset, including
manufacturers warranties in respect of any plant or equipment and the right to
receive outstanding insurance claims to the extent due and payable to the
authority, absolutely unto the Authority or its nominee;¯
17. From above said clause of the concession agreement it is clear that No title
vests in the State unless it is duly handed over to the Authority through deed
of conveyance by a document that is duly registered. The Concession Agreement
makes it abundantly clear about the time and manner of transfer of the Project
Works.
18. Further, Project Works involving financing construction of large-scale
infrastructure is well documented in the principles of accounting contained in
Indian Accounting Standard also since its incorporation into Indian law by
Companies Act, 2013. Guidance available to the nature of Annuity-based Project
Works undertaken through Public-Private Partnership is established to be asset
of the Concessionaire to be amortized over duration of Concession Grant.
19. Support services for transport is the accurate classification applicable
to Concession arrangements and this is borne out in the minutes of the
deliberations by the 22nd GST Council dated October 6, 2017. NHAI referring to
the amendment made with effect from 13.10.2017 specifically clarified that no
GST is applicable on annuity payments made for construction of road.
20. Ld. Rajasthan AAR has grossly erred in ruling that input tax credit is fully
available under O&M and Annuity leg of the project as full exemption is
available to Annuity by way of Heading 9967 - Supporting services in transport¯
under Sl.no.23A under Exemption Notification ibid, wherein Services by way of
access to a road or a bridge on payment of annuity¯ are fully exempt from GST
with effect from 13 Oct, 2017.
21. Adverting to obligation to manage, operate and maintain the Project, the
Appellant is enjoined with this responsibility as the Concessionaire of the
Project Works and not as a Supplier.
22. Section 19 of the said Act declares the ownership of the State Highways will
be determined in terms of the said Concession Agreement. As such, the
responsibility of the Appellant to manage, operate and maintain the Project,
is for self to be able to handover the Project Works in a manner befitting of
the obligation at the time appointed for transfer under the said Concession
Agreement. Further, as regards the finding for the Appellant to be eligible to
avail input tax credit on a presumption of taxability of activity of Appellant
to manage, operate and maintain the Project in its capacity of Concessionaire
is illegal for failure to consider facts. For this reason, ruling that input tax
credit is fully available in respect of goods and services procured in so far it
relates to annuity received is also erroneous and liable for reversal as per
provisions of Sec. 17(2) of CGST/RGST Act 2017 read with Rule 42 of CGST/RGST
Rules 2017. For this reason, the Impugned Advance Ruling is liable to be set
aside as prayed.
Personal Hearing
23. Shri Jatin Harjai, Chartered Accountant appeared on behalf of the Appellant
on 05.02.2019 and reiterated the submissions made in their appeal memorandum. He
also submitted additional submissions in their support.
Discussion and Findings
24. We have gone through the Appeal papers filed by the Appellant, original
application filed before the AAR and Ruling of the AAR. Having gone through all
these documents, we find that the Appellant is not satisfied with the ruling of
the AAR on these two counts.
1. The AAR has ruled that the annuity payments are not exempted by virtue of
Entry No. 23A of the notification No. 12/2017-Central Tax (Rate) dated
28.06.2017. Hence these payments are also taxable in the construction phase
itself. The Appellant is not satisfied with this ruling and has raised objection
as narrated in the Grounds of Appeal¯.
2. The AAR has ruled that full credit is available to the Applicant (Now Appellant) in the post construction phase (O&M phase) because the annuity
received in this phase was liable to be taxed in the construction phase itself
and O&M payments are also liable to be charged GST as and when received . The
Appellant is not satisfied with this ruling and has raised objection as narrated
in the Grounds of Appeal¯.
We are taking both of these issues one by one.
25. Coming to the first issue, we are first reproducing the Entry No. 23A of the
notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
Notification No. 12/2017- Central Tax (Rate) New Delhi, the 28th June, 2017
G.S.R......(E).- In exercise of the powers conferred by sub-section (1) of
section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the
Central Government, on being satisfied that it is necessary in the public
interest so to do, on the recommendations of the Council, hereby exempts the
intra-State supply of services of description as specified in column (3) of the
Table below from so much of the central tax leviable thereon under sub-section
(1) of section 9 of the said Act, as is in excess of the said tax calculated at
the rate as specified in the corresponding Entry in column (4) of the said
Table, unless specified otherwise, subject to the relevant conditions as
specified in the corresponding Entry in column (5) of the said Table, namely:-
TABLE
SI. No. |
Chapter, Section, Heading, Group or Service Code (Tariff) |
Description of Services |
Rate (per cent.) |
Condition |
1 | 2 | 3 | 4 | 5 |
23A |
Heading 9967 |
Service by way of access to a road or a bridge on payment of annuity. |
Nil |
Nil |
26. We find that this Entry was
not the part of the original notification No. 12/2017-CT(R) dated 28.06.2017.
This Entry was introduced, after the deliberations and decisions taken in the
22nd meeting of the GST Council (which took place on 06.10.2017),through
notification No. 32/2017-Central Tax (Rate) dated 13.10.2017. To have a look on
the background, nature and scope of this Entry, we find it essential to visit
the agenda and minutes of the GST Council meeting. The said agenda of the
meeting reads as under:
Agenda Item 13 (iv) - Issue of Annuity being given in Place of Toll Charges to
Developers of Public Infrastructure-exemption there on
Toll is exempt from GST. In service tax it was in the Negative List.
2. There is a difference between toll and annuity. While toll is a payment made
by users of road to concessionaires for usage of roads, annuity is an amount
paid by National Highways Authority of India (NHAI) to concessionaires for
construction of roads. In other words, annuity is a consideration for the
service provided by concessionaires to NHAI.
3. The works contract services by way of construction of road was exempt from
service tax. However, service tax was leviable only on the service component of
such works contract (40%). The material or goods component of the works contract
was leviable to VAT. However, it was subject to State VAT (composition rate).
4. Construction of roads is now subject to 12% GST. EPC contractor (Engineering,
Procurement and Construction) pays 12% GST on the service of road construction
to the concessionaire.
5. In view of the above, there is a free flow of ITC from EPC Contractor to the
concessionaire and thereafter to NHAI. As a result, the GST of 12%leviable on
the service of road construction provided by concessionaire to NHAI would be
paid partly from the ITC available with him.
6. A view may be taken for grant of exemption to annuity paid by NHAl/State
Highways Construction Authority to concessionaires for construction of roads.
This will amount to not taxing the value addition of the concessionaire. The
argument for exempting annuity from GST is that the road construction service
was exempt from service tax. However, GST would continue to be levied on the
road construction service provided by the EPC contractor to the concessionaire.¯
And the minutes of the meeting reads as under:
Agenda item 13(iv): Issue of Annuity being given in Place of Toll Charges to
Developers of Public Infrastructure - exemption thereon
61. Introducing this Agenda item, the Joint Secretary (TRU-II), CBEC stated that
while toll is a payment made by the users of road to concessionaires for usage
of roads, annuity is an amount paid by the National Highways Authority of India
(NHAI) to concessionaires for construction of roads in order that the
concessionaire did not charge toll for access to a road or a bridge. In other
words, annuity is a consideration for the service provided by concessionaires to
NHAI. He stated that construction of roads was now subject to tax at the rate of
12% and due to this, there was free flow of input tax credit from EPC
(Engineering, Procurement and Construction) contractor to the concessionaires
and thereafter to NHAI. He stated that as a result, tax at the rate of 12%
leviable on the service of road construction provided by concessionaire to NHAI
would be paid partly from the input tax credit available with them. He stated
that the Council may take a view for grant of exemption to annuity paid by NHAl/State
Highways Construction Authority to concessionaires during construction of roads.
He added that access to a road or bridge on payment of toll was already exempt
from tax. The Honble Minister from Haryana suggested to also cover under this
provision annuity paid by State-owned Corporations. After discussion, the
Council decided to treat annuity at par with toll and to exempt from tax,
service by way of access to a road or bridge on payment of annuity.¯
After visiting the agenda and minutes of the 22nd GST Council meeting we concur
to find that while toll is a payment made by the users of road to
concessionaires for usage of roads, annuity is an amount paid by the National
and State Highways Construction Authorities to concessionaires for construction
of roads in order that the concessionaire did not charge toll for access to a
road or a bridge. A view was taken in the meeting of the Council for grant of
exemption to annuity paid by NHAI/State Highways Construction Authority to
concessionaires for construction of roads. This amounts to not taxing the value
addition of the concessionaire. The argument for exempting annuity from GST was
that the road construction service was exempt from service tax. However, GST
would continue to be levied on the road construction service provided by the EPC
contractor to the concessionaire. After discussion, the Council decided to treat
annuity at par with toll and to exempt from tax, service by way of access to a
road or bridge on payment of annuity. And hence the abovementioned Entry No. 23A
was introduced. Entry No. 23A ibid squarely covers the annuity paid to the
Concessionaire (i.e. Appellant) by the PWD, Govt. of Rajasthan. The AAR erred in
denying the benefit of Entry No. 23A ibid to the Appellant on the ground that
the Entry No. 23A belongs to SAC 9967 which is meant for support services of
transportation while the activity of the appellant is liable to be taxed under
SAC 9954. After going through the Scheme of Classification of Services,
Explanatory notes to classification of services, Agenda of the GST Council
meeting, Minutes of the GST Council meeting and Entry No. 23A ibid, we are of
the firm view that whole project can be divided into two parts- one is
construction phase and second is O&M phase. The activity of the Appellant (i.e.
Concessionaire) having nexus with annuity is classifiable under SAC 9967 and
activity of the Appellant having nexus with the Construction payments during
construction phase is Works Contract which is taxable under Notification No.
11/2017-Central Tax (Rate) dated 28.06.2017 under SAC 9954. Hence we have no
hitch in providing the benefit of the Entry No. 23A ibid to the annuity payments
i.e. road construction payments received after COD (during O&M phase). But this
benefit does not come free. It comes with a rider that only 50% ITC of the GST
paid on the Input and Input service used in the construction phase is available
to the Appellant because annuity (50% of the construction payments) is not
taxable and the appellant is not having any other non-business and/or exempted
supply .
27. Coming to the second issue, we find that the Appellant is receiving two
types of payments during O&M phase :
(1) O&M related payments, and (2) Construction related Annuity payments. GST is
payable on the O&M payments and the appellant has also not disputed this While
annuity payments are exempted from GST, as per discussion hereinabove, our
mandate is to pronounce upon the eligibility of the ITC of GST paid on the
inputs and input services used in the O&M phase. Contention of the Appellant is
that since they are having both taxable supply (O&M payments) and exempted
supply (annuity payments), the ITC is admissible as per Section 17(2) of the
Act, read with Rule 42 of the Central GST Rules, 2017. Contention of the
Appellant is not tenable because annuity payments (exempted supply) are to be
taken into consideration for taking proportionate ITC during Construction leg of
the project and not during O&M leg of the project.
When such is the case, full ITC of the tax paid on the inputs and input services
used in the O&M phase is available to the Appellant if they are having no other
outward supply during this phase.
28. In view of above, we rule as under:-
Ruling
1. Annuity payments are exempted
by virtue of Entry No. 23A of the notification No. 12/2017-Central Tax (Rate)
dated 28.06.2017. However, only 50% ITC of the GST paid on the Input and Input
service used in the construction phase is available to the Appellant subject to
the provisions of Section 17(5) of the Central GST Act, 2017.
2. Full ITC of the GST paid on the inputs and input services used in the O&M
phase is available to the subject to the provisions of Section 17(5) of the
Central GST Act, 2017.
RAKESH KUMAR SHARMA)
MEMBER (CENTRAL TAX)
(DR. PREETAM B. YASHVANT)
MEMBER(STATE TAX)
To, M/s Nagaur Mukundgarh Highways Pvt. Ltd 80A, Shahi Complex, HiranMagri, Sector 11, Udaipur, Rajasthan 313002.
Dated.13 February,2019
F.No. IV(16)AAAR/RAJ/06/2018-19/1553-1558
Copy to
1. The Chief Commissioner of CGST & Central Excise (Jaipur Zone), NCR Building,
Statue Circle , Jaipur-302005.
2. The Commissioner of SGST & Commercial Taxes Rajasthan, Kar Bhawan, Bhawani
Singh Road, Ambedkar Circle, C-Scheme, Jaipur-302005.
3. Asstt. Commissioner, Work Contract & Leasing Tax, Udaipur, Commercial Taxes
Dept, Divisional Kar- Bhawan, Udaipur.
4. Dy/Asstt. Commissioner,CGST Division -A, (Range-1), 142-B, HiranMagri,
Sector-11, Udaipur 313001
5. Guard File.
(Pramod Kumar Sharma)
Superintendent
Equivalent .