DABUR INDIA LTD.

Classification of goods – Odomos – whether classified under Chapter 38 of Customs Tariff Act and is classified under HSN 3808 91 91 or otherwise? – challenge to AAR decision.

Whether the order passed by the Authority for Advance Ruling is illegal and not sustainable because the authority ignored the comments submitted by the department in response to the Application filed by the Applicant? – HELD THAT:- The ruling has been given by the AAR by way of a speaking order and there is no evidence that it has been passed in an arbitrary manner. Therefore, the impugned Order passed by the Authority cannot be held unsustainable on this ground.

Whether the impugned order is illegal as the same has not followed the binding precedent for the same product as decided by Hon’ble Allahabad High Court in the case of COMMISSIONER OF SALES TAX VERSUS BALSARA HYGIENE PRODUCTS LTD. [1985 (12) TMI 366 – ALLAHABAD HIGH COURT]? – HELD THAT:- We have gone through the cited judgment of the Hon’ble High Court in the case of M/s. Balsara Hygiene Products Ltd. and observe that it was passed in the context as to whether the said product fell within the ambit of Entry No. 29 of Notification No.ST-II-5785/X-10(1)-80-U.P. Act XV /48-Order-81, dated 7-9-1981 issued under Section 3A of the U.P. Sales Tax Act, 1948.

As far as the third issue raised by the Applicant is concerned, i.e., that the order of the AAR was based on extraneous considerations, we observe that the appellant has failed to detail such alleged extraneous consideration, nor do we find anything in the impugned order which may give rise to such an inference. We, therefore, disregard this ground, apparently being an unsupported and vague charge.

Classification of product Odomos? – HELD THAT:- Undoubtedly, the description under Heading No. 3808 91 ’91, i.e., “Repellants for insects such as flies, mosquito” is far more specific as compared to the description under the other heading under consideration, i.e., Heading No. 3004 90 99 which is “Other” (meaning medicaments other than all those explicitly specified in the other sub-headings of Heading No. 3004). Evidently, the latter heading is a residual classification while the former is specific and conforms to the description of the goods adopted by the appellants themselves for the purposes of packing as well as advertisement and publicity.

The Hon’ble Supreme Court also, in their judgment in the case of HPL CHEMICALS LTD. VERSUS CCE, CHANDIGARH [2006 (4) TMI 1 – SUPREME COURT]], have held that specific heading is preferable over residuary heading for classification. Therefore, in terms of the aforesaid rules for interpretation, Heading No. 3808 91 91 will prevail over 3004 90 99.

The appellant declare prominently on the packing of the goods under reference that it is “mosquito repellent cream”. The advertisement and publicity of these goods is also done as a mosquito repellent. It would also not be out of place to mention that the appellant’s own website www.dabur.com, describes Odomos as a ‘mosquito repellent’ – the market identity in common parlance of the subject goods is as a mosquito repellent and their usefulness in preventing mosquito borne diseases (again derived from their characteristic quality of being a mosquito repellent) is of a subsidiary/ supplementary nature.

Also, the substance DEET is mentioned in the schedule to the “Insecticides Act, 1968” as an insecticide and by corollary, its improved version, i.e., NNDB would also be an insecticide. In this context, it is pertinent that mosquito repellents are classified at Heading No. 3808 91 91 of the Customs Tariff as a subcategory of insecticides. Thus, this again indicates that even by applying the yardstick of chemical composition, Heading No. 3808 91 91 is most specific for the classification of the subject product.

All the factors relevant for classification under the Customs Tariff lead to the classification of the Applicants’ product “Odomos” under Heading No. 3808 91 91, be it the rules for interpretation of the said Tariff, the common parlance test, its chemical composition or its usage and way of working. Hence, Odomos is a mosquito repellent and has to be classified under Chapter Heading 3808 91 91 of the Customs Tariff Act.

The ruling of AAR upheld.

No.- Order No. 8/AAAR/19/8/2019

Dated.- August 19, 2019

Citations:

  1. M/s DEENA JEE SANSTHAN & ORS. Versus COMMISSIONER OF CENTRAL EXCISE, MEERUT – 2019 (1) TMI 431 – Supreme Court
  2. COMMISSIONER OF CENTRAL EXCISE, NEW DELHI Versus M/s CONNAUGHT PLAZA RESTAURANT (P) LTD., NEW DELHI – 2012 (12) TMI 149 – Supreme Court
  3. COMMISSIONER OF CENTRAL EXCISE Versus M/s WOCKHARDT LIFE SCIENCES LTD – 2012 (3) TMI 40 – Supreme Court
  4. Commissioner of Central Excise Versus Shree Baidyanath Ayurved Bhawan Ltd. And vice versa – 2009 (4) TMI 6 – Supreme Court
  5. HPL CHEMICALS LTD. Versus CCE, CHANDIGARH – 2006 (4) TMI 1 – Supreme Court
  6. SUJANIL CHEMO INDUSTRIES Versus COMMISSIONER OF C. EX., & CUS., PUNE – 2005 (2) TMI 129 – Supreme Court
  7. Mahinder Kumar Chaudhary And Anr. Versus Balsara Hygiene Products Ltd. – 2001 (12) TMI 894 – DELHI HIGH COURT
  8. Commissioner of Sales Tax Versus Balsara Hygiene Products Ltd. – 1985 (12) TMI 366 – ALLAHABAD HIGH COURT

Shri Rajeev Tandon, Member (CGST) and Smt. Amrita Soni, Member (SGST)

ORDER

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and Uttar Pradesh Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act’ and the ‘UPGST Act’, respectively) by M/s. Dabur India Ltd., Khasra Nos. 2834, 2835, 2836, Amka Road, Dhoom Manikpur, off  NH-91, Dadri, Gautam Buddha Nagar, U.P.-203207 (hereinafter referred to as the “Applicant”) against the Advance Ruling Order No. 25, dated 20-2-2019 by the Authority for Advance Ruling, Uttar Pradesh.

At the outset, we would like to make it clear that the provisions of both the CGST Act and the UPGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the UPGST Act and vice versa.

Brief facts of the case

1.  M/s. Dabur India Ltd., Khasra Nos. 2834, 2835, 2836, Amka Road, Dhoom Manikpur, off NH-91, Dadri, Gautam Buddha Nagar, U.P.-203207 (hereinafter called the ‘applicant’) is a registered assessee under GST having GSTN : 09AAACD0474C1Z3.

2.  The Applicant is a Private Limited Company, resident in India, and is engaged in the manufacture of various Fast-Moving Consumer Goods (FMCGs) under various product categories such as Hair Care, Oral Care, Health Care, Skin Care, Home Care, Foods, etc.

3.  The Applicant submitted application for Advance Ruling dated 26-12-2018, with an issue :- for the classification of the product Odomos being manufactured and supplied by them.

4.  The Applicant was granted hearing on 8-2-2019. Shri Atul Gupta, Advocate and Shri Padmesh Dubey, Senior Associate Manager, Authorized representatives appeared for hearing.

5.  After going through the submissions of the applicant and the jurisdictional office, the Authority for Advance Ruling (AAR) ruled as under :-

“Odomos is well covered under Chapter 38 of Customs Tariff Act and is classified under HSN 3808 91 91”

6.  Being aggrieved with the Order No. 25, dated 20-2-2019, M/s. Dabur India Ltd., filed appeal application before us.

Grounds of appeal Submitted by the appellant :

7.  The Applicant submitted the grounds of appeal as. Annexure-II. The grounds for appeal are as under :-

(A)  The impugned order is illegal and not sustainable because the Authority ignored the comments submitted by the department in response to the Application filed by the Appellant.

(B)  The impugned order is illegal as the same has not followed the binding precedent for the same product as decided by the Hon’ble Allahabad High Court.

(C)  The impugned order is based on extraneous consideration; therefore, the same is not sustainable.

(D)  The product in question is not repellent but medicine; therefore, the same is not classifiable under Chapter 3808 of the Customs Tariff Act adopted for the purpose of classification of products under GST Law.

8.  Applicant was granted personal hearing on 16-7-2019.

Personal Hearing

9.  Mr. Atul Gupta, Advocate, Mr. Padmesh Dubey, Senior Associate Manger and Naveen Goyal, Taxation Head, appeared in PH on behalf of M/s. Dabur India Ltd., Ghaziabad.

During the PH, they submitted a compilation of case laws and details of classification. They specifically relied on the decision of ‘CST v. Balsara Hygiene Products Ltd‘., 1986 UPTC 367 (All.) passed by Allahabad High Court holding odomos as medicament. They also submitted that the said decision Allahabad High Court was upheld by Hon’ble Supreme Court vide decision dated 23-2-1987 in S.L.P. (Civil) No. 9950 of 1986. They also relied on ‘Sujanil Chemo Industries v. CCE’, reported in 2005 (181) E.L.T. 206 (S.C.) and ‘CCE v. Wockhardt Life Science Ltd’., 2012 (277) E.L.T. 299 (S.C.). Therefore, they submitted that the product odomos is classifiable under sub-heading 3004 90 99 as medicament. Further, they assured to submit within two days literature regarding NNDB as drug.

Further, through e-mail dated 17-7-2019, the applicant forwarded additional written submissions with a copy of literature showing the active ingredient DEET having been mentioned in US Pharmacopoeia and Indian pharmacopoeia, Allahabad High Court decision in the matter of ‘M/s. Baidyanath Ayurved Bhawan (P) Ltd. v. CST’ reported in 2004 NTN (Vol-24) 436, High Court Delhi decision in case of ‘M/s. Mahinder Kumar Chaudhary v. Balsara Hygiene Products Ltd.’ dated 19-12-2001 and copy of VAT invoices in State of Delhi on the subject product odomos showing as medicine only.

Discussion and Findings

10. We have gone through the submissions made by the applicant and examined the detailed explanation submitted by them. We observe that the appeal in the instant case is mainly based upon the grounds stated in Para 7 above. The appellant vide his application has prayed :

(i)  To modify the impugned Advance Ruling Order No. 25, dated 20-2-2019 and allow the appeal holding that the product Odomos is to be classified as ‘medicine’ under sub-heading 3004 90 99 of the Customs Tariff Act, 1975.

(ii)  To declare that only 12% GST is payable on the said product as applicable on medicaments.

(iii)  To pass such other order or orders as may be deemed fit and proper in the facts and circumstances of the case.

11. We have gone through the submissions and grounds of appeal of the Applicant and therefore, we discuss the issue point-wise :

12.1 The first issue to be decided is whether the order passed by the Authority for Advance Ruling is illegal and not sustainable because the authority ignored the comments submitted by the department in response to the Application filed by the Applicant.

12.2 It is observed that the case was duly represented by the jurisdictional Superintendent during the proceedings and the Authority for Advance Ruling has passed the ruling after taking due consideration of the submissions of the departmental representative. Normally, in such proceedings, the comments of all stakeholders are taken so that a holistic picture may be obtained which helps the concerned authority in arriving at a considered decision. However, such comments are not of a binding nature and every authority is required to decide the cases before them by diligently applying the facts thereof to the issue at hand. The ruling has been given by the AAR by way of a speaking order and there is no evidence that it has been passed in an arbitrary manner. Therefore, the impugned Order passed by the Authority cannot be held unsustainable on this ground.

13.1 The second issue raised by the Applicant is that the impugned order is illegal as the same has not followed the binding precedent for the same product as decided by Hon’ble Allahabad High Court in the case of M/s. Balsara Hygiene Products Limited reported at 1986 UPTC 367 (All.), which was also upheld by Hon’ble Supreme Court vide decision dated 23-2-1987.

13.2 We find that the instant case involves deciding the correct classification of the product from, inter alia, the two rival headings- one preferred by the Applicant, i.e., Heading No. 3004 90 99 (as ‘other medicament for therapeutic or prophylactic uses and put up in forms or packings for retail sale’) and the other, favoured by the Authority for Advance Ruling, i.e., Heading No. 3808 91 91 (as ‘mosquito repellant’, which itself is a sub-sub-heading under the sub-heading of ‘insecticide’ in the main heading). We have gone through the cited judgment of the Hon’ble High Court in the case of M/s. Balsara Hygiene Products Limited reported at 1986 UPTC 367 (All.) and observe that it was passed in the context as to whether the said product fell within the ambit of Entry No. 29 of Notification No.ST-II-5785/X-10(1)-80-U.P. Act XV /48-Order-81, dated 7-9-1981 issued under Section 3A of the U.P. Sales Tax Act, 1948. The description of the goods under the said entry reads as –

“Medicines and pharmaceutical preparations Including Insecticides and Pesticides” (emphasis supplied). Thus, the said entry included insecticides and pesticides within the broader category of medicines and pharmaceutical preparations. Here it is also pertinent to note that, as also mentioned earlier in this paragraph, ‘insecticides’ and ‘pesticides’ are classified under Customs Tariff Heading No. 3808 and ‘mosquito repellants’ are further classified therein as ‘insecticides’. Thus, it is evident that the relevant notification entry comprised the goods of both the rival headings of the Customs Tariff germane to the instant case. In the context of the above, it may be further noted that the Hon’ble High Court held that the said product was used as a mosquito repellant and is a preventive medicine (emphasis supplied), preventing the body from being infected by the bite of mosquitoes. Thus, we observe that in the above cited case, there was no occasion for the Hon’ble High Court to examine and give a decision on the relative merits of the two rival classifications presented before us (medicament v. mosquito repellant) and the Hon’ble Court held that the subject product would be covered by a notification entry which included within its’ ambit both the types of goods as covered by the two rival classification headings. Furthermore, while applying the ratio of the cited judgment to the present case, the importance of the Hon’ble High Court’s observation that the subject goods were used as a mosquito repellant cannot be lost sight of as, prima facie, it signifies that, in the context of what is stated earlier in this paragraph, that judgment does not hold that their classification as ‘medicaments’ was preferable over that as ‘mosquito repellant (insecticide)’, especially when the relevant entry treated insecticides as medicines/pharmaceutical preparations. In other words, the Hon’ble Court had decided that the subject goods would be covered by a notification entry which included products of both the present rival classifications and observed that these were medicine and used as mosquito repellant. Therefore, no clear distinction between ‘medicine’ and ‘mosquito repellant’ vis-a-vis the subject classification was drawn by the Hon’ble Court. Hence, it cannot be said that the order of the AAR, classifying the subject goods as ‘mosquito repellant’ under Customs Tariff Heading No. 3808 91 91, was in defiance of the cited judgment of the Hon’ble High Court and we do not find any infirmity in the said ruling of the AAR on this ground.

13.3 As far as the third issue raised by the Applicant is concerned, i.e., that the order of the AAR was based on extraneous considerations, we observe that the appellant has failed to detail such alleged extraneous consideration, nor do we find anything in the impugned order which may give rise to such an inference. We, therefore, disregard this ground, apparently being an unsupported and vague charge.

13.4 Now, we come to the final and all important issue of the correct classification of the appellants’ product “Odomos” in terms of the Customs Tariff. We observe that the Applicant was clearing the same goods i.e. ‘Odomos’ as mosquito repellent under Chapter Heading 3808 before the advent of GST, i.e., under the Central Excise regime. Further, there is no change in the composition or intended usage of these goods after the introduction of GST and the packing thereof bears a clear declaration that the product therein is a mosquito repellent cream. Regarding the technical aspect of classification, “The General Rules for the Interpretation of Import Tariff’ stipulate [in Rule 3(a) thereof] that the heading which provides the most specific description shall be preferred to headings providing a more general description. Undoubtedly, the description under Heading No. 3808 91 ’91, i.e., “Repellants for insects such as flies, mosquito” is far more specific as compared to the description under the other heading under consideration, i.e., Heading No. 3004 90 99 which is “Other” (meaning medicaments other than all those explicitly specified in the other sub-headings of Heading No. 3004). Evidently, the latter heading is a residual classification while the former is specific and conforms to the description of the goods adopted by the appellants themselves for the purposes of packing as well as advertisement and publicity. Moreover, besides the stipulation of the aforesaid interpretation rules, the Hon’ble Supreme Court also, in their judgment in the case of ‘H.P.L. Chemicals Ltd. v. CCE, Chandigarh’ [2006 (197) E.L.T. 324 (S.C.)], have held that specific heading is preferable over residuary heading for classification. Therefore, in terms of the aforesaid rules for interpretation, Heading No. 3808 91 91 will prevail over 3004 90 99.

13.5 Furthermore, in matters of classification of goods under taxation statutes, all the judicial forums, including the Apex Court, have stressed upon the importance of the identity of the goods in common parlance and there is a plethora of case law which hold that for classification of goods under statutes for taxation of commercial supplies thereof, the primary test is their identity in the market, or in other words, in common parlance. Some such judgments are as follows :

(i)  Deena Jee Sansthan v. CCE, Meerut [2019 (365) E.L.T. 353 (S.C.)]

(ii)  CCE, New Delhi v. Connaught Plaza Restaurant (P) Ltd. [2012 (286) E.L.T. 321 (S.C.)]

(iii) CCE, Nagpur v. Shree Baidyanath Ayurved Bhawan Ltd. [2009 (237) E.L.T. 225 (S.C.)]

13.6 As stated in preceding paragraphs, the appellant declare prominently on the packing of the goods under reference that it is “mosquito repellent cream”. The advertisement and publicity of these goods is also done as a mosquito repellent. It would also not be out of place to mention that the appellant’s own website www.dabur.com, describes Odomos as a ‘mosquito repellent’. No doubt, that characteristic of these goods, which aid in prevention of vector borne diseases by preventing mosquito bites, is also mentioned; however, it is a matter of common knowledge that public or market identity of the product is as a mosquito repellent. Here, it is pertinent to mention that mosquito bite, since time immemorial has been an irritant and source of discomfort to humankind and individuals want to safeguard themselves of the irritation and itchiness of a mosquito bite. This holds true for almost everybody anywhere on the planet, irrespective of whether the place/ locality they inhabit has prevalence of mosquito borne diseases or not. Moreover, even in the past, when the role of mosquitoes in spreading of certain diseases was not known, human kind has always endeavoured to prevent mosquito bites by using mosquito nets and paste or smoke of certain herbs and spices. All of the above to state the common truth that the primary motive of the common person, for using materials like the subject goods, is to save and protect themselves from mosquito bites even if there is no or negligible incidence of mosquito borne diseases in their localities. This is also borne out by the fact that odomos is not normally prescribed as a medicine by a registered medical practitioner and is available in stores and establishments of all types including “kirana stores”, their sale not being restricted to chemists/ druggists alone. It neither controls the disease for which mosquitoes are carrier nor develops preventive characteristics inside human body to fight against vector borne diseases. Therefore, the market identity in common parlance of the subject goods is as a mosquito repellent and their usefulness in preventing mosquito borne diseases (again derived from their characteristic quality of being a mosquito repellent) is of a subsidiary/ supplementary nature.

13.7 The Applicant have laid much stress on the fact that the manufacture of the subject goods is regulated under the “Drugs and Cosmetics Act, 1940” (Drugs Act) to contend that these are medicaments. However, first of all, as stated hereto before, the primary test of classification is that of common parlance, applying which, we unequivocally arrive at the identity of the product as a mosquito repellent. Secondly, regulation under the Drugs Act does not ipso facto mean that the product automatically becomes a medicine. The term ‘drug’ includes, besides medicines, any substance which affects the structure or functions of the human body while the term ‘medicine’ is used for a substance which is used to prevent or cure any illness. Thus, there are a number of substances/materials/products which are regulated by the Drugs Act though they are not used or recognized as medicines. Here, it is extremely pertinent that even mosquito repellents fall within the ambit of the statutory definition of drugs, as given in Section 3(b)(ii) of the Drugs Act and therefore, the fact of regulation under that statute does not, by itself, lead to any conclusion regarding then classification as medicament vis-ä-vis mosquito repellent. We also observe, that the appellants have stated that the active ingredient in their product is NNDB which is an improved version/formula of DEET, the active component of many mosquito repellents. The substance DEET is mentioned in the schedule to the “Insecticides Act, 1968” as an insecticide and by corollary, its improved version, i.e., NNDB would also be an insecticide. In this context, it is pertinent that mosquito repellents are classified at Heading No. 3808 91 91 of the Customs Tariff as a subcategory of insecticides. Thus, this again indicates that even by applying the yardstick of chemical composition, Heading No. 3808 91 91 is most specific for the classification of the subject product.

13.8 The Applicants have also stated that their product is not a mosquito repellant as, while such products achieve their desired result by nerve poisoning, stomach poisoning, asphyxiation or by odour, the subject product prevents mosquito bites by interfering with their olfactory receptors. Firstly, we observe that there is no authoritative literature which declares that mosquito repellents can work only in the above stated manner and any product preventing mosquito bites through any other method will not fall in the category of repellents. In fact, olfactory receptors are the odour perceiving receptors of mosquitoes and by interfering with their function, their ability to smell out the human body is impaired. Thus, the factor of odour is brought into play by the subject product, albeit indirectly. Furthermore, since, in the above manner, the subject goods make the human body unattractive, as a source of food, to the mosquito, it effectively repels a mosquito from a human being, thereby working as a mosquito repellent. Above all is also the test as to how they themselves identify & sell the product in the market i.e. “mosquito repellents”.

13.9 In light of the foregoing discussions, we observe that all the factors relevant for classification under the Customs Tariff lead to the classification of the Applicants’ product “Odomos” under Heading No. 3808 91 91, be it the rules for interpretation of the said Tariff, the common parlance test, its chemical composition or its usage and way of working. Hence, we conclude that Odomos is a mosquito repellent and has to be classified under Chapter Heading 3808 91 91 of the Customs Tariff Act and thus, we pass the order as :

Ruling

14. In view of the foregoing discussions and findings we hereby uphold the Ruling in Order No. 25, dated 20-2-2019 of the Authority for Advance Ruling that “Odomos is well covered under Chapter 38 of Customs Tariff Act and is classified under HSN 3808 91 91”.

M/S. SIEMENS LIMITED

Exemption form CGST and SGST – GTA services – transportation activities – composite contracts or not – divisibility of contracts – freight charges recovered by the Appellant under the contract from the customer without issuance of consignment note – Serial no. 18 of Notification no. 12/2017-Central Tax Rate F. No. 334/1/2017, dated 28 June 2017 – Serial no. 18 in Notification no. 12/2017-State Tax (Rate) no. MGST 1017/C.R.103(11)/ Taxation-1 dated 29 June 2017 – Challenge to AAR decision.

The appellant has entered into separate contracts for supply of goods and supply of services and the same does not constitute a composite supply – HELD THAT:- After going through the terms of contracts it is seen that though there are two contracts one for supply of goods and other for supply of services, in fact these two contracts are not separate or independent contracts as envisaged by the appellant but are parts of the one whole contract which are separated by the appellant for the reason known to him – All the contracts are interdependent. Further the contracts are covered by the cross fall breach clause which means breach of one will be deemed as breach of other. The work of Taking Over/Time for Completion of the project and handing over to the Employer upon successful completion is to be completed within 38 months.

From the terms of the contract it is crystal clear that the transportation services provided by appellant which are the part of Fifth service contract is not only integrally connected with Third contract of supply of goods but it is also connected with the other contracts (First, Second, Fourth and Sixth contracts) which are performed by the JV partners other than the appellant – The appellant is entrusted with the work mainly for their expertise in erection and installation of the plant and the execution of turnkey project. The function relating to the supply of material and the rendering of services of erection and installation are integrally connected and interdependent. The terms of supply clearly show that the implementation schedule is not only for supply but also for erection, testing and commissioning of the project.

The supply of the goods and the supply of services are inextricably linked with each other. The contract awarded in substance and essence is a composite contract as defined in section 2 (30) of the C.G.S.T. Act, 2017 for supply of goods and services – The entire transaction of providing the goods and the services is naturally bundled and hence this is clearly a case of composite supply of goods and supply of services.

Another contention made by the appellant is that the Contracts entered into by the Appellant are not composite supply of services as work contract and Services provided by the Appellant are not in relation to immovable property – HELD THAT:- It is seen from the nature of contract which envisages installation, which involves civil works to erect the structure for execution of the project in its entirety. It is an entire system comprising of a variety of different structures which are installed after a lot of prior work which involves detailed designing, ground work. Appellant has also submitted few photographs of the project which clearly shows that the structure is attached to the earth with the help of civil work. The photographs indicate the magnitude of the work done. Further foundations in cement concrete, cement concrete walls as well as cement concrete structures are constructed during the execution of the project. The mode of annexation shows that the groundwork, being the necessary foundation, is an important part of the project. The object of annexation, as said earlier, cannot be to make it movable from one place to the other – Hence considering the scope of the work and the facts revealed by the photographs, it can be very well said that completion of the installation, erection of the total project is resulting into immovable property. Hence the total project assigned to the appellant is nothing but composite supply of works contract as envisaged u/s 2 (119) of GST Act.

Applicability of decision in the Advance Ruling in the case of IN RE: M/S. NR ENERGY SOLUTIONS INDIA PVT. LTD. [2019 (6) TMI 1171 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA] – HELD THAT:- From the order of the Advance Ruling Authority in case of M/s. NR Energy Solutions India Pvt. Ltd. it can be seen that the terms of the contract are limited to supply and installation of Relay & Protection Panels and Substation Automation System {SAS) which is a small part of system compare to the whole contract awarded to appellant. The appellant cannot equate the contract of supply and installation of certain part of the system with the whole contract in the present case of on-shore and off-shore supply of goods and services for complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur – Hence ratio of advance ruling in case of M/s. NR Energy Solutions India Pvt. Ltd. is not applicable to present case.

The agreement for setting up for + 320KV, 2 X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala) is a composite works contract as defined u/s 2(119) of GST Act and taxable @ 18% and hence:

Transportation services provided by the appellant being part of the whole works contract will be taxable @ 18% as works contract services and will not be eligible for the exemption as provided in Serial no. 18 of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017 and Notification No. 12/2017-State Tax (Rate) dated the 29th June, 2017.

Order passed by the Advance Ruling upheld.

No.- MAH/AAAR/SS-RJ/4/2019-20

Dated.- August 23, 2019

Citations:

  1. Commissioner of Customs And Central Excise, Nagpur Versus M/s Ispat Industries Ltd. – 2015 (10) TMI 613 – Supreme Court
  2. Indure Ltd. and another Versus Commercial Tax Officer and others – 2010 (9) TMI 883 – Supreme Court
  3. Commissioner of Central Excise, Ahmedabad Versus Solid & Correct Engineering Works & Ors. – 2010 (4) TMI 15 – Supreme Court
  4. COMMISSIONER OF CUS. (PRV.), AMRITSAR Versus MALWA INDUSTRIES LTD. – 2009 (2) TMI 41 – Supreme Court
  5. VISA International Ltd. Versus Continental Resources (USA) Ltd. – 2008 (12) TMI 793 – Supreme Court
  6. COMMR. OF C. EX., JAIPUR Versus RAJASTHAN SPG. & WVG. MILLS LTD. – 2007 (11) TMI 19 – Supreme Court
  7. ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. Versus DIRECTOR OF INCOME-TAX – 2007 (1) TMI 91 – Supreme Court
  8. TTG. INDUSTRIES LTD. Versus COLLECTOR OF CENTRAL EXCISE, RAIPUR – 2004 (5) TMI 77 – Supreme Court
  9. DUNCANS INDUSTRIES LTD Versus STATE OF U.P. & ORS – 1999 (12) TMI 857 – Supreme Court
  10. MIRAH EXPORTS PVT. LTD. Versus COLLECTOR OF CUSTOMS – 1998 (2) TMI 124 – Supreme Court
  11. SIRPUR PAPER MILLS LTD. Versus COLLECTOR OF CENTRAL EXCISE, HYDERABAD – 1997 (12) TMI 109 – Supreme Court
  12. MITTAL ENGINEERING WORKS (P) LTD. Versus COLLR. OF C. EX., MEERUT – 1996 (11) TMI 66 – Supreme Court
  13. UNION OF INDIA Versus MAHINDRA & MAHINDRA LTD. – 1995 (3) TMI 88 – Supreme Court
  14. QUALITY STEEL TUBES (P) LTD. Versus COLLECTOR OF CENTRAL EXCISE, UP. – 1994 (12) TMI 75 – Supreme Court
  15. The Bhopal Sugar Industries Ltd. Versus Sales Tax Officer, Bhopal – 1977 (4) TMI 151 – Supreme Court
  16. M/s. Larsen and Toubro Ltd. Versus State of Andhra Pradesh rep. by its Principal Secretary (Revenue) , Hyderabad And Others – 2015 (12) TMI 470 – ANDHRA PRADESH HIGH COURT
  17. Linde AG, Linde Engineering Division And Another Versus Deputy Director of Income Tax – 2014 (4) TMI 975 – DELHI HIGH COURT
  18. Sri Velayuthaswamy Spinning Mills (P) Ltd Sivaraj Spinning Mills (P) Ltd. Sri Shanmugavel Mills (P) Ltd., Sri Shanmugavel Mills (P) Ltd. Versus The Inspector General of Registration – 2013 (3) TMI 681 – MADRAS HIGH COURT
  19. Siemens India Limited Versus State of Kerala – 2002 (9) TMI 806 – KERALA HIGH COURT
  20. State of Tamil Nadu Versus Titanium Equipments and Anode Manufacturing Corporation Limited – 1997 (8) TMI 460 – MADRAS HIGH COURT
  21. Perumal Naicker Versus T. Ramaswami Kone And Anr. – 1967 (9) TMI 147 – MADRAS HIGH COURT
  22. In Re: M/s. NR Energy Solutions India Pvt. Ltd. – 2019 (6) TMI 1171 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
  23. In Re: M/s. Siemens Limited – 2019 (4) TMI 1623 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
  24. In Re: Dinesh Kumar Agrawal – 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA
  25. M/s. Om Telecom Logistics Versus C.S.T., New Delhi. – 2018 (4) TMI 723 – CESTAT NEW DELHI
  26. South Eastern Coal Fields Ltd. Versus C.C.E., Raipur – 2016 (8) TMI 677 – CESTAT NEW DELHI
  27. Northern Coal Fields Versus Commissioner of Customs And Central Excise, Allahabad – 2015 (11) TMI 1256 – CESTAT ALLAHABAD
  28. M/s. Nandganj Sihori Sugar Co. Versus CCE. Lucknow – 2014 (5) TMI 138 – CESTAT NEW DELHI
  29. ESSAR LOGISTICS LTD. Versus COMMISSIONER OF CENTRAL EXCISE, SURAT – 2014 (6) TMI 763 – CESTAT AHMEDABAD
  30. Birla Ready Mix Versus Commissioner of Central Excise, Noida – 2012 (12) TMI 736 – CESTAT, NEW DELHI
  31. SS. Associates Versus Commissioner of Central Excise, Bangalore – 2009 (12) TMI 152 – CESTAT, BANGALORE
  32. CCE & C, GUNTUR Versus KANAKA DURGA AGRO OIL PRODUCTS PVT. LTD. & ANR. – 2009 (3) TMI 130 – CESTAT, Bangalore
  33. BHARATHI SOAP WORKS Versus COMMISSIONER OF CUS. & C. EX., GUNTUR – 2007 (9) TMI 55 – CESTAT, BANGALORE
  34. RAJASTHAN SPG. & WVG. MILLS LTD. Versus COMMISSIONER OF C. EX., JAIPUR – 2001 (4) TMI 118 – CEGAT, COURT NO. I, NEW DELHI

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Siemens Limited (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-69/2018-19/13-164 dated 19.12.2018 = 2019 (4) TMI 1623 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA.

Brief Facts of the Case

  1. M/s Siemens Limited (hereinafter referred as the ‘Appellant’) is registered under the Central and State GST legislations vide GSTIN 27AAACS0764L1Z6 and is situated at Plot No 2, Siemens Limited, Sector 2, Kharghar Node, Navi Mumbai 410210, Maharashtra. The Appellant is a leader in technology solutions for intelligent (smart), sustainable cities, smart grid, building technologies, mobility and power distribution.
  2. The Appellant has entered into six contracts with one of the major Public Sector Undertakings in the State of Haryana (herein after referred as‘the Customer’) for on – shore and offshore supply of goods and services on a joint venture (‘J V’) basis with M/s Siemens AG, Germany as the Lead Partner and M/s Sumitomo Electric Industries Ltd. Japan as another Partner.
  3. The six contracts cover specific and detailed nature of supply of various goods and services. Out of which two contracts are required to be executed by the Appellant as a JV’s Associate. The Third Contract vide Ref. No. CC-CS/698 – SR2/HVDC – 3249/7/G10/R/NOA-III/7215 dated 22.03.2017 (hereinafter referred to as‘on-shore Supply Contract/ Third Contract’) provide for supply of goods on ‘ex-works’ basis. The Third Contract is in relation to placing of orders by customers for supply of VSC (Voltage Source Converters) based HVDC Terminals between Pugalur and North Trichur. This involves supply of equipment and services, both on off-shore as well as on-shore basis.
  4. The Fifth Contract vide Ref. No. CC-CS/698 – SR2/HVDC – 3249/7/G10/R/NOA-V/7217 dated 22.03.2017 termed as ‘on shore Service Contract (VSC part) (NOA-V)’ (hereinafter referred to as‘on-shore Service Contract/ Fifth Contract’). The scope of work under this contract as referred at 3.1 Clause of the Fifth Contract is as follows:
  5. Local transportation, insurance and other incidental services
  6. Installation charges
  7. Training charges
  8. The present query relates to the ‘service activities’ involved in their Fifth Contract. The Appellant, through an independent ‘Service Contract vide Ref. RPT-HVDC/C&M/3429/CA-V/7217/BBU-03/18/533 dated 14.03.2018 (hereinafter referred to as ‘Service Contract’) is entrusted with the responsibility of delivery of the goods at Customer’s site. For this, the Appellant engages local transporters who issue consignment notes to the Appellant for such transportation of goods and issue their freight invoices on the Appellant.
  9. In turn, the Appellant discharges the GST liability under reverse charge mechanism on such freight amount being paid by it to these transporters as provided under Notification no. 13/2017 – Central Tax Rate F. No. 334/1/2017, dated 28 June 2017.
  10. The Appellant charges local transportation from the customer as per the terms of the Service Contract. However, since the consignment note is already issued by the transporters engaged by the Appellant, no subsequent additional consignment note is issued by the Appellant.
  11. In terms of Serial no. 18 of Notification no. 12/2017 – Central Tax Rate F. No.334/1/2017, dated 28 June 2017, an exemption from Central GST has been provided for services by way of transportation of goods. The relevant extract of the notification is given below:
Sr.no. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (percent) Condition
18 Heading 9965 Services by way of transportation of goods-

a. by road except the services of-

i. a goods transportation agency;

ii. a courier agency;

b. by inland waterways

NIL NIL
  1. There is a similar exemption which has been provided under the Maharashtra Goods & Services Tax Act, 2017 vide Serial no. 18 in Notification no. 12/2017-State Tax (Rate) no. MGST 1017/C.R.103(11)/ Taxation-1 dated 29 June 2017.
  2. With respect to the local transportation charges and recovered by the Appellant from the Customer, the Appellant sought the Advance Ruling under Section 97(2) of Central Goods & Services Act, 2017 as amended (‘CGST Act’) and the Maharashtra Goods & Services Tax Act, 2017 as amended (‘SGST Act’) on the applicability of tax exemption as provided under Serial no. 18 of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017.

Questions for Advance Ruling:

  1. Whether the freight charges recovered by the Appellant under the aforesaid contract from the customer without issuance of consignment note will be eligible for exemption from CGST as prescribed in Serial no. 18 of Notification no. 12/2017-Central Tax Rate F. No. 334/1/2017, dated 28 June 2017?
  2. Whether the freight charges recovered by the Appellant under the aforesaid contract from the customer without issuance of consignment note will be eligible for exemption from SGST as prescribed in Serial no. 18 in Notification no. 12/2017-State Tax (Rate) no. MGST 1017/C.R.103(11)/ Taxation-1 dated 29 June 2017?

Observations of AAR:

  1. Vide theMaharashtra Advance Ruling Authority Order No. GST – ARA – 69/2018- 19/B – 164, Mumbai dated December 19, 2018 = 2019 (4) TMI 1623 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA (hereinafter referred to as ‘AAR Ruling’) and received by the Appellant via email on 25 April 2019 (copy of order received on 30th April, 2019), the AAR Ruling was issued wherein both the questions put forth by the Appellant regarding the applicability of Exemption Notification were answered in negative. In order to reach such conclusions, the Ld. Member, AAR observed as follows:
  2. That the scope of work is a package, for performance of all other activities inter alia including port handling of the plant and Equipment including mandatory Spares (except +320kV HVDC Cable and some of its associated items) to supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied.
  3. That the contract is awarded for total Contract Price for the entire scope of work under this Contract. It means, it is awarded for single price which covers all activities as required for competition of the project.

iii. That there is no break – up of the Contract Price, the Contract shall, at all the times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire Contract.

  1. That the Appellant is one of contract party in this JV to complete the work in stipulated time who is supplying the goods and services to complete the project undertaken. The Appellant is also equally responsible to this contract to achieve the target within time, otherwise it is breach of contract.
  2. That the First Contract including on-shore Ex works supply of all equipment and materials cannot be executed independent of the Second Contract which is for the on-shore supply of services. It is further observed that there cannot be any ‘supply of goods’ without a place of supply. As the goods to be supplied under the First Contract involves movement and/ or installation at the site, the place of supply shall be location of the goods at the time when movement of goods terminates for delivery to the recipient or moved to the site for assembly or installation refer to Section 10 (7) (a) and (d) of the IGST Act, 2017. The First Contract however does not include the provision and cost of such transportation and delivery. Therefore, it does not amount to a contract for ‘supply of goods’ unless tied up with the Second Contract. The First Contract has ‘no leg’ unless supported by the Second Contract.
  3. That although awarded under two separate contract agreements, clauses under both them make it abundantly clear that notwithstanding the breakup of Contract Price, the contract shall, at all times, be construed as a single source responsibility and the Application shall remain responsibility to ensure execution of both the contracts to achieve successful competition. Any breach in any part of the First Contract shall be treated as a breach of the Second Contract, and vice versa.

vii. That the two contracts are linked by a cross fall breach clause deeming that any breach in either of the contracts is to be considered to be a breach of the other contract as well. Thus, it provides the recipient with an absolute right to either terminate both the contract or claim damages accordingly. That the ‘cross fall breach clause’, settles unambiguously that supply of goods, their transportation to the contractee’s site delivery and related services are not separate contracts, but only form parts of an indivisible composite works contract supply, as defined under Section 2 (119) of the GST Act, with single source responsibility.

viii. That the composite nature of the contract is clear from the facts that first Contract cannot be performed satisfactorily unless the goods have been transported and delivered to the contractee’s site. The two contracts for supply of the goods and allied services are not separately enforceable. The recipient has not contracted for ex-factory supply of material, but for the composite supply, namely Works Contract for Supply for VSC based HVDC Terminal and DC XLPE Cable System. Reliance was placed on decision of Hon’ble SC in case of M/s Indure Ltd. Vs. CTO in Order dated 20.09.2010 in C.A. No. 1123 of 2003 = 2010 (9) TMI 883 – SUPREME COURT.

  1. Placing reliance onAAR Order No. GST-ARA-36/2017-18/8-43 dated 04.06.2018 in case of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA, it is held that the first and second contracts have cross fall breach clause and thus, are in nature of ‘Composite Supply of Works Contract’, therefore should be taxable @18%.
  2. Aggrieved by the order of Maharashtra Authority for Advance ruling, appellant wish to file an appeal with The Maharashtra Appellate Authority for Advance Ruling, Goods and Services Tax in terms of rule 106(1), Central Goods and Service Tax Rules, 2017. However, appellant would like to state that, it could not submit the appeal application online as the status of order is not yet updated on GST portal and hence is filing the application manually with your good office.

GROUNDS OF APPEAL

  1. Exemption Notification is applicable to the Appellant
  2. On a plain reading of Entry No, 18 of the Exemption Notification, it can be seen that the following conditions would have to be cumulatively satisfied by the Appellant in order to avail the benefit of the exemption:

(i) Services are to be provided by way of transportation of goods by road.

(ii) Services are not that of Goods Transportation Agency (‘GTA’).

2.1 In order to determine whether the aforementioned conditions get satisfied, it is relevant to refer to the term ‘GTA’. In this regard, the term ‘GTA’ is defined in para 2 (ze) of the Exemption Notification to mean any person who provides service in relation to transport of goods by road and issues consignment note. The extract of para 2(ze) is reproduced below:

‘(ze) “goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called;’

2.2 This position on taxability of GTA services is very similar to the erstwhile Service Tax regime wherein Service Tax was applicable on GTA, provided the service provider issues a consignment note to the service recipient.

2.3 In light of the above, it is amply clear that a GTA clearly includes any person who provides services in relation to transportation of goods by road and who issues a consignment note. Accordingly, it can be said that the key determining factor for qualifying as a GTA is the issuance of a consignment note. In this regard, the Appellant submits that once a consignment note is issued, there can be no doubt that the service qualifies as a GTA service. Reference in this regard is made to the decision in the case of Bharathi Soap Works vs. CCE&C, Guntur [2008 (9) STR 80 (Tri-Bang)] = 2007 (9) TMI 55 – CESTAT, BANGALORE wherein, on a similar issue of consignment note pertaining to the erstwhile Service Tax regime, it was held as follows.

‘The transporters are bound to issue the consignment note or Bills or Challans as defined in Rule 4(8) of Service Tax Rules or any other serially numbered bills. Failure to do so would be a violation of law.”

2.4 Similar effect was also given to the decision in the case of Essar Logistics Ltd. vs. CCE, Surat [2014 (33) STR 588 (Tri-Ahmd)] = 2014 (6) TMI 763 – CESTAT AHMEDABAD.

2.5 Further, in the decision of M/s. Om Telecom Logistics vs. CCE, Delhi (2018-TIOL-1430), Delhi – CESTAT = 2018 (4) TMI 723 – CESTAT NEW DELHI, it was held that a person is to be categorized as a ‘goods transport agent’, only when he issues the ‘consignment note’ in the manner prescribed in the statute.

2.6 Similar view has been taken by the Tribunals in the following matters:

  1. CCE Guntur vs. Kanaka Durga Agra Oil Products Pvt. Ltd. (2009) 15 STR 399 – Bangalore CESTAT = 2009 (3) TMI 130 – CESTAT, BANGALORE
  2. South Eastern Coal Fields Ltd. vs. CCE, Raipur (2016-TIOL- 2773) – Delhi CESTAT = 2016 (8) TMI 677 – CESTAT NEW DELHI
  3. Birla Ready Mix vs. CCE, Noida (2012-TIOL-2200) – Delhi CESTAT = 2012 (12) TMI 736 – CESTAT, NEW DELHI
  4. Northern Coal Fields vs CCE, Allahabad (2015-TIOL-2459) – Allahabad CESTAT = 2015 (11) TMI 1256 – CESTAT ALLAHABAD
  5. Nandganj Sihori Sugar Co. Ltd. vs. CCE (MANU/CE/0194/2014) – Delhi CESTAT = 2014 (5) TMI 138 – CESTAT NEW DELHI

2.7 In the present case, the Appellant, by virtue of an independent and separate Service Contract is entrusted with the responsibility of delivery of the goods to the customer’s premises. Given this, the Appellant engages local transporters who issue consignment notes to the Appellant for such transportation of goods. Further, the Appellant discharges the GST liability on such freight amount on reverse charge basis. Thereafter, the Appellant provides services in relation to transport of goods by road and recovers charges for local transportation from the customer.

2.8 In light of the above, it is can be seen that any person who provides services in relation to transport of goods by road and issues consignment notes will be covered under the ambit of service category of GTA services.

2.9 In the present case, it can be seen that the Appellant is purely providing the service of transportation of goods to the customer and is not issuing any consignment note. Accordingly, it is clear that the services provided by the Appellant are that of transportation of goods by road and not that of GTA. Accordingly, given that the conditions specified in the Exemption Notification are satisfied, the Appellant is eligible for exemption contained in Entry No. 18 of the Exemption Notification.

2.10 Lastly, the Appellant also submits that it is a settled principle in law that exemption notifications have to be accorded a liberal interpretation. In this regard, the Appellant places reliance in the judgement of Commissioner of Cus. (Prv.), Amritsar Vs Malwa Industries Ltd [2009 (235) E.L.T. 214 (S.C] = 2009 (2) TMI 41 – SUPREME COURT, wherein the Honourable Supreme Court had held that an exemption notification should be read literally and the same is to be construed liberally if it is found that the notification is applicable to the assessee. In this regard, the relevant extract of the judgement is reproduced below:

‘10. An exemption notification should be read literally. A person claiming benefit of an exemption notification must show that he satisfies the eligibility criteria. Once, however, it is found that the exemption notification is applicable to the case of the assessee, the same should be construed liberally.’

2.11 The Appellant further submits that, it is a settled principle of law that when the language is clear and unambiguous, the intention of the legislature is to be gathered from the language used. The court cannot add words to a statute or read words into it which are not there. In this regard, the relevant extract of the judgement is reproduced below:

‘The court cannot add words to a statute or read words into it which are not there. The court cannot, on an assumption that there is a defect or an omission in the words used by the legislature, correct or make up assumed deficiency, when the words are clear and unambiguous.’

  1. The Appellant has entered into separate contracts for supply of goods and supply of services and the same does not constitute a composite supply

2.12 Before we proceed to counter the observations made by the Ruling Authority, the summary of the findings contained in the AAR Ruling are outlined in the ensuing paragraphs.

2.13 The AAR Ruling has primarily observed that two contracts i.e. Third Contract and Fifth Contract for on – shore supply of the goods and on-shore supply of services, respectively, are to be read conjointly and thus, disregarded the claim of the Appellant that both the contracts are separately enforceable. In this regard, the main observations concluding the abovesaid understanding of the Ruling Authority are enlisted below:

  • The contract is awarded for a single price which covers all the activities as required for completion of the project. There is no break-up of the contract price and the contract shall, at all the times, be construed as a single source responsibility contract and any breach in any part of the contract shall be treated as a breach of the entire contract.
  • The contract is a composite supply of services of works contract as defined under Section 2(119) of the CGST Act, wherein the transportation is merely a component of the same and not a separate supply. Since the contract for on-shore supply of goods cannot be performed satisfactorily unless the goods have been transported and delivered to the contractee’s site, the recipient has not contracted for ex-factory supply of material but for the composite supply.
  • The two contracts are linked by a cross fall breach clause, thus, any breach in either of the two contracts will result in a breach of the other contract as well, providing the recipient with an absolute right to terminate both the contracts or claim damages accordingly. Thus, the ‘cross fall breach clause’ present in the contract, settles unambiguously that supply of goods, their transportation to the contractee’s site delivery and related services are not separate contracts, but only forms part of an indivisible composite works contract supply.
  • Reliance is placed on M/s Indure Ltd. V. CTO in Order dated 20.09.2010 in C.A. No. 1123 of 2003 = 2010 (9) TMI 883 – SUPREME COURT and AAR Order No. GST – ARA – 36/2017 -18/8 – 43 dated 04.06.2018 in case of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRAto observed that the first and second contracts have cross fall breach clause and thus, they are in nature of ‘composite supply of works contract’ taxable @18%.

Divisibility of Contracts

2.14 At the outset, the Appellant has entered into 6 separate contracts for different on-shore and off-shore supply of goods and services. More specifically, out the six contracts, the present issue relates to two contracts i.e. Third Contract and Fifth Contract for the supply of VSCs and the supply of services respectively.

2.15 On a plain perusal of the Third and Fifth Contract, it can be clearly seen that there are separate clauses, terms/conditions which are expressly outlined in the contract governing contract price, scope of work, lead partner, other partners, joint ventures, performance securities, bank guarantees, price components, pricing mechanism, raising of invoices, time period for completion of services, duration of the contract, etc.

2.16 In this regard, it is submitted that as exclusive clauses and conditions are clearly outlined in the Third and Fifth Contract respectively, the two contracts are separate and distinct in nature. The Third Contract contains terms governing supply of goods and the Fifth Contract contains terms governing supply of services. The scope of works and contract price for the Third Contract is reproduced below:

‘Design, Ex – works supply of equipment and materials including mandatory spares from within India, Type Testing (as applicable), required for the complete execution of the +(-) 320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh ) and Southern region (Pugalur, Tamil Nadu – North Trichur, Kerela),’

3.0 CONTRACT PRICE

S. No. Price Component Amount
i) Ex – works Price Component EURO 82,463,172 +USD 235,584 +INR 8,345,326,393

Included EURO 82,463,172 +USD 235,584 +INR 8,345,326,393

ii) Type Test Charges

2.17 Similarly, the scope of work and contract price for the Fifth Contract is reproduced below:

‘for performance of all other activities inter – alia including port handing of the Plant and Equipment including mandatory Spares (except +- 320kV HVDC Cable and some of it’s associated items) to be supplied from abroad, loading, inland transportation & insurance for delivery at site, insurance, unloading, storage & handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘First Contract’ and ‘Third Contract’ any other services specified in the Bidding Documents referred to hereinabove.’

3.0 CONTRACT PRICE

S. No. Price Component Amount
i) Local Transportation, Insurance and other Incidental Services (VSC Portion) INR 623, 073, 872
ii) Installation Charges (VSC Portion) INR 2,174, 363, 480
iii) Training Charges Included
Total for Fifth Contract (i+ii+iii) INR 2,797, 437, 352

2.18 Further, given that the transaction with the customer is on ex-works basis where the ownership in the goods is transferred at the premises of the Appellant, it can be said that the Fifth Contract would commence only when the ownership in the goods is transferred to the customer.

2.19 Therefore, in light of the above, it is evident that each of the activities to be carried on by the Appellant under the aforementioned two contracts are independent and distinct. Accordingly, the two contracts cannot be regarded as one single contract.

2.20 Both the contracts have different scope of work, separate consideration and separate invoices. Therefore, in no circumstances, the two contracts can be said to form one composite contract.

2.21 Reliance in this regard is placed on the case of lshikawajma-Harima Heavy Indus. Ltd. Vs Dir. Of Income Tax, Mumbai 2007 (6) STR 3 (S.C.) = 2007 (1) TMI 91 – SUPREME COURT, the assessee was to develop, design, engineer and procure equipment, materials and supplies, to erect and construct storage tanks and some other services for Petronet LNG in India. The contract, inter alia involved onshore services as well as offshore services. Separate prices were mentioned in the contract. One of the contentions of the Income Tax department was that the entire contract is one composite contract and therefore, income tax is payable even on offshore services. The Supreme Court in this case held as under:-

30. The contract is a complex arrangement. Petronet and the appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different.

  1. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different.
  2. Thiscaseis clearly distinguishable from the facts of the present case, since the payment for the offshore and onshore supply of goods and services were in itself clearly demarcated and cannot be held to be a complete contract that has to be read as a whole and not in parts.
  3. We would in the aforementioned context consider the question of division of taxable income of offshore services. Parties were ad idem that there existed a distinction between onshore supply and offshore supply. The intention of the parties, thus, must be judged from different types of services, different types of prices, as also different currencies in which the prices are to be paid.’

2.22 Similarly, reliance is placed on the decision of Linde Engineering Division v. Income Tax, (2014) 365 ITR 1 = 2014 (4) TMI 975 – DELHI HIGH COURTwherein the Hon’ble Delhi High Court relied on the decision of Ishikawajima (supra) and held that the impugned contract for different scope of works ranging from supply of equipment to the services, is not a composite contract and the same can be split for the purposes of taxation.

2.23 Moreover, the Hon’ble High Court of Kerala in a matter concerned with an identical issue in the case of the Appellant [Siemens India Limited vs. State of Kerala 2003 (132) STC-0418] = 2002 (9) TMI 806 – KERALA HIGH COURT, held that when two separate contracts have been entered into by either parties, identifying two separate works viz. supply and service, then it is wrong in holding the same as indivisible contract. In this regard, the relevant extract of the judgement is reproduced below:

‘After hearing the parties, and after going through the records, we are of the opinion that the matter has to be considered again by the assessing authority. The assessing authority takes the view that in this case, there is indivisible contract. So far as this case is concerned, according to us, it is not indivisible. It contains two parts: supply order and service order. According to us, the Tribunal was not correct in holding that there was only one contract. The work order will show that it contains two parts; supply order and service order. Price is also shown separately. The right of the buyer to inspect the goods before they are transported is also preserved. So also, the goods are insured. When the goods were transmitted, the assessee transferred the title to the property to Cominco Binani Zinc Limited.’

Contracts entered into by the Appellant are not composite supply of services as work contract

2.24 It is submitted that the Appellant has not entered into a composite supply contract with the customer as erroneously observed by the Ruling Authority. In this regard, reference is made to the decision of Hon’ble High Court of Madras in State of Tamil Nadu v. Titanium Equipments and Anode Manufacturing Corporation, (1998) 110 STC 43 = 1997 (8) TMI 460 – MADRAS HIGH COURT wherein two divisible contracts, one for supply and another for supervision and installation were held not to be considered as works contract, when the clauses of both the contracts including the charges payable therein were independent. Relevant portion of the decision is extracted herein:

‘5. There can be no doubt whatsoever that this contract is clearly a divisible contract, one for the supply of the TSIAs and another for supervision and installation and undertaking recoating maintenance. The price payable for the supply of the material was distinct from the consideration payable for the supervision of installation and commissioning and for recoating maintenance.’

  1. The parties themselves had no doubt to the nature of the arrangement they had entered into and have specifically provided for the payment of the excise duty, sales tax and all other statutory levies by the buyer.
  2. It is unfortunate that the Tribunal, instead of examining the contract with reference to the various clauses therein hasthoroughly mislead itself into embarking on discussion of the law relating to works contract without first making sure that this is a contract which can come within the category of works contract. The Tribunal has completely overlooked the clauses providing for the maintenance charge irrespective of the period for which the TVA were to be maintained as also to the charges payable for the supervising engineer. It is clear from a reading of this contract that the parties intended to sell the goods, viz., titanium anodes had also entered into another arrangement for the supervision of the erection and installation of the anodes, as also the maintenance for which separate charges were payable.’

2.25 Thus, in view of the abovesaid decision, it is submitted that the view of the Ruling Authority that the Third Contract is a composite supply of works contract as defined u/s 2 (119) of the GST Act, of which transportation is merely a component and not a separate supply is erroneous. In the present case, the contractual terms of both the contacts for supply of goods and services are different from each other with different prices and conditions thereof. Hence, the Third Contract is merely for the supply of goods and is distinct vis-a-vis the terms and conditions as stipulated in the Fifth Contract. Thus, the Service Contract for the transportation of goods supplied as per Third Contract is not to fulfil the terms of the composite supply under works contract as suggested by the Ruling Authority.

2.26 In this regard, it is submitted that the Ruling Authority has failed to understand that the fact that the contracts have different price considerations for distinct activities undertaken therein, itself indicates the divisibility of the contract. It is submitted that there is no interdependence in the Third and Fifth contract. Both the contracts are two separate documents entered for two separate activities to be undertaken and invoiced separately, which are not even inclined to be bundled together. Hence, the Ruling Authority has misunderstood the divisible and distinct contract to be a works contract for composite supply without analyzing the clauses of the contracts.

2.27 Therefore, in view of the above, it is submitted that the Ruling Authority has ignored the factual position and contractual terms of both the contracts and decided the matter accordingly. It is reiterated that the two contracts for supply of goods and services are divisible contracts with different pricing mechanism and invoice. Hence, it cannot be said that the contract is indivisible and that the Appellant is providing a composite supply of services in the nature of works contract.

Services of transportation of goods are not naturally bundled with the supply of goods

2.28 Without prejudice to the above, in order to qualify two or more taxable supplies as a ‘composite supply’, it is essential that the supplies should be naturally bundled. In this regard, the term ‘composite supply’ as defined under Section 2 (30) of the CGST Act as follows:

‘(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;’

2.29 On a plain reading of the aforesaid extract of Section 2(30) of the CGST Act, it can be seen that in order to qualify as a composite supply, the supply would have to be bundled in the ordinary course of business.

2.30 The concept of naturally bundled services was explained in the Education Guide issued by the CBEC in the year 2012 (‘the Education Guide’). In this regard, the relevant extract of the Education Guide is reproduced as under for ease of reference:

‘Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.’

2.31 The Education Guide also clarifies that in cases of composite transactions, the nature of such transaction would be determined by the application of the dominant nature test. Further, the Education Guide lays down the manner to determine whether services are bundled in the ordinary course of business or not. In this regard, the Education Guide specifies that the same would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:

– The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.

– Majority of service providers in a particular area of business providing similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.

– Nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidentally or ancillary services which help in better enjoyment of a main service. For example, service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.

– The different elements are not available separately.

– The elements are normally advertised as a package.

2.32 In light of the above, going solely by the parameters for determining whether the services of transportation are bundled, the Appellant submits that the services of transportation of goods do not per se get covered under the ambit of bundled services on account of the fact that the Contract with the customer is on ex-works basis, where the ownership of the goods gets transferred to the customer at the factory premises of the Appellant. Moreover, the customer had the option/right to engage any other party/person for availing the service of transportation of goods by road. However, the customer has chosen to enter into the Service Contract with the Appellant for the said transportation in an independent capacity.

Services provided by the Appellant are not in relation to immovable property

2.33 The Advance Ruling Order has stated that the contract qualifies as a works contract as defined under Section 2 (119) of the CGST Act. In this regard, the Appellant humbly submits that the Order is grossly incorrect in holding that the services provided by the Appellant are in the nature of works contract services on account of the following submissions in the ensuing paragraphs.

2.34 It i relevant to refer to the term ‘works contract’ as defined in Section 2 (119) of the CGST Act as amended. As per the said term, works contract inter alia includes a contract for building, construction, fabrication, completion, erection, installation 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 extract of Section 2(119) of the CGST Act is reproduced below:

‘(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;’

2.35 On a plain reading of the Section 2 (119) of the CGST Act, it can be clearly seen that the term ‘works contract’ is in relation to immovable property. Given this, it is relevant to refer to the term ‘immovable property’.

2.36 The term ‘immovable property’ is not defined under the GST law. Therefore, it would be relevant to refer to the meaning of the said term used in other legislations as well as judicial pronouncements which have interpreted the said term. Accordingly, reference is made to the General Clauses Act, 1897 (‘General Clauses Act’). In this regard, the term is defined under Section 3 (26) of the General Clauses Act as follows:

‘26. “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.’

2.37 Further, it has been highlighted in various pronouncements by the judicial authorities that in cases where an object is installed/fastened to the land for better/improved efficiency of the said object, and not for the benefit of land, such object will not be considered as immovable property. Further, it has been held that if fixing of a plant to a foundation is only for providing stability to the plant and where there is no intention to make such plant permanent, the foundation provided would not change the nature of the plant and make it an immovable property.

2.38 Reliance in this regard can also be placed on the judgement of the Hon’ble Supreme Court in the matter of Sirpur Paper Mills vs. CCE, Hyderabad [1998 (1) SCC 400] = 1997 (12) TMI 109 – SUPREME COURT, wherein in case of a paper making machine, it was held that merely because the machinery was attached to the earth for operational efficiency, it does not automatically become an immovable property. If the appellant wanted to sell such goods, it could always remove it from the base and sell it. Hence, in this case as well, there was no movement indeed, however, the machine was capable of being moved which was enough for the machine to not be classified as an immovable property.

2.39 Similar view is also taken in the following judicial pronouncements:

– Commissioner of Central Excise v. Solid and Correct Engg. Works & Ors. [2010 (175) ECR 8 (SC)] = 2010 (4) TMI 15 – SUPREME COURT

– Sri Velayuthaswamy Spinning Mills v. The Inspector General of Registration and the Sub Registrar [(2013 (2) CTC 551)] = 2013 (3) TMI 681 – MADRAS HIGH COURT

– Perumal Naicker v. T. Ramaswami Kone and Anr. (AIR 1969 Mad 346) = 1967 (9) TMI 147 – MADRAS HIGH COURT

2.40 In view of the aforesaid judgements, it can be said that goods cannot be termed as immovable property for the following reasons:

– Such plants/systems cannot be said to be ‘attached to the earth’.

– The fixing of the plants/ systems to a platform/foundation is meant only to give stability to the plant/ system and keep its operation vibration free.

– The setting up of the plant/ system itself is not intended to be permanent at a given place.

2.41 In view of the aforesaid judgments, the Appellant submits that the aforesaid parameters/factors governing determination of immovable property are per se not fulfilled by the Appellant as the goods specified in the contracts are not such that would be attached to the earth and are not intended to be affixed permanently. Further, in the present case, specific goods supplied by the Appellant are installed only for the purpose of better functioning of the said goods and are capable of being removed and transferred from one place to another. Hence, the fact that the said goods are firmly but not permanently attached to the land, clearly means that the goods in question do not per se come under the ambit of immovable property.

Underlying intention of the parties to the agreement are final and conclusive

2.42 As elaborated above in detail, the Appellant reiterates that the Third and the Fifth Contract are separate and distinct contract whose terms are independent to each other. The impugned Third contract contains explicit terms indicating the ex-works price of the Contract for the on – shore supply of goods. In this regard, the Appellant submits that the intention of the Appellant was not to provide the transportation services in relation to the supply of the goods, otherwise it would have intended to have cost+ insurance+ freight contract as opposed to Ex – works price contract. Furthermore, the ex-works price of the Contract clearly indicates that the ownership of the goods to be supplied to the customers is transferred by the Appellant at its premise itself. However, the Advance Ruling Authority ignored the factual position indicated in the terms and conditions of the contract and artificially interlinked the Third Contract and the Fifth Contract to imply the arrangement as a composite supply.

2.43 As stated above, the Appellant submits that in the present case, the Appellant has one exclusive and separate ‘Third Contract’ for the on-shore supply of goods and the price determination in the said contract has been done on ex-works basis. Further, the transporter undertook the local transportation activity as per an independent ‘Service Contract’ and the said transportation costs were charged from the customer. Hence, there is no iota of doubt in the intention of the parties entering into separate contracts for carrying out distinct and different activities of supply of goods and transportation. The subsequent transportation of the said goods are done as per the independent ‘Service Contract’ which is purely for the transportation activities. Thus, the Ruling Authority has erroneously read the Third Contract for supply of goods and Fifth Contract for supply of services, conjointly, to observe that the independent ‘Service Contract’ covers the obligations of the Appellant as promised in the Fifth Contract for the on-shore supply of services. However, the same was not the intention of the parties.

2.44 Appellant submits that in the present case, the various contracts entered by the parties are to fulfil distinct and separate obligations. It was merely for the ease of functioning and commercially viability that all the six contracts for different transactions were entered with the JV, where the Appellant was one-on-one party to impugned contracts. As an industry practice, the particular range of contracts were awarded to the Appellant. The same does not necessarily mean or imply that they are interlinked or cannot exist independent of each other. It is further submitted that as a cardinal principle of interpretation of contracts, a commercially sensible construction of a contract must be favoured.

2.45 It is thus submitted that, the interpretation by the Ruling Authority of the contract being in the nature of composite supply of goods and services is merely a semantic and syntactical analysis of a commercial contract, which has led to a conclusion that flouts the commercial sense of the business. Thus, the contract should be interpreted in a way where it must be made to yield to business sense.

2.46 Reliance is also placed on the decision of the Hon’ble Supreme Court in VISA International Limited v. Continental Resources (USA) Limited, [2009 (2) SCC 55] = 2008 (12) TMI 793 – SUPREME COURT, wherein it was held that what is required to be gathered is the intention of the parties from the surrounding circumstances including the conduct of the parties and the evidence, such as exchange of correspondence between the parties etc.

2.47 Appellant further submits that, unless the authorities can provide evidence to the contrary, an agreement is required to be read on the basis that it reflects the true intention of the parties thereto as regards their respective roles and obligations. The position has also been categorically upheld in the decision of the Hon’ble Supreme Court in the case Union of India vs. Mahindra and Mahindra [1995 (76) E.L.T. 481 (S.C.)] = 1995 (3) TMI 88 – SUPREME COURT, wherein in the context of price agreed under a contract, the Apex Court observed as under:

‘[ ] There is no material nor was it suggested that the dealings between the parties are not at arm’s length. No evidence is available to show that the payment of royalty to the collaborator induced any extra commercial obligation for the price of CKD packs, parts and components. Ordinarily the Court should proceed on the basis that the apparent tenor of the agreements reflect the real state of affairs. It is, no doubt, open to the revenue to allege and prove that the apparent is not the real and that the price for the sale of the CKD packs is not the true price, and the price was determined by reckoning or taking into consideration the lumpsum payment made under the collaboration agreement in the sum of 15 million French Francs.

[ ]

The collaboration agreement entered into between the parties is clear and it is not open to the revenue to construe it differently by reading into it something which is not there. in the result, we hold that the Judgment appealed against does not merit interference and this appeal deserves to be and is hereby dismissed with costs, which we quantify at ₹ 10,00% []’. (emphasis supplied)’

2.48 The aforesaid position has also been adopted by various Courts and Tribunals in the following decisions:

2.49 Therefore, in the view of above, it is submitted that the understanding of the Ruling Authority is flawed as the intentions of the parties are clear to the extent that Third and Fifth Contract are independent in nature.

Decisions relied upon by Ruling Authority are inapplicable in the present case

2.50 It is submitted that Department has placed reliance on the decision of Hon’ble Apex Court in M/s Indure Ltd. V. CTO in Order dated 20.09.2010 in C.A. No. 1123 of 2003 = 2010 (9) TMI 883 – SUPREME COURT to observe that both the contracts i.e. Third and Fifth Contract having cross fall breach provisions, are in the nature of composite supply of works contract, therefore taxable at the rate of 18% GST.

2.51 The Appellant submits that the reliance place on the decision in Indure’s case is erroneous as the facts and legal issue involved therein are completely different from the present case. The main issue in the Indure’s case was whether the import of MS Pipes and supply thereof by assessee was an inseparable part of the Contracts entered by the assessee with the other party, and the consequent eligibility to claim benefit of Section 5(2) of the Central Sales Tax Act, 1956 (‘CST Act’). On the contrary, there is no such issue in the present matter as the impugned contracts have the clear absolute and unambiguous scope of work for different activities. Moreover, the relevant portion of the decision as relied upon by the Ruling Authority is mere factual observations made by the Hon’ble Apex Court as oppose to the ratio decidendi of the case holding that the benefit of Section 5(2) of the CST Act is available to the assessee which clearly signifies that the Court itself split the contract to determine the on-shore and off-shore supplies made by the assessee.

2.52 Further, the reliance place on the AAR Order No. GST-ARA-36/2017-18/B-43 dated 04.06.2018 in case of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA is also erroneous as it has relied upon the factual observations made in the Indure case to determine whether the contract is for the composite supply.

2.53 Therefore, in the view of above, it is submitted that the Ruling Authority has erroneously placed reliance on the judicial precedents which are totally inapplicable to the present case on both factual as well as principle basis.

III. The on-shore contract for supply of goods is an ex-works supply, thus the place of supply is Appellant’s premise

2.54 The Ruling Authority in the AAR has observed that the Third Contract with respect to on-shore ex-works supply of all equipment and materials cannot be executed independent of the Fifth Contract. It has further observed that, there cannot be any ‘supply of goods’ without a place of supply. As the goods to be supplied under the Third Contract involves movement and/or installation at the site, the place of supply shall be the location of the goods at the time when movement of goods terminates for delivery to the recipient or moved to the site for assembly or installation in term of Section 10 (1) (a) and (d) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) as amended.

2.55 The Ruling Authority has further observed that, since the Third Contract does not include the provision and cost of such transportation and delivery, it therefore, does not amount to a contract for ‘supply of goods’ unless tied up with the Fifth Contract. The Third Contract has ‘no leg’ unless supported by the Fifth Contract.

2.56 The Appellant submits that the observations of the Ruling Authority is based on the incorrect understanding of the contractual terms and statutory provisions governing the concept of ‘place of supply’. It has erroneously observed that there is no ‘supply of goods’ in the present case as there is no place of supply. With the understanding that the Third Contract involves movement and/ or installation at the site, the Ruling authority has observed that the place of supply shall be location of the goods at the time when movement of goods terminates for delivery to the recipient or moved to the site for assembly or installation in terms of Section 10 (1) (a) and (d) of the IGST Act.

2.57 The Appellant submits that the present on-shore contract for supply of goods is on the basis of ex-works price, wherein the ‘place of supply’ is the premise of the Appellant who is the supplier. In this regard, firstly, it is pertinent to analyze the definition of place of supply as given in Section 10 of IGST Act:

‘10. (1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,-

(a) where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient;

….

(d) where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly;’

2.58 With respect to the clause (a) of the Section 10 of IGST Act, it is submitted that the provision clearly states that where the supply involves movement of goods, the place of supply of goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient. The Third Contract contains terms and procedures of payment which clearly shows the ex-works price of the contract, which indicates that the ownership of the property in the goods passes to customer at the Appellant’s premise. Therefore, the place of supply under the Third Contract will be the Appellant’s premises.

2.59 In view of the above, it is submitted that in case of the ex-works contract, the supplier delivers the goods to the buyer at his factory gate. Therefore, the goods stand delivered to the buyer at the factory gate of the supplier, the movement of goods terminates at the factory gate itself. Consequently, the factory gate of the supplier becomes the place of supply. In the present case, the place of supply is the factory gate of the Appellant as the movement of the goods as per the contractual terms terminates at the Appellant’s factory gate. It is for mere convenience of the customer that the Appellant has provided the transportation activities under a separate Service Contract. Hence, the understanding of the Ruling Authority is flawed in the present matter.

2.60 Similarly, with respect to clause (d) of Section 10 of IGST Act, it is submitted that the Third Contract for the supply of goods nowhere mentions that the installation and other related activities are to be carried out by the Appellant. The Ruling Authority has merely attributed such obligations based on the presumption that the Third and Fifth Contract are dependent on each other.

2.61 The abovesaid is further strengthen by the fact that the Appellant has a separate Service Contract and raise invoices for the exclusive transportation activities undertaken by a third party. It is submitted that, had the transportation activities been part of the Third Contract, the said price for the Third Contract would not have been on ex-works, but on cost+ insurance + freight basis. However, the same is not the case here. Thus, the observations of the Ruling Authority that there is no place of supply in case the goods are cleared from the factory premises of the Appellant is wrong.

2.62 Reliance in this regard is place on the decision of CCE, Nagpur v. Ispat Industries, 2015 (324) ELT 670 (SC) = 2015 (10) TMI 613 – SUPREME COURT in relation to the erstwhile Service Tax law, wherein it was held that the buyer’s place cannot be ‘place of removal’ in case of the Ex-works contract. Drawing an analogy from the said decision, it can be said that the buyer’s place cannot qualify to be the ‘place of supply’. Thus, the actual place of supply in the present case is the Appellant’s premise as oppose to the buyer’s premise considering the contract being ex-works in nature. The ownership of the goods to be supplied stands transferred once the goods are cleared from the Appellant’s premise. Thereafter, the transportation activity is handed over to the third party and the charges are collected from the customers in this regard. Hence, the Ruling Authority has erroneously held that there is no supply in the present case if the Third Contract is read independent of the Fifth Contract. Further, the Third Contract being an ex-works price contract has an independent clause and activities to be undertaken, which are exclusive and has no link with the Fifth Contract for the on-shore services. The two contracts are distinct and thus, are erroneously and artificially linked by the Ruling Authority.

2.63 Therefore, in view of the above, it is submitted that the place of supply in the present case is the Appellant’s premise and the observation of the Ruling Authority is contrary to the settled position of facts and law.

PRAYER

Thus, in view of the above the Appellant has pleaded to:

  1. a) set aside theMaharashtra Advance Ruling Authority Order No. GST – ARA – 69/2018-19/B – 164, Mumbai dated December 19, 2018 = 2019 (4) TMI 1623 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRApassed by Advance Ruling Authority, Mumbai;
  2. b) decide the eligibility of the Appellant for exemption from CGST as prescribed in Serial no. 18 of Notification no. 12/2017 – Central Tax Rate F. No. 334/1/2017, dated 28 June 2017.
  3. c) decide the eligibility of the Appellant for exemption from SGST as prescribed in Serial no. 18 in Notification no. 12/2017 – State Tax (Rate) no. MGST 1017/C.R.103(11)/ Taxation-1 dated 29 June 2017.

And grant such further and other reliefs as the nature and circumstances of the case may require.

ADDITIONAL SUBMISSIONS DATED 14.08.2019 FILED BY APPELLANT:

At this outset, the Appellant submits that the additional submissions outlined below are without prejudice to the submissions already made by the Appellant in the Appeal filed before the Hon’ble AAAR.

Decisions relied upon by the Ruling Authority are not applicable to the present case.

  1. It is submitted that the Ruling Authority has placed reliance on the decision of the Hon’ble Apex Court inM/s Indure Ltd. V. CTO in Order dated 20.09.2010 in C.A. No. 1123 of 2003  = 2010 (9) TMI 883 – SUPREME COURT– copy attached as Annexure 1 to observe that both the contracts i.e. third and fifth contract having cross fall breach clauses, are in the nature of composite supply of works contract, which is a service and is therefore taxable at the rate of 18% Goods and Services Tax (‘GST’).
  2. The Appellant submits that the reliance placed on the aforementioned decision is erroneous as the facts and legal issue involved therein are completely different from the presentcase.
  3. In thecaseof lndure, the issue which came up for determination was when can a transaction of sale be considered as one in the course of import as contained in Section 5 (2) of the Central Sales Tax Act, 1956 (‘CST Act’). In this regard, the Hon’ble Apex Court observed that there must be an integral connection or inextricable link between the first sale following the import and the actual import, provided by an obligation to import arising from the statute, contract or mutual understanding or nature of the transaction which links the sale to import.
  4. The Apex Court held that the Department has failed to establish that the imported goods were not used in the plant of National Thermal Power Corporation. Further, it was held that the assessee had imported the goods into India for completion of the project and that the benefit claimed under Section 5 (2) of the CST Act was allowed. In this regard, the relevant extract of the decision is reproduced below:

‘Conversely, in order that the sale should be one in the course of import, it must occasion the import and to occasion the import there must be integral connection or inextricable link between the first sale following the import and the actual import provided by an obligation to import arising from statute, contract or mutual understanding or nature of the transaction which links the sale to import which cannot, without committing a breach of statute or contract or mutual understanding, be sapped (sic snapped)

……………………….

In the facts and circumstances of the case we are of the opinion that the order passed by Division Bench of the High Court as also the orders assed by Tribunal and other Authorities cannot be sustained in law. Same are hereby set aside and quashed. Appellant is held entitled to claim benefit of Section 5(2) of the Act’

  1. On the contrary, there is no such issue in the present facts of the matter of the Appellant as the contracts have clear, absolute and unambiguous scope of work for different activities. Moreover, the relevant portion of the decision as relied upon by the Ruling Authority is merely factual observations made by the Hon’ble Apex Court as opposed to the ratio decidendi of thecase.
  2. The Ruling Authority has further placed reliance on theAAR Order No. GST-ARA-36/2017-18/B-43 dated June 4, 2018 incase of Shri Dinesh Kumar Agarwal – = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA copy attached as Annexure 2. In this regard, the Ruling Authority has stated that the facts of the said decision inter alia pertain to an agreement for setting up for +320V, 2X 1000MW VSC based HVDC terminals and DC XLPE Cable system. In this regard, the relevant extract as mentioned in the Impugned Order is as follows:

‘Thus from the detailed facts of the case as put before us, as per the first and second contracts referred above we have no doubt to rule that both the contracts having cross fall breach provisions are in the nature of ‘Composite supply of Works Contract’ which is a service and would be taxable @ 18% in terms of Notification No. 11/2017 – Central tax (Rate) dated 28.06.2017. This is our consistent view as evidenced from the ruling Order No. GST-ARA- 36/2017-18/8-43 dated 04.06.2018 =  in case of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA and the reasoning ana decision as arrived in that case is as below.’

‘From the conjoined and harmonious reading of various clauses of first contract and second contact, it can be safely concluded that the agreement for setting up for+ 320KV, 2 X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh ) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kera/a) Specification No: CC-CS/698- SR2/HVDC 3249/7/G10/R International Competitive Bidding Project is a single indivisible contract. As the contract consists of two or more taxable supplies of goods and services and their combination, is a composite supply as defined u/s 2(30) of the GST Act. For the proposition of law that the first contract and the second contract is one single individual contract, we may find support from the decision of Supreme Court of India in case of M/s. Indure Ltd. and Anr vs. Commercial Tax Officer and Ors on 20 September, 2010 CA. No. 1123 of 2003.’

  1. The Appellant submits that the observations made by the Ruling Authority is erroneous as the aforesaid extract as contained in the Impugned Order does not find any mention in theRuling Order No. GST-ARA-36/2017-18/B-43 dated June 4, 2018 = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRAin the decision of Dinesh Kumar Agarwal.
  2. Therefore, in the view of above, it is submitted that the Ruling Authority in the Impugned Order placed reliance on the decisions which are inapplicable to the presentcaseon both factual as well as on principle basis.

Services provided by the Appellant are not in relation to immovable property

  1. Without prejudice to the above, the Appellant humbly submits that the term ‘works contract’ is defined under Section 2 (119) of the CGST Act to inter alia mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, 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.
  2. In this regard, it is humbly submitted that the services provided by the Appellant will qualify as works contract services only if the said services are in relation to immovable property. In the presentcase, the goods supplied in terms of the contracts entered with the customers, are such that, it can be permanently removed from the Project site upon termination of the contract. Further, in thecase where the goods are to be repaired, the goods can be removed from the Project site for repairs and installed back at the Project site after carrying out the repair activity.
  3. It is also submitted that the goods supplied as part of the contracts entered with the customers are not attached to the earth. Moreover, the nature and description of the goods are such that the installation of the goods are not intended to be permanent at a given place. In this regard, sample photographs of the goods installed at the Project site have been attached herewith. Accordingly, it is submitted that there is no element of permanence associated with the installation of goods at the Project site.
  4. As a matter of fact, there have been instances in past, that incase of any fault in the installed transformer, it is removed from the site without causing any damage to it for repair and re- installed after the repair work is complete. The Appellant wishes to place on record one such instance with Power Grid Corporation itself (Annexure 4).
  5. It has been highlighted in various pronouncements by the judicial authorities that in cases where an object is installed/fastened to the land for better/improved efficiency running of the said object, and not for the benefit of land, such object will not be considered as immovable property. Further, it has been held that if fixing of a plant to a foundation is only for providing stability to the plant and where there is no intention to make such plant permanent, the foundation provided would not change the nature of the plant and make it an immovable property.
  6. Reliance in this regard can also be placed on the judgement of theHon’ble Supreme Court in the matter ofSirpur Paper Mills vs. CCE, Hyderabad [1998 (1) SCC 400] = 1997 (12) TMI 109 – SUPREME COURT – copy attached as Annexure 5, wherein in case of a paper making machine, it was held that merely because the machinery was attached to the earth for operational efficiency, it does not automatically become an immovable property. If the appellant wanted to sell such goods, it could always remove it from the base and sell it. Hence, in this case as well, there was no movement indeed, however, the machine was capable of being moved which was enough for the machine to not be classified as an immovable property.
  7. The Appellant would like to submit that the Ministry of New and Renewable Energy in the context of solar plants had issued a clarification vide Circular F.No. 283/11/2017 – GRID SOLAR dated 3 April, 2018 {hereinafter referred to as ‘the MNRE Circular’) to specified industry players wherein it has been categorically stated that ‘structural’ as such do not qualify as immovable property and hence are outside the domain of works contract. The relevant extract of the MNRE Circular is reproduced below:

‘Structures, as such, do not qualify as immovable property and, hence, are outside the domain of ‘works contract service’.

  1. In view of the aforesaid extract, the Appellant submits that in the presentcase, an analogy can be drawn that goods in the nature of structurals, supplied as part of the contracts entered with the customers will not qualify as immovable property and hence will be outside the domain of works contract.
  2. The Appellant also submits, that the Central Board of Customs and Excise, vide 37B Order No. 58/1/2002 – CX issued under F.No. 154/26/99 -CX-4 dated 15 January, 2002 – copy attached with the additional submissions, issued the following clarifications with respect to plant and machinery assembled at site:

‘(v) if items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then the items would not be considered as moveable and will, therefore, not be excisable goods.

(vi) If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable and thus excisable. The mere fact that the goods, though being capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be dutiable merely because they are transported in dismantled condition

  1. Though, in terms of Section 103 of the CGST Act, advance ruling is binding only on the applicant and the concerned officer, the Ruling Authority has gone ahead and placed reliance on theAAR Order No. GST- ARA-36/2017-18/B-43 dated June 4, 2018 incase of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA which is not applicable in the appellant’s case.
  2. Further, it is pertinent to mention that in a similarcasethe same Ruling authority while deciding the case of M/s. NR Energy Solutions India Pvt. Ltd. (GST-ARA-83/2018-19/B-03 dated 8.01.19) = 2019 (6) TMI 1171 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA  – copy attached as Annexure 7 had taken a divergent view and held that supply of Relay & Protection Panels and Substation Automation System {SAS), complete design, manufacture, packing, insurance, transport and delivery to sites, training, installation, testing and commissioning of protection panels with SAS compatible to IEC 61850 protocol, to control and operate the 220 KV, 132 KV & 33 KV feeders, Power Transformers and equipment cannot be treated as works contract.”
  3. In view of the aforesaid submissions and clarifications relied upon, the Appellants submits that the goods installed at the Project site are not permanently affixed to the earth and can be dismantled/removed upon termination of the contract entered into with customers if any or at the time of carrying out repairs on the said goods. Therefore, it is submitted that the services provided by the Appellant are not in relation to immovable property and will accordingly not qualify as works contract services.
  4. On the basis of the aforesaid additional submissions, the Appellant prays that the Honorable AAAR set asides the Impugned Order passed by the Ruling Authority.

HEARING

A personal Hearing in the matter was conducted on 14.08.2019, wherein Shri Vikash Garg and Shri Mahesh Parnerkar, Chief Manager (Indirect Taxation) appeared on behalf of the Appellant, and reiterated their earlier written submissions, which were made at the time of filing of this appeal and also filed additional submissions (supra) at the time of the personal hearing. On behalf of the Respondent Shri Kamlesh Nagare, Dy. Commissioner, State Tax appeared and reiterated the same submissions, which they have made before the Advance Ruling Authority. Copy of the additional submission was enclosed to the appeal. Both the submissions of the appellant are kept on record.

FACTS OF THE CASE

  1. We have gone through the facts of thecase, oral and written submissions made by the Appellant as well as by the jurisdictional officer and the applicable provisions of the GSTlaws in this regard.
  2. M/s Siemens Limited (hereinafter referred as the ‘Appellant’) is registered under the Central and State GST legislations videGSTIN 27AAACS0764L126.The Appellant is a leader in technology solutions for intelligent (smart), sustainable cities, smart grid, building technologies, mobility and power distribution.
  3. The Appellant as Joint venture associate, has entered into contract with M/s Power grid corporation of India Ltd (in short ‘PGCIL’), one of the major Public Sector Undertakings in the State of Haryana (herein after referred as ‘PGCIL’) on a joint venture (‘.J\/’) basis along with M/s Siemens AG, Germany as the Lead Partner and M/s Sumitomo Electric Industries Ltd. Japan as another Partner. The contract entered by appellant with PGCIL is for on-shore and off-shore supply of goods and services for complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur. The said contract of supply of goods and services is divided into 6 contracts by Joint Venture.

The six contracts cover specific and detailed nature of supply of various goods and services to be executed by members of JV. Out of these 6 contracts two contracts i.e. third and fifth contract are required to be executed by the Appellant as a JV’s Associate.

The Third Contract (hereinafter referred to as ‘on-shore Supply Contract/ Third Contract’) provides for supply of equipment and materials including mandatory spares except +320kV HVDC Cable (including some of its associated items) from within India and Type Testing (as applicable), required for the complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur.

The Fifth Contract termed as ‘on shore Service Contract (VSC part) (NOA-V)’ (hereinafter referred to as ‘on-shore Service Contract/ Fifth Contract’) provides for the subject package, for performance of all other activities inter-alia including port handling of the plant and Equipment including mandatory Spares (except +320kV HVDC Cable and some of its associated items) to be supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘First Contract’ and ‘Third Contract’ and any other services specified in the Bidding Documents referred to hereinabove. The scope of work under this contract as referred at 3.1 Clause of the Fifth Contract is as follows:

  1. Local transportation, insurance and other incidental services
  2. Installation charges
  3. Training charges
  4. The present query raised by the appellant in Advance Ruling as well in this appeal relates to the ‘transportation activities’ involved in their Fifth Contract. The Appellant is entrusted with the responsibility of delivery of the goods at PGCIL’s site. For this, the Appellant engages local transporters who issue consignment notes to the Appellant for such transportation of goods and issue their freight invoices on the Appellant.

Appellant discharges the GST liability under reverse charge mechanism on such freight amount being paid by it to these transporters as provided under Notification no. 13/2017 – Central Tax Rate dated 28 June 2017.

The Appellant charges local transportation from the PGCIL as per the terms of the Service Contract. However, since the consignment note is already issued by the transporters engaged by the Appellant, no subsequent additional consignment note is issued by the Appellant.

With respect to the local transportation charges recovered by the Appellant under the aforesaid contract from the PGCIL without issuance of a consignment note, the Appellant sought the Advance Ruling under Section 97 (2) of Central Goods & Services Act, 2017 as amended (‘CGST Act’) and the Maharashtra Goods & Services Tax Act, 2017 as amended (‘SGST Act’), on the applicability of tax exemption as provided under Serial no. 18 of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017.

  1. In terms of Serial no. 18 of Notification no. 12/2017 – Central Tax Rate, dated 28 June 2017, an exemption from Central GST has been provided for services by way of transportation of goods. The relevant extract of the notification is given below:
Sr. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (percent) Condition
18 Heading 9965 Services by way of transportation of goods-

c. by road except the services of-

iii. a goods transportation agency;

iv. a courier agency;

d. by inland waterways

NIL NIL

Applicant submitted before the Advance Ruling Authority that an exemption from payment of GST has been provided for services by way of transportation of goods by road other than services of GTA and a courier agency in terms of the said notification. Applicant in support of his exemption claim has strongly relied on the fact that he has not issued consignment notes to the service recipient and thus not a GTA as defined in the said notification.

Applicant also submitted that support taken by the Advance Ruling Authority of Advance Rulings of other States are not binding and Contract under consideration is not a works contract as it does not result in an immoveable property. The applicant has separate contracts for supply of goods and services and cross fall breach clause in the two contracts does not alter the nature of contracts to composite supply. Applicant supported his above contention by various judgment & documents which are reproduced in the first part of this order under the heading “Grounds of appeal”.

ORDER PASSED BY THE ADVANCE RULING AUTHORITY

  1. Advance ruling was issued by the advance ruling authority wherein both the questions put forth by the Appellant regarding the applicability of Exemption Notifications under MGST Act & CGST Act were answered in negative. In order to reach such conclusions, the Ld. Members, AAR observed as follows:

That the First Contract including on-shore Ex works supply of all equipment and materials cannot be executed independent of the Second Contract which is for the on-shore supply of services. It is further observed that there cannot be any ‘supply of goods’ without a place of supply. As the goods to be supplied under the First Contract involves movement and/ or installation at the site, the place of supply shall be location of the goods at the time when movement of goods terminates for delivery to the recipient or moved to the site for assembly or installation refer to Section 10 (1) (a) and (d) of the IGST Act, 2017. The First Contract however does not include the provision and cost of such transportation and delivery. Therefore, it does not amount to a contract for ‘supply of goods’ unless tied up with the Second Contract. The First Contract has ‘no leg’ unless supported by the Second Contract.

That although awarded under two separate contract agreements, clauses under both them make it clear that notwithstanding the breakup of Contract Price, the contract shall, at all times, be construed as a single source responsibility and the applicant shall remain responsible to ensure execution of both the contracts to achieve successful competition. Any breach in any part of the First Contract shall be treated as a breach of the Second Contract, and vice versa.

That the two contracts are linked by a cross fall breach clause deeming that any breach in either of the contracts is to be considered to be a breach of the other contract as well. Thus, it provides the recipient with an absolute right to either terminate both the contract or claim damages accordingly. That the ‘cross fall breach clause’, settles unambiguously that supply of goods, their transportation to the contractee’s site delivery and related services are not separate contracts, but only form parts of an indivisible composite works contract supply, as defined under Section 2 (119) of the GST Act, with single source responsibility.

That the composite nature of the contract is clear from the facts that first Contract cannot be performed satisfactorily unless the goods have been transported and delivered to the contractee’s site. The two contracts for supply of the goods and allied services are not separately enforceable. The recipient has not contracted for ex – factory supply of material, but for the composite supply, namely Works Contract for Supply for VSC based HVDC Terminal and DC XLPE Cable System. Reliance was placed on decision of Hon’ble SC in case of M/s Indure Ltd. Vs. CTO in Order dated 20.09.2010 in C.A. No 1123 of 2003 = 2010 (9) TMI 883 – SUPREME COURT and also on AAR Order No. GST-ARA-36/2017-18/B-43 dated 04.06.2018 in case of Shri Dinesh Kumar Agarwal = 2018 (7) TMI 1691 – AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA.

It is held that the first and second contracts have cross fall breach clause and thus, are in nature of ‘Composite Supply of Works Contract’, therefore should be taxable @18%.

  1. Aggrieved by the order of Maharashtra Authority for Advance ruling, the appellant has filed present appeal before us. Appellant has further stated that, he could not submit the appeal application online as the status of order is not yet updated on GST portal and hence is filing the application manually.

OBSERVATIONS

  1. In this matter, the core issue raised before us is related to the applicability of exemption from levy of tax as provided under entry Sr. 18 of Notification No. 12/2017 of CGST Act, on the transaction of supply of transportation services to PGCIL under service contract (i.e. Fifth contract). Before deciding the applicability of notification entry, it is necessary to examine the terms of contracts made between the parties, nature of transaction and intention of the PGCIL.
  2. The applicant as an associate of the Joint Venture of M/S SIEMENS AG, GERMANY (lead partner) and M/S SUMITOMO INDUSTRIES LIMITED, JAPAN (other partner) has been awarded contract for on-shore and off-shore supply of goods and services for complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur (hereinafter referred as ‘whole contract’)
  3. The whole contract involves supply of equipment’s and services both on off-shore as well as on-shore basis. For certain reasons the JV has proposed the division of scope into six contracts as given below:-
  4. off shore supply contract (VSC part) (First Contract)
  5. off shore supply contract (cable system part) (Second Contract)
  6. on shore supply contract (VSC part)(Third Contract)
  7. on shore supply contract (cable system part) (Fourth Contract)
  8. on shore services contract (VSC part)(Fifth Contract)
  9. on shore services contract (cable system part) (Sixth Contract)

The above mentioned division is as proposed by JV executing the entire contact. More specifically, out these six contracts, the present issue relates to two contracts i.e. Third Contract and Fifth Contract for the supply of goods and the supply of services respectively, awarded to the appellant as associates of JV.

  1. The relevant portions of the Third and Fifth contracts are reproduced hereunder for the better understanding of the terms of contracts.

(i) The First contract – for On-Shore Supply Contract-I-

Sub.: Notification of Award for On-Shore Supply Contract-I for 320KV, 2 X 1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh. Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala)

Specification No: CC-05/698-SR2/HVDC-3249/7/G10/R International Competitive Bidding. Clauses –

2.0 AWARD OF CONTRACT AND ITS SCOPE —

2.1 We confirm having accepted the Bid of the JV of SIEMENS AG and SUMITOMO (referred to at para 1.4, 1.7 and 1.9 above) read in conjunction with all the specifications, terms and conditions of the Bidding Documents including Record Notes of Clarification Meetings referred to at para 1.3, 1.5 and 1.6 above (hereinafter referred to as “Bidding Documents’) and specific confirmations recorded in the Record Notes of Post Bid Discussions (referred to at para 1.10 above), and award on you, the ‘On-Shore Supply Contract-I’ (also referred to as the ‘Third Contract’) for the subject package, for supply of equipment and materials including mandatory spares except +320kV HVDC Cable (including some of its associated items) from within India and Type Testing (as applicable), required for the complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as detailed in the Bidding Documents referred to hereinabove. The scope of work under this Contract inter-alia includes the following:

Design, Ex-works supply of equipment and materials including mandatory spares from within India, Type Testing (as applicable), required for the complete execution of the 1320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala),

The scope of work under this Notification of Award (NOA) shall also include all such items which are not specifically mentioned in the Bidding Documents and/or the IV’s bid but are necessary for the successful completion of the scope under the Contract for 1320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), unless otherwise specifically excluded in the Bidding Documents or in this NOA.

2.2 As per para 1.4 above and as tied up in Clarification Meetings, we have also notified the following Notifications of Awards:

(a) on the Lead Partner of JV i.e. SIEMENS AG on behalf of JV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698 SR2/HVDC-3249/7/G10/R/N0A-17213 dated 22.03.2017 for award of ‘Off-Shore Contract-1’ (also referred to as the ‘First Contract’) for the subject package, covering inter-alia, all works to be performed in countries outside India including CIF supply of all equipment and materials including mandatory spares except +320kV HVDC Cable(including some of its associated items), to be supplied from abroad including corresponding type tests and training to be conducted abroad, required for the complete execution of the + 320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents.

(b) on the Other Partner of the JV i.e. SUMITOMO on behalf of the JV of SIEMENS AG and SUMITOMO, vide our Notification of Award Ref. No. CC-CS/698-SR2/HVDC-3249/7/G10/R/NOA-11/7214 dated 22.03.2017 for award of ‘Off-Shore Contract-ll (also referred to as the ‘Second Contract’) for the subject package, for design, engineering, manufacture and CIF supply of +320kV HVDC Cable and some of its associated items including mandatory spares (if any), Type Testing and Training to be conducted outside India, required for the complete execution of the +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents;

(c) on the Other Partner of the JV i.e. SUMITOMO on behalf of the JV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698-SR2HVDC-3249/7/G10/R/NOA-IV/7216 dated 22.03.2017 for award of ‘On-Shore Supply Contract-II’ (also referred to as the ‘Fourth Contract) for the subject package, for supply of some items including mandatory spares (if any) for +320kV HVDC Cable system from within India and Type Testing (as applicable), required for the complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents.

(d) on you vide our Notification of Award Ref. No. CC-CS/698 SR2/HVDC-3249/7/G10/R/N0A-V/7217 dated 22.03.2017 for award of On-Shore Services Contract-1’ (also referred to as the ‘Fifth Contract’) for the subject package, for performance of all other activities inter-alia including port handling of the Plant and Equipment including mandatory Spares (except +320kV HVDC Cable and some of it’s associated items) to be supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘First Contract’ and ‘Third Contract and any other services specified in the Bidding Documents;

(e) on the Other Partner of the JV i.e. SUMITOMO on behalf of the IV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698-SR2/HVDC-3249/7/G.10/R/NOA-VI/7218 dated 22.03.2017 for award of ‘On-Shore Services Contract-11 (also referred to as the Sixth Contract) for the subject package, for performance of all other activities inter-alia including port handling of the Plant and Equipment including mandatory Spares for +320kV HVDC Cable and some of its associated items to be supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘Second Contract and ‘Fourth Contract and any other services specified in the Bidding Documents,

Notwithstanding the award of work under six separate Contracts in the aforesaid manner, the JV shall be overall responsible to ensure the execution of all the six Contracts to achieve successful completion and Taking Over of the works covered under the package and Operational Acceptance by the Employer as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by the IV that any default or breach by the JV partners under the ‘First Contract’ and/or ‘Second Contract and/or the ‘Fourth Contract and/or the ‘Sixth Contract and/or breach by the Associate of JV- SIEMENS-I under the ‘Fifth Contract shall automatically be deemed as a default or breach of this ‘Third Contract’ also and vice-versa, and any such default or breach or occurrence giving us a right to terminate the ‘First Contract and/or ‘Second Contract and/ or ‘Fourth Contract and/ or ‘Fifth Contract and/or the ‘Sixth Contract, either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract at your risk, cost and responsibility, either in full or in part and/or recover damages under this ‘Third Contract as well. However, such default or breach or occurrence in the ‘First Contract’ and/or ‘Second Contract’ and/or ‘Fourth Contract and/or ‘Fifth Contract and/or the ‘Sixth Contract’ shall not automatically relieve you any of your obligations under this ‘Third Contract. It is also expressly understood and agreed by you that the equipment/materials supplied by you under this ‘Third Contract, by SIEMENS AG on behalf of JV under the ‘First Contract’, by SUMITOMO on behalf of JV under the Second Contract and Fourth Contract identified scope of works in respective Contracts, when erected, installed and commissioned by you under the ‘Fifth Contract/ by SUMITOMO under the Sixth Contract shall give satisfactory performance in accordance with the provisions of the Contract(s).

3.0 CONTRACT PRICE-

3.1. The total Contract Price for the entire scope of work under this Contract shall be EURO 82,463,172 + USD 235,584 + INR 8,345,326,393 (Euro Eighty Two Million Four Hundred Sixty Three Thousand One Hundred Seventy Two plus US Dollar Two Hundred Thirty Five Thousand Five Hundred Eighty Four plus Indian Rupees Eight Billion Three Hundred Forty Five Million Three Hundred Twenty Six Thousand Three Hundred Ninety Three only) as per the following break-up:

Sr. No Prise Component Amount
1 Ex-works Price Component EURO 82,463,172

+USD 235,584

+1NR 8,345,326,393

2 Type Test Charges

Total for Third Contract (1+2)

Included EURO 82,463,172

+USD 235,584

+INR 8,345,326,393

3.2. Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire Contract.

5.0. For release of advance payment (admissible as per the Bidding Documents) equal to 10% of the Ex-works Price component of the Contract Price for Main Equipment (excluding spares), you are, inter-alia, required to furnish Bank Guarantee for the equivalent advance amount, as detailed at APPENDIX (NOA)-3. Further, please note that furnishing of all the Contract Performance Securities under the ‘First Contract’, ‘Second Contract, ‘Third Contract’, ‘Fourth Contract, ‘Fifth Contract’ and ‘Sixth Contract by the JV and Contract Performance Securities under “Third Contract’ and ‘Fifth Contract’ by you (Associate of the JV i.e. SIEMENS-I) shall be one of the conditions precedent for release of advance under this Contract.

7.0 The schedule for Taking Over/Time for Completion of the Facilities by the Employer upon successful completion of the +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh ) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala) and the Additional Time for Completion for all contractual purposes in line with the provisions of the Bidding Documents shall be as follows:

Sr. No. Completion (Taking Over) of: Duration from the effective date of contract
Time for Completion
1. +320KV, two 1000MW Voltage Source Converter (VSC) based HVDC transmission system between Pugalur (Tamil Nadu) and North Trichur (Kerala)

a. Monopole 1 and associated Cable system

b. Monopole 2 and associated Cable system

38 months

38 months

Additional Time for Completion#: 30 weeks

#Additional Time for Completion shall be subject to levy of Liquidated Damages (LD) as per provisions of Bidding Documents’

* The Time for Completion (Taking Over) for the Replica along with Real Time Simulator and IPSRTS for real time studies included in the above Facilities will be 45 months.

8.0 This Notification of Award constitutes formation of the Contract and comes into force with effect from the date of issuance of this Notification of Award.

9.0 You shall enter into a Contract Agreement with us within twenty-eight (28) days from the date of this Notification of Award.

  1. ii) Second contract – for On-Shore Services Contract-I

Notification of Award for On-Shore Services Contract-I for + 320KV, 2 X 1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh ) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala) Specification No: CC-CS/698-SR2/HVDC-3249/7/G10/. R International Competitive Bidding.

Clauses–

2.0 AWARD OF CONTRACT AND ITS SCOPE–

We confirm having accepted the Bid of the IV of SIEMENS AG and SUMITOMO (referred to at para 1.4, 1.7 and 1.9 above) read in conjunct all the specifications, terms and conditions of the Bidding Documents including Record Notes of Clarification Meetings referred to at para 1.3, 1.5 and 1.6 above (hereinafter referred to as “Bidding Documents”) and specific confirmations recorded in the Record Notes of Post Bid Discussions (referred to at para 1.10 above), and award on you, the ‘On-Shore Services Contract-I’ (also referred to as the ‘Fifth Contract) for the subject package, for performance of all other activities inter-alia including port handling of the plant and Equipment including mandatory Spares (except +320kV HVDC Cable and some of its associated items) to be supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘First Contract’ and ‘Third Contract’ and any other services specified in the Bidding Documents referred to hereinabove.

The scope of work under this Notification of Award (NOA) shall also include all such items which are not specifically mentioned in the Bidding Documents and/ or the JV’s bid but are necessary for the successful completion of the scope under the Contract for S320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), unless otherwise specifically excluded in the Bidding Documents or in this NOA.

2.2 As per para 1.4 above and as tied up in Clarification Meetings, we have also notified the following Notifications of Awards: m

(a) on the Lead Partner of 11/ i.e. SIEMENS AG on behalf of JV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698 SR2/HVDC-3249/7/G10/R/NOA-1/7213 dated 22.03.2017 for award of ‘Off-Shore Contract-l’ (also referred to as the ‘First Contract’) for the subject package, covering inter-alia, all works to be performed in countries outside India including CIF supply of all equipment and trials including mandatory spares except +320kV HVDC Cable(including some of its associated items), to be supplied from abroad including corresponding type tests and training to be conducted abroad, required for the complete execution of the + 320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents.

(b) on the Other Partner of the IV i.e. SUMITOMO on behalf of the JV of SIEMENS AG and SUMITOMO, vide our Notification of Award Ref. No. CC-CS/698-SR/HVDC-3249/7/G10/R/NOA-11/7214 dated 22.03.2017 for award of ‘Off-Shore Contract-II (also referred to as the ‘Second Contract’) for the subject package, for design, engineering, manufacture and CIF supply of +320kV HVDC Cable and some of its associated items including mandatory spares (if any), Type Testing and Training to be conducted outside India, required for the complete execution of the +320KV, 2X1000MW FSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents;

(c) On the Associate of the JV i.e. M/s. Siemens Limited, India (SIEMENS-I), vide our Notification of Award Ref. No. CC-CS/698-SR2HVDC 3249/7/G10/R/NOA-II/7215 dated 22.03.2017 for award of ‘On- Shore Supply Contract-r (also referred to as the ‘Third Contract’) for the subject package, for supply of equipment and materials including mandatory spares except +320kV HVDC Cable (including some of its associated items) from within India and Type Testing (as applicable), required for the complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala), as set forth in the Bidding Documents;

(d) On the Other Partner of the 1V i.e. SUMITOMO on behalf of the JV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698-SR2/HVDC-3249/7/G10/R/N0A-1V/7216 dated. 22.03.2017 for award of ‘On-Shore Supply Contract-II’ (also referred to as the ‘Fourth Contract) for the subject package, for supply of some items including mandatory spares (if any) for +320kV HVDC Cable system from within India and Type Testing (as applicable), required for the complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala), as set forth in the Bidding Documents.

(e) On the Other Partner of the JV i.e. SUMITOMO on behalf of the JV of SIEMENS AG and SUMITOMO vide our Notification of Award Ref. No. CC-CS/698-SR2/HVDC-3249/7/G10/R/N0A-VI/7218 dated 22.03.2017 for award of ‘On-Shore Services Contract-Ir (also referred to as the ‘Sixth Contract’) for the subject package, for performance of all other activities inter-alia including port handling of the plant and Equipment including mandatory Spares for +320kV HVDC Cable and some of its associated items to be supplied from abroad, loading, inland transportation and insurance for delivery at site, insurance, unloading, storage and handling at site, installation including civil works, testing and commissioning including Performance Testing in respect of all Plant and Equipment supplied under both ‘Second Contract’ and ‘Fourth Contract and any other services specified in the Bidding Documents.

Notwithstanding the award of work under six separate Contracts in the aforesaid manner, the JV shall be overall responsible to ensure the execution of all the six Contracts to achieve successful completion and Taking Over of the works covered under the package and Operational Acceptance by the Employer as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by the JV that any default or breach by the JV partners under the ‘First Contract’ and/or ‘Second Contract and/ or the ‘Fourth Contract’ and/ or the ‘Sixth Contract and/or breach by the Associate of JV-SIEMENS-1 under the ‘Third Contract shall automatically be deemed as a default or breach of this ‘Fifth Contract also and vice-versa, and any such default or breach or occurrence giving us a right to terminate the First Contract’ and/ or ‘Second Contract and/or ‘Third Contract and/or ‘Fourth Contract and/or the ‘Sixth Contract, either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract at your risk, cost and responsibility, either in full or in part and/or recover damages under this Fifth Contract as well.

However, such default or breach or occurrence in the First Contract’ and/ or ‘Second Contract and/or ‘Third Contract and/or ‘Fourth Contract’ and/ or ‘Sixth Contracts, shall not automatically relieve you any of your obligations under this ‘Fifth Contract. It is also expressly understood and agreed by you that the equipment/materials supplied by you under the ‘Third Contract, by SIEMENS AG on behalf of JV under the ‘First Contract, by SUMITOMO on behalf of JV under the ‘Second Contract and Fourth Contract, as per identified scope of works in respective Contracts, when erected, installed and commissioned by you under this ‘Fifth Contract’/ by SUMITOMO under the ‘Sixth Contract shall give satisfactory performance in accordance with the provisions of the Contract(s)..

3.0 CONTRACT PRICE –

3.1 The total Contract Price for the entire scope of work under this Contract shall be INR 2,797,437,352 (Indian Rupees Two Billion Seven Hundred Ninety Seven Million Four Hundred Thirty Seven Thousand Three Hundred Fifty Two only) as per the following break-up:

Sr. No. Price Component Amount
I Local Transportation, Insurance and other Incidental Services (VSC Portion) INR 623,073,872
II Installation Charges (VSC Portion) INR 2,174,363,480
III Training Charges Total for Fifth Contract (i+ii+iii) Included INR 2,797,437,352

3.2 Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire contract.

4.0 You are required to furnish, at the earliest, the Performance Securities for an amount equal to 10% (Ten percent) of the Contract Price as detailed at APPENDIX (NOA)-2, in line with provisions of the Bidding Documents.

5.0 All the bank guarantees shall be furnished from eligible bank(s) as described in the Bidding Documents.

6.0 The schedule for Taking Over/Time for Completion of the Facilities by the Employer upon successful completion of the +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh ) and Southern region (Pugalur, Tamil Nadu- North Trichur, Kerala) and the Additional Time for Completion for all contractual purposes in line with the provisions of the Bidding Documents shall be as follows:

Sr. No Completion (Taking Over) of: Duration from the effective date of contract
Time for Completion
1. +320KV, two 1000MW Voltage Source Converter (VSC) based HVDC transmission system between Pugalur (Tamil Nadu) and North Trichur (Kerala)
a. Monopole 1 and associated Cable system 38 months
b. Monopole 2 and associated Cable system 38 months
Additional Time for Completion#: 30 weeks

# Additional Time for Completion shall be subject to levy of Liquidated Damages (LD) as per provisions of Bidding Documents

*The Time for Completion (Taking Over) for the Replica along with Real Time Simulator and IPSRTS for real time studies included in the above Facilities will be 45 months.

7.0 This Notification of Award constitutes formation of the Contract and comes into force with effect from the date of issuance of this Notification of Award.

  1. Now in the light of above contracts and whole contract we shall discuss the issues raised in the grounds of appeal by the appellant.
  2. Exemption from payment of tax as per notification (Serial no. 18 in Notification No. 12/2017 – Central Tax (Rate) dated 29 June 2017), on the transportation charges is available to the Appellant or not on the ground that the appellant has entered into separate contracts for supply of goods and supply of services and the same does not constitute a composite supply

Detail contention of the appellant is reproduced in the first part of the order under the heading grounds of appeal. The main line of arguments of appellant is as under;

Appellant has submitted that on a plain perusal of the Third and Fifth Contract, it is clearly seen that there are separate clauses, terms/conditions which are expressly outlined in the contract governing contract price, scope of work, lead partner, other partners, joint ventures, performance securities, bank guarantees, price components, pricing mechanism, raising of invoices, time period for completion of services, duration of the contract, etc. As exclusive clauses and conditions are clearly outlined in the Third and Fifth Contract respectively, the two contracts are separate and distinct in nature. The Third Contract contains terms governing supply of goods and the Fifth Contract contains terms governing supply of services.

Further, given that the transaction with the PGCIL is on ex-works basis where the ownership in the goods is transferred at the premises of the Appellant, it can be said that the Fifth Contract would commence only when the ownership in the goods is transferred to the PGCIL. Therefore, in light of the above, it is evident that each of the activities to be carried on by the Appellant under the aforementioned two contracts are independent and distinct. Accordingly, the two contracts cannot be regarded as one single contract.

Both the contracts have different scope of work, separate consideration and separate invoices. Therefore, in no circumstances, the two contracts can be said to form one composite contract and should be treated separately. The second contract of provision of services of transportation should be treated separately for levy of tax and appellant has submitted that he is purely providing the service of transportation of goods to the PGCIL and is not issuing any consignment note. Services provided by the Appellant are that of transportation of goods by road and not that of GTA. Accordingly, given that the conditions specified in the Exemption Notification are satisfied, the Appellant is eligible for exemption contained in Entry No. 18 of the Exemption Notification. No. 12/2017 – Central Tax (Rate) dated 29 June 2017. In support of this appellant has relied on no of judgments which are reproduced in grounds of appeal.

Whole line of arguments of the appellant regarding exemption on the transportation of service is in fact without considering the terms and obligations created under the both contracts of supply of goods and services and is based on the theory that the supply of service contract is in total isolation from the whole contract. Here appellant is isolating transportation services not only from other services envisaged under on-shore service contract (Fifth contract) but also isolating it from whole contract of supply of goods and services allotted to the JV in which appellant is an associate. Hence here most important questions is to verify whether the transportation services and other services provided by the appellant are altogether separate contract independent of any obligation cast on the appellant under the whole contract or not.

  1. We have gone through the contention of appellant and also the terms of the both contracts. After going through the terms of contracts it is seen that though there are two contracts one for supply of goods and other for supply of services, in fact these two contracts are not separate or independent contracts as envisaged by the appellant but are parts of the one whole contract which are separated by the appellant for the reason known to him. Below are the some important paras from the contract which clearly throw light on the nature of the two contracts in relation to whole contract which is divided in six contracts and their interrelation with each other.

In the para 2.2 of the Fifth contract i.e. onshore service contract it is mentioned that,

Notwithstanding the award of work under six separate Contracts in the aforesaid manner, the JV shall be overall responsible to ensure the execution of all the six Contracts to achieve successful completion and Taking Over of the works covered under the package and Operational Acceptance by the Employer as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by the JV that any default or breach by the JV partners under the ‘First Contract’ and/or ‘Second Contract and/ or the ‘Fourth Contract’ and/ or the ‘Sixth Contract and/or breach by the Associate of JV-SIEMENS-1 under the ‘Third Contract shall automatically be deemed as a default or breach of this ‘Fifth Contract also and vice-versa, and any such default or breach or occurrence giving us a right to terminate the First Contract’ and/ or ‘Second Contract and/or ‘Third Contract and/or ‘Fourth Contract and/or the ‘Sixth Contract’, either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract at your risk, cost and responsibility, either in full or in part and/or recover damages under this Fifth Contract as well.

However, such default or breach or occurrence in the First Contract’ and/ or ‘Second Contract and/or ‘Third Contract and/or ‘Fourth Contract’ and/ or ‘Sixth Contracts, shall not automatically relieve you any of your obligations under this ‘Fifth Contract. It is also expressly understood and agreed by you that the equipment/materials supplied by you under the ‘Third Contract, by SIEMENS AG on behalf of iv under the ‘First Contract, by SUMITOMO on behalf of JV under the ‘Second Contract and Fourth Contract, as per identified scope of works in respective Contracts, when erected, installed and commissioned by you under this ‘Fifth Contract’/ by SUMITOMO under the ‘Sixth Contract shall give satisfactory performance in accordance with the provisions of the Contract(s)..

Regarding pricing of the contract, in clause 3.2 it is mentioned that,

“Notwithstanding the break-up of contact price, the contract shall at all times be construed as a single source responsibility contract and any breach in any part of the contract shall be treated as breach of the entire contract.”

Further in para 6.0 time period assigned for completion of contract is for whole contract of supply goods and services along with commissioning of the project and no separate time period is mentioned for supply of goods and supply of services.

  1. It is seen that these paras are included in both of these contracts i.e. Third and Fifth contracts of supply of goods and supply of services resp. The contracts are awarded to the JV of SIEMENS AG and SUMITOMO in which the appellant is associate of JV.
  2. We find that the Third Contract includes on shore ex works supply of all equipment’s and materials. The Fifth contract includes on shore services i.e. all other activities like transportation, insurance and all incidental services, installation along with civil work, training required to be performed for complete execution of the VSC based HVDC Terminal and DC XLPE Cable package. It is apparent that the Third Contract cannot be executed independent of the Fifth Contract. It is clear from the contract that not only the third contract and fifth contract is interdependent but all six contracts are interrelated with each other. All the contracts are interdependent. Further the contracts are covered by the cross fall breach clause which means breach of one will be deemed as breach of other. The work of Taking Over/Time for Completion of the project and handing over to the Employer upon successful completion is to be completed within 38 months.
  3. The Contractee is aware of such interdependence of the two contracts. Although there is breakup of contract price for supply of goods & supply of services and also awarded under two separate contract agreements, clauses under both of these contracts make it abundantly clear that notwithstanding the breakup of the Contract Price, the contract shall, at all times, be construed as a single source responsibility and the Applicant shall remain responsible to ensure execution of both the contracts to achieve successful completion. Thus these two contracts for supply of goods & supply of services are naturally bundled under the whole contract. It is expressly understood and agreed by the appellant along with JV partners that while entering into Fifth contract of supply of services that any default or breach by the IV partners under the ‘First Contract’ and/or ‘Second Contract and/ or the ‘Fourth Contract’ and/ or the ‘Sixth Contract and/or breach by the Associate of JV-SIEMENS-1 under the ‘Third Contract shall automatically be deemed as a default or breach of this ‘Fifth Contract also and vice-versa, and any such default or breach or occurrence giving us a right to terminate the First Contract’ and/ or ‘Second Contract and/or ‘Third Contract and/or ‘Fourth Contract and/or the ‘Sixth Contract’, either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract at your risk, cost and responsibility, either in full or in part and/or recover damages under this Fifth Contract as well.Thus from the terms of the contract it is crystal clear that the transportation services provided by appellant which are the part of Fifth service contract is not only integrally connected with Third contract of supply of goods but it is also connected with the other contracts (First, Second, Fourth and Sixth contracts) which are performed by the JV partners other than the appellant.
  4. The ‘cross fall breach clause’, settles unambiguously that supply of goods, their transportation to the contractee’s site delivery and related services of insurance, unloading and handling at site, installation including civil work, testing etc. are not separate contracts, but only form parts of an indivisible composite supply of goods and services with single source responsibility.
  5. The two contracts for supply of the goods and allied services are not separately enforceable. The recipient has not contracted for ex-factory supply of materials, but for the composite supply. It is important that these two contracts if were separate and independent then inclusion of clause 2.1 as reproduced above was in fact not necessary. But by including the clause 2.1 the PGCIL has created interdependency between the two contracts so as to ensure the quality of the material and effective performance in execution of services related to contract.

It is seen from the agreement that though the parties have entered into distinct and separate contracts, one for the transfer of material and other for supply of services, this is in effect a single instrument embodying the intention of the parties. In turnkey projects more particularly of the kind involved in this impugned issue the same person has been entrusted with the responsibility of procuring the material and erection and installation of equipment and commissioning of project. Though as per the contention of the appellant, goods formed a predominant part of the contract, the obligation of the appellant under both the contract ceases only after the turnkey project becomes operational and after the final payment is made both for supply of material and for erection of the system.

The appellant is entrusted with the work mainly for their expertise in erection and installation of the plant and the execution of turnkey project. The function relating to the supply of material and the rendering of services of erection and installation are integrally connected and interdependent. The terms of supply clearly show that the implementation schedule is not only for supply but also for erection, testing and commissioning of the project.

  1. Thus, from the above it is seen that the supply of the goods and the supply of services are inextricably linked with each other. The contract awarded in substance and essence is a composite contract as defined in section 2 (30) of the C.G.S.T. Act, 2017 for supply of goods and services. The term ‘composite supply’ is given under clause 30 of Section 2 of the CGST Act.

“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;

Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

It is important to see the definition of ‘principal supply’ and goods along with the same.

“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;

A reading of the definition of ‘composite supply’ shows that there should be

  1. Two or more taxable supplies;
  2. Of goods or services or both;
  3. Or in combination thereof;
  4. Which are naturally bundled and supplied in conjunction with each other;
  5. In the ordinary course of business.
  6. One of which is a principal supply.
  7. The Contracts involve two supplies, one for the supply of goods and the other for the supply of services. The contracts fulfill the conditions of the ‘composite supply’. There is supply of goods and services. They are naturally bundled in the sense that both the goods and services may require to fulfill the intention of the buyer in giving the contract. The supply of goods and services are provided as a package and if one or more is removed, the nature of the supply would be affected. Thus, we hold that though there are two contracts made one for the supply of goods and the other for the supply of services, what can be easily gathered from the tenor of the agreements is that the buyer has given a contract which is a single indivisible contract which involves element of two supplies- one for the supply of goods and other for the supply of services. By making two separate agreements – one for the supply of goods and the other for the ‘supply for services’ what is purported to be done is an artificial division of contracts which though done, cannot take away the true and inherent nature of the contract.

It is important to note that in GST, under composite supply, whether the two taxable supplies are arising from one indivisible contract or from two separate contract is immaterial till these two supplies are naturally bundled and one supply being principal supply & other being ancillary supply to principal supply. Even if the considerations for two taxable supplies are separately quoted or there is single consideration for two supplies, both types of scenarios are covered under composite supply till the conditions as mentioned above for composite supply are fulfilled (i.e. naturally bundled supplies and one being principal supply and other ancillary supply to principal supply).

The entire transaction of providing the goods and the services is naturally bundled and hence this is clearly a case of composite supply of goods and supply of services.

  1. The appellant on the issue of divisibility of contract has relied on judgments which areM/s, lshikawajma-Harima Heavy Indus. Ltd. Vs Dir. Of Income Tax, Mumbai 2007 (6) STR 3 (S.C.) = 2007 (1) TMI 91 – SUPREME COURT,M/s. Linde Engineering Division v. Income Tax, (2014) 365 ITR 1 = 2014 (4) TMI 975 – DELHI HIGH COURT, M/s. Siemens India Limited vs. State of Kerala 2003-(132)-STC-0418 = 2002 (9) TMI 806 – KERALA HIGH COURTM/s. Titanium Equipments and Anode Manufacturing Corporation, (1998) 110 STC 4 = 1997 (8) TMI 460 – MADRAS HIGH COURT.

The sum and substance of these judgments is that when two separate contracts have been entered into by either parties, identifying two separate works viz. supply and service, then it is wrong in holding the same as indivisible contract.

It is to be noted that all judgments cited by the appellant are based on different terms of contract, scope of the contract and the provisions of law by which contract is governed i.e. Income Tax Act or other Acts. In the paras of judgments relied by the appellant nowhere the concept of overriding effect of one contract on other, cross fall clause in the contract are discussed. Further the judgments are under Income Tax Act or pre-GST Acts where concept of composite supply (as explained aforesaid) as incorporated under GST was not present. Further in present case the indivisibility of contract or composite contract is not required to be decided by interpreting terms of contract but there is clear cut mention of the same in the terms of agreement that notwithstanding the award of work under six separate contracts, the JV shall be overall responsible to ensure the execution of all the six contracts to achieve successful completion and taking over of the works covered under the package and operational acceptance by the employer as per the requirements stipulated in the bidding documents and notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire contract. Hence it is felt that the judgments relied by the appellant are not applicable to the present case before us.

  1. Rather reference can be made to theAndhra High Court judgement in thecase of M/s Larsen And Toubro Ltd (14 September, 2015 Nos. 22960 of 2007) = 2015 (12) TMI 470 – ANDHRA PRADESH HIGH COURT. In this case, all the petitioners had executed turnkey projects for different PGCILs (same customer as in present case). They claimed that the goods supplied by them, for being used in the turnkey projects, were subsequent sales exempt from tax under Section 6(2) of the CST Act, import sales under Section 5(2) of the CST Act, and the respondents lacked jurisdiction to subject these transactions to tax under the AP VAT Act treating them as intra-state sales. The assessing authority also examined the question whether there can be a sale in transit, or a sale in the course of import, in a transaction of works contract. He held that, from the nature of the contracts awarded, it could be seen that the petitioner was required to supply the goods as per the supply contract; they were also required to execute the works themselves; the intention of both the contractor and the contractee was completion of the works involving supply of goods as well as labor and therefore the transaction is a ‘works contract. The Court observed- ..

“In turn-key projects, more particularly of the kind involved in this batch of Writ Petitions, the same person has been entrusted with the responsibility of procuring material, and of erection and installation of equipment. While in-built safeguards are provided in all the contracts to ensure quality of the material, and effective performance of the erection contract, the supply contracts, in substance, do not absolve the petitioners-contractors of their obligations of erection and installation of equipment after the goods are sold by them to the owner. The petitioners-contractors obligations, under both the supply and erection contracts, cease only after the turn-key project becomes operational, and after final payment is made both for supply of material and for erection installation of equipment. While a dual role is not impermissible in execution of turnkey projects, its relevance, in determining whether or not the subject contracts are indivisible works contracts, is insignificant.”

It further referred to a specific clause in the agreement as below-

…“Appendix-H of the L & T Vemagiri supply agreement stipulates that 5% of the price shall be paid on successful test for the identified packages as per the pricing and technical specifications; 5% of the price on provisional acceptance; and 5% of the price on final acceptance. Provisional acceptance is defined under the supply agreement to mean the achievement of provisional acceptance as defined in the civil works and erection agreement, and in accordance with the terms thereof. It is evident, therefore, that 10% of the payment under the supply agreement is required to be made only after provisional and final acceptance as stipulated under the erection agreement’.

The Court concluded-

. “The goods supplied to the owner, under the supply contracts, are tailor made goods, and cannot be bought off the shelf. Such goods cannot, ordinarily, be sold to another except for its use in turnkey projects of a similar nature. The petitioners have been entrusted with the work mainly for their expertise in erection and installation of plants in the execution of turn-key projects. As they were entrusted with the work of erection and installation, the petitioners-contractors have also been entrusted with the task of procuring material therefor. The functions relating to the supply of material, and rendering services of erection and installation, are integrally connected and are interdependent”.

The above observations of the Hon’ble High court are clearly applicable in the present case. The functions relating to the supply of goods and the installation thereof are clearly inter-dependent and though distinct agreements are made they are linked to each other and are indivisible.

  1. Further appellant in support of his claim has cited some decisions related to how the agreement is to be read, which are;M/s VISA International Limited v. Continental Resources (USA) Limited, [2009 (2) SCC 55] = 2008 (12) TMI 793 – SUPREME COURT,Union of India v. Mahindra and Mahindra [1995 (76) E.L.T. 481 (S.C.)] = 1995 (3) TMI 88 – SUPREME COURT and Mirah Exports Pvt. Ltd. vs. Collector of Customs [1998 (98) E.L.T. 3 (S.C.)] = 1998 (2) TMI 124 – SUPREME COURT Rajasthan Spg. & Wvg. Mills ltd. vs. Commissioner of C. Ex., Jaipur [2001 (131) E.L.T.594 (Tri.-Del.)] = 2001 (4) TMI 118 – CEGAT, COURT NO. I, NEW DELHIS.S. Associates vs. Commissioner of C. Ex., Bangalore [2010 (19) S.T.R. 438 (Tri.-Bang.)] = 2009 (12) TMI 152 – CESTAT, BANGALORE. The sum & substance of these decisions is that the Department cannot question the commercial wisdom of the parties entering into an agreement and must proceed on the basis that what is stated in the contract reflects the true nature of the intent and transaction and that it is therefore impermissible for the tax authorities to go behind the language of the contract or act contrary to it without producing evidences. In this respect we refer to the Supreme Court judgment in the case of Bhopal Sugar Industries Ltd vs. Sales Tax Officer, Bhopal on 14 April, 1977 (Equivalent citations: 1977 AIR 1275, 1977 SCR (3) 578) = 1977 (4) TMI 151 – SUPREME COURT. The Apex Court has observed the following-

“It is well settled that while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. The mere fact that the word ‘agent’ or ‘agency’ is used or the words ‘buyer’ and ‘seller’ are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus, the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended ‘to treat a buyer as a buyer and not as an agent.”

It is clear from the observations made by this Court that the true relationship of the parties in Such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship.”

Thus, what the Supreme Court says above is that the form of the agreement is not important, it is rather the substance which has to be seen. The parties may use any words they like to suit their intention and it is therefore imperative that the agreement may not be taken as it is but its nature/substance has to be seen to arrive at the correct conclusions.

  1. The appellant in support of his claim of exemption related to transportation services has relied on some judgments likeBharathi Soap Works vs. CCE&C, Guntur [2008 (9) STR 80 (Tri-Bang)] = 2007 (9) TMI 55 – CESTAT, BANGALORE;Essar Logistics Ltd. vs. CCE, Surat [2014 (33) STR 588 (Tri-Ahmd)]  = 2014 (6) TMI 763 – CESTAT AHMEDABAD etc. and Commissioner of Cus. (Pry.), Amritsar Vs Malwa Industries Ltd [2009 (235) E.L.T. 214 (S.C)] = 2009 (2) TMI 41 – SUPREME COURT. The judgments quoted by the appellants are with respect to the transactions of transportation contract which appellant has considered it as a separate contract and in isolation of other contract of supply of goods. Here the contract of transportation of goods is not be considered in the isolation but it has to be read along with the contract of supply of goods since performance of both of these contracts being interdependent and naturally bundled resulting into composite supply under GST. The decisions relied upon by the applicant in support of his claim are not applicable to the facts of the case considering the fact that the nature of supplies under contracts being composite supply under Goods and Services Tax Act, and the supply of transportation services cannot be considered in isolation in determining the levy of tax.
  2. Another contention made by the appellant is that the Contracts entered into by the Appellant are not composite supply of services as work contract and Services provided by the Appellant are not in relation to immovable property
  3. Before deciding the taxation of aforesaid composite supply as per section 8 of GST Act we have to see whether the contracts/agreement before us is a ‘works contract’ as defined in clause (119) of section 2 of the CGST Act or otherwise.

The definition of works contract is reproduced below.

(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;

Clause 6 of the Schedule II lists the two composite supplies which shall be treated as supply of services. Clause 6(a) of Schedule II of the CGST Act states that Works Contract as defined in Clause (119) of Section 2 of the CGST Act shall be treated as ‘supply of services’.

  1. From the definition it is clear that it defines only those supplies as works contract which are contracts for building, construction, fabrication etc. of any immovable property. Now here we have to verify whether the execution of the contract of the appellant with PGCIL i.e. Third contract and Fifth contract which are the part of the whole contract of on-shore and off-shore supply of goods and services for complete execution of +320KV, 2X 1000 MW, VSC Based HVDC Terminals and DC XLPE Cable System between Pugalur and North Trichur, results into immovable property or not.

Regarding this issue of immovability appellant in the grounds of appeal has contended that…

“The goods specified in the contracts are not such that would be attached to the earth and are not intended to be affixed permanently. Further, in the present case, specific goods supplied by the Appellant are installed only for the purpose of better functioning of the said goods and are capable of being removed and transferred from one place to another. Hence, the fact that the said goods are firmly but not permanently attached to the land, clearly means that the goods in question do not per se come under the ambit of immovable property.”

It can be seen from the definition that works contract involves activities of 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. However, these activities should be in respect of immovable property. In order to decide whether the transaction is a works contract it is for us to decide whether it is in respect of immovable property. The term ‘immovable property’ has not been defined under the GST Act.

  1. Appellant has submitted the photographs of the project site, in support of his claim. The appellant has also submitted certain judgments in his favour in defining the term immovability which areM/s. Sirpur Paper Mills vs. CCE, Hyderabad [1998 (1) SCC 400] = 1997 (12) TMI 109 – SUPREME COURT,Commissioner of Central Excise v. Solid and Correct Engg. Works & Ors. [2010 (175) ECR 8 (SC)] = 2010 (4) TMI 15 – SUPREME COURTM/s. Sri Velayuthaswamy Spinning Mills v. The Inspector General of Registration and the Sub Registrar [(2013 (2) CTC 551)] = 2013 (3) TMI 681 – MADRAS HIGH COURTM/s. Perumal Naicker v. T. Ramaswami Kone and Anr. (AIR 1969 Mad 346) = 1967 (9) TMI 147 – MADRAS HIGH COURT. After going through same, we find that the following principles emerge:-

If a machine is attached for operational efficiency, it does not become immoveable property. The degree and nature of annexation is an important element for consideration; for where a chattel is so annexed that it cannot be removed without great damage to the land, it affords a strong ground for thinking that it was intended to be annexed in perpetuity to the land. The English law attaches greater importance to the object of annexation which is determined by the circumstances of each case. One of the important considerations is founded on the interest in the land wherein the person who causes the annexation possesses articles that may be removed without structural damage and even articles merely resting on their own weight are fixtures only if they are attached with the intention of permanently improving the premises. The Indian law has developed on similar lines and the mode of annexation and object of annexation have been applied as relevant test in this country also.

If the fixing of the plants to a foundation is meant only to give stability to the plant and keep its operation vibration free then it cannot be called as ‘Immoveable property’. .

If the setting up of the plant itself is not intended to be permanent at a given place and if the plant can be moved and is indeed moved after the road construction or repair project for which it is set up is completed, then also it cannot be termed as ‘Immoveable property’.

  1. So, what to be seen above is that in deciding whether a property is movable property or otherwise, we have to see what is the mode of necessary annexation and the object of annexation. If object is so annexed that it cannot be removed without causing damage to the land then it gives a reasonable ground for holding that it was intended to be annexed in perpetuity. Also whether the intention of the parties while erecting the system was that the plant has to be moved from place to place in the near future would also make a difference. We have to see by relying upon the above principles i.e. 1) mode of object of annexation 2) mode of annexation whether the plant was installed merely to make it wobble free or it is affixed to the earth. Also, it needs to be seen whether ‘the setting up of the plant itself is not intended to be permanent at a given place. The plant can be moved and is indeed moved after the project for which it is set up is completed.”
  2. Now, that we have discussed the above judgments, we shall see whether the present issue i.e. composite supply of a goods and services would be termed as immovable property or not. In order to answer this question, we have to go through the nature of a contract as well as documents submitted by the appellant in relation to execution of the project.

It is seen from the nature of contract which envisages installation, which involves civil works to erect the structure for execution of the project in its entirety. It is an entire system comprising of a variety of different structures which are installed after a lot of prior work which involves detailed designing, ground work. Appellant has also submitted few photographs of the project which clearly shows that the structure is attached to the earth with the help of civil work. The photographs indicate the magnitude of the work done. Further foundations in cement concrete, cement concrete walls as well as cement concrete structures are constructed during the execution of the project. The mode of annexation shows that the groundwork, being the necessary foundation, is an important part of the project. The object of annexation, as said earlier, cannot be to make it movable from one place to the other. It simply cannot be equated to the Asphalt mix (the issue in Solid & Concrete Engg case) which was intended to be moved from one place to other. Hence considering the scope of the work and the facts revealed by the photographs, it can be very well said that completion of the installation, erection of the total project is resulting into immovable property. Hence the total project assigned to the appellant is nothing but composite supply of works contract as envisaged u/s 2 (119) of GST Act.

  1. We shall refer to certain judgments in this regard. The first judgment is theSupreme Court judgment in thecase of M/S. T.T.G. Industries Ltd., vs Collector of Central Excise, … on 7 May, 2004 Appeal (civil) 10911 of 1996 = 2004 (5) TMI 77 – SUPREME COURT. The contract here was for the design, supply, supervision of erection and commissioning of four sets of Hydraulic Mudguns and Tap Hole Drilling Machines required for blast furnace and the issue was whether the same is immoveable property. The Apex Court observed-

.. “Keeping in view the principles laid down in the judgments noticed above, and having regard to the facts of this case, we have no doubt in our mind that the mudguns and the drilling machines erected at site by the appellant on a specially made concrete platform at a level of 25 feet above the ground on a base plate secured to the concrete platform, brought into existence not excisable goods but immovable property which could not be shifted without first dismantling it and then re-erecting it at another site. We have earlier noticed the processes involved and the manner in which the equipment were assembled and erected. We have also noticed the volume of the machines concerned and their weight. Taking all these facts into consideration and having regard to the nature of structure erected for basing these machines, we are satisfied that the judicial member of the CEGAT was right in reaching the conclusion that what ultimately emerged as a result of processes undertaken and erections done cannot be described as “goods” within the meaning of the Excise Act and exigible to excise duty.”

In the above case, the Supreme Court took note of the fact that the various components of the Mudguns and the Drilling machines are mounted piece by piece on a metal frame, and the components are lifted by a crane and landed on a cast house floor 25 feet high. The volume and weight of these machines are such that there is nothing like assembling them at ground level and then lifting them to a height of 25 feet for taking to the case house floor and the to the platform over which it is mounted and erected. It observed that the machines cannot be lifted in an assembled condition and after taking note of these facts, it concluded that the same is immoveable property.

The Court further held that it cannot be disputed that such Drilling Machine and Mudguns are not equipment which are usually shifted one place to another nor it is practicable to shift them frequently.

  1. The court also referred to its own judgments in thecaseof Quality Steel Tubes (P) Ltd. 75 ELT 17 (SC) = 1994 (12) TMI 75 – SUPREME COURT and Mittal Engineering Works (P) Ltd. 1996 (88) ELT 622 (SC) = 1996 (11) TMI 66 – SUPREME COURT. In the case of Quality Steel Tubes (cited supra), the court held that goods which are attached to earth and thus become immovable did not satisfy the test of being goods within the meaning of the Act. It held that tube mill or welding head is immovable property. In the case of Mittal Engineering Works, the issue was whether mono vertical crystallizers is goods (in which case it would be excisable or immovable property). The mono vertical crystallizers is fixed on solid RCC Slab. It consists of bottom plates, tanks, coils, drive frames, supports etc. It is a tall structure rather like a tower with a platform. It was decided by the Court that the said product has to be assembled, erected and attached to the earth by a foundation and therefore not goods but immovable property.
  2. We shall also refer to the Supreme Court decision in thecaseof Duncans Industries Ltd vs State Of U.P. & Ors on 3 December, 1999 = 1999 (12) TMI 857 – SUPREME COURT where the SC had to decide whether the ‘plant and machinery’ in the fertilizer is ‘goods’ or ‘immoveable property. The Apex Court held that the same is immoveable property and observed the following-

.. “The question whether a machinery which is embedded in the earth is movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the parties when it decided to embed the machinery whether such embedment was intended to be temporary or permanent. A careful perusal of the agreement of sale and the conveyance deed along with the attendant circumstances and taking into consideration the nature of machineries involved clearly shows that the machineries which have been embedded in the earth to constitute a fertilizer plant in the instant case, are definitely embedded permanently with a view to utilize the same as a fertilizers plant. The description of the machines as seen in the Schedule attached to the deed of conveyance also shows without any doubt that they were set up permanently in the land in question with a view to operate a fertilizer plant and the same was not embedded to dismantle and remove the same for the purpose of sale as machinery at any point of time. The facts as could be found also show that the purpose for which these machines were embedded was to use the plans as a factory for the manufacture of fertilizer at various stages of its production. Hence, the contention that these machines should be treated as movables cannot be accepted.”

Thus, what can be seen from the above is that when machines are embedded with no visible intention to dismantle them and they are intended to be used for a fairly long period of time, they are ‘immoveable property’.

The judgment relied by the appellant regarding immovability are not applicable as the facts in the present case and in the judgments cited are different. Rather ratios in judgments of Supreme Court judgment in the case of M/S. T.T.G. Industries Ltd., vs Collector of Central Excise, … on 7 May, 2004 Appeal (civil) 10911 of 1996 = 2004 (5) TMI 77 – SUPREME COURTMittal Engineering Works (P) Ltd. 1996 (88) ELT 622 (SC) = 1996 (11) TMI 66 – SUPREME COURT and Duncans Industries Ltd vs State Of U.P. & Ors on 3 December, 1999 = 1999 (12) TMI 857 – SUPREME COURT. are squarely applicable to the present case since the nature of contracts and its execution show without any doubt that the complete setup of the project in between Pugalur and North Trichur is permanent with a view to operate the project by PGCIL and not to dismantle and remove the same for any purpose at any point of time in future.

  1. Further in additional submission the appellant has relied on the Order of Advance Ruling Authority incaseof M/s. NR Energy Solutions India Pvt. Ltd. (GST-ARA-83/2018-19/B-03 dated 8.01.19) = 2019 (6) TMI 1171 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA and submitted that-

“The Advance Ruling Authority had taken divergent view and held that supply of Relay & Protection Panels and Substation Automation System {SAS), complete design, manufacture, packing, insurance, transport and delivery to sites, training, installation, testing and commissioning of protection panels with SAS compatible to IEC 61850 protocol, to control and operate the 220 KV, 132 KV & 33 KV feeders, Power Transformers and equipment cannot be treated as works contract.”

From the order of the Advance Ruling Authority in case of M/s. NR Energy Solutions India Pvt. Ltd. it can be seen that the terms of the contract are limited to supply and installation of Relay & Protection Panels and Substation Automation System {SAS) which is a small part of system compare to the whole contract awarded to appellant. The appellant cannot equate the contract of supply and installation of certain part of the system with the whole contract in the present case of on-shore and off-shore supply of goods and services for complete execution of +320KV, 2X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur. Hence ratio of advance ruling in case of M/s. NR Energy Solutions India Pvt. Ltd. is not applicable to present case before

Accordingly, we pass the following order:

ORDER

In view of the above discussions and findings and in terms of Section 101 (1) of the CGST Act 2017 and MGST Act 2017, we hold that-

  1. From the conjoined and harmonious reading of various clauses of Third contract and Fifth contract awarded to the appellant and their interdependency under the whole contract comprising of six contracts, it can be safely concluded that the agreement for setting up for + 320KV, 2 X1000MW VSC based HVDC Terminals and DC XLPE Cable system between Pugalur and North Trichur associated with HVDC Bipole link between Western region (Raigarh, Chhattisgarh) and Southern region (Pugalur, Tamil Nadu-North Trichur, Kerala) is a composite works contract as defined u/s 2(119) of GST Act and taxable @ 18% and hence-
  2. transportation services provided by the appellant being part of the whole works contract will be taxable @ 18% as works contract services and will not be eligible for the exemption as provided in Serial no. 18 of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017 and Notification No. 12/2017-State Tax (Rate) dated the 29th June, 2017.
  3. Order passed by theMaharashtra Advance Ruling Authority Order No. GST-ARA-69/2018-19/B-164, Mumbai dated December 19, 2018 = 2019 (4) TMI 1623 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRAis confirmed.

SAFSET AGENCIES PVT. LTD.

Determination of value of second hand goods – Applicability of Rule 32(5) of CGST Rules,2017 – sale of Paintings bought from individual collectors and connoisseur – Antique jewellery, watches and books – Collectibles and Memorabilia – interpretation of statute – scope of phrase ‘where no input tax credit has been availed on the purchase of such goods’ – challenge to AAR decision – HELD THAT:- The only conclusion we can draw from the order of the AAR is that they seem to have been swayed by the fact that antique watches, painting and jewelry are valuable products which cannot be classified in the category of ‘second-hand or used’. Also the fact that there is a separate tariff heading for ‘Antiques’ in the form of tariff heading code 97060000 covering ‘Antiques exceeding 100 years’ seems to have influenced them. However, we wish to point out that the classification of the goods does not have anything to do with the application of rule 32 (5).

The question of whether the rule will apply has to be decided independently of the fitment of the product. There is nothing in rule 32 (5) which says that it is not applicable to valuable or precious objects or objects having antique value. It is a settled principle of jurisprudence that when the words of a statute are unambiguous and only one reasonable meaning can be given to it, then the courts are bound to give effect to that meaning. Such words have to be interpreted in their natural and ordinary sense. Therefore, the term ‘second-hand and used’ has to be given its ordinary meaning and nothing more is to be attributed to it especially when the legislature has not chosen to expand or contract its meaning. Antique pieces are also second-hand and used by people before they come in the market. The paintings are bought by the appellant from individual art collectors. It presupposes that the art collectors have bought it second-hand or used and then sold it to the appellant. It would be an entirely different thing if the appellant has bought the paintings from the artists themselves. However, this is not the fact before us and we go entirely by the submissions of the appellant that they have bought it from individual art collectors. If such is the case, then there are no grounds to say that they are not second-hand or used. All the categories- valuable paintings, antique watches, antique jewelry, though falling under the category of valuable goods, are at the same time also ‘second hand or used goods’ and therefore they cannot be denied the benefit of rule 32(5). We feel that the term ‘antique books’ is evocative enough to describe what it contains and the appellant can apply Rule 32(E) to it.

The AAR has not given any ruling on collectibles/memorabilia and collectible books; the reason being given is that no specific details of such goods are given. In the grounds of appeal presented before the AAR, the appellant has described such goods as only ‘collectibles’ and ‘memorabilia and collectibles’. They have not dwelt at length as to what commodities are covered in that category. The appellant has stated that ‘collectibles and memorabilia’ encompasses clothing, support equipment, spectacles, accessories etc. The above description is of general nature. The appellant has not given any further description as to whether they are bought from individual art collectors or not. Also, the appellant has asked for separate ruling on collectible books and antique books. It is not known whether they are same or not. Also no specific explanation is given as to what is the difference between collectible books and antique books.

The ruling of AAR has to be upheld.

No.- MAH/AAAR/SS-RJ/08/2019-20

Dated.- October 7, 2019

Citations:

  1. Swedish Match AB Versus Securities & Exchange Board of India – 2004 (8) TMI 389 – Supreme Court
  2. GOVT OF AP & ANR Versus ROAD ROLLERS OWNERS WELFARE ASSOCIATION & ORS – 2004 (4) TMI 602 – Supreme Court
  3. Bhatia International Versus Bulk Trading SA – 2002 (3) TMI 824 – Supreme Court
  4. DISTRICT MINING OFFICER & ORS. Versus TATA IRON & STEEL CO. & ANR. – 2001 (7) TMI 1277 – Supreme Court
  5. Gurudevdatta VKSSS Maryadit & Others Versus State of Maharashtra & Others – 2001 (3) TMI 976 – Supreme Court
  6. KARTAR SINGH Versus STATE OF PUNJAB – 1994 (3) TMI 379 – Supreme Court
  7. Nelson Motis Versus Union Of India And Another – 1992 (9) TMI 355 – Supreme Court
  8. S. NARAYANASWAMI Versus G. PANNEERSELVAM – 1972 (4) TMI 95 – Supreme Court
  9. R. VENKATASWAMI NAIDU Versus NARASRAM NARAINDAS – 1965 (4) TMI 122 – Supreme Court
  10. SOUTH ASIA INDUSTRIES PRIVATE LTD. Versus S. SARUP SINGH AND OTHERS – 1965 (4) TMI 112 – Supreme Court
  11. In Re: M/s. Safset Agencies Pvt. Ltd. (Astaguru. com) – 2019 (6) TMI 822 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Safset Agencies Pvt Ltd. (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-86/2018-19/B-7 dated 15.01.2019 = 2019 (6) TMI 822 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA.

BRIEF FACTS OF THE CASE

  1. This Appeal is being filed bySafset Agencies Private Limited (Astaguru.com) against ruling no. GST-ARA-86/2018-19/B-7 dated 15.01.2019 = 2019 (6) TMI 822 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRApronounced by Maharashtra Authority for Advance Ruling (“AAR”). The said order was served to appellant on 14.06.2019 through email.
  2. Applicant, having Good and Service Tax (“GST”) Registration No. 27AABCS9352H1Z4.
  3. Appellant is a dealer dealing in various goods such as paintings, vintage collectibles, sculptures, classic miniatures paintings, fine writing instruments, vintage timepieces, celebrity memorabilia, aristocratic jewellery and vintage cars.
  4. Appellant usually procures the abovementioned goods on approval basis from unregistered as well as registered persons (“sellers”). Appellant displays all such goods on its website and conducts the auction sale in respect of such goods. The goods are sold to the highest bidder in the auction.
  5. The standard business process of Appellant is as under:
  6. Intending seller and Appellant sign an ‘on approval contract’ wherein intending seller agrees to sell his goods to the appellant on approval basis at mutually agreed price.
  7. On receipt of goods on approval and being satisfied with quality and authenticity of the goods, Appellant uploads the details of goods for on line auction.

iii. The goods remain in the possession of Appellant during the mutually agreed period of approval. Appellant has right to retain or return the goods during the approval period. Either approval is granted by Appellant within 6 months from the date on which it receives the said goods and purchases the same at mutually agreed price or returns the said goods to the intending seller.

  1. After conveying the approval and confirming purchase of goods, Appellant sells the goods to buyer (highest bidder) in auction.
  2. Appellant issues the sales invoice to the buyers.
  3. Ownership of auctioned goods is transferred from Appellant to buyer on issuance of invoice by Appellant.
  4. The appellant deals in painting, old jewelry, cars, watches, memorabilia/collectibles and antiques. Appellant is predominantly a dealer in personal effects (second hand or used goods) procured or bought from users or collectors.
  5. There are different practices prevailing in the trade as to classification, valuation and applicable GST rates on goods dealt in by the appellant. Appellant had filed an application before the AAR seeking a ruling on classification, valuation and applicable GST rates on goods dealt by the Appellant. The purpose of appellant going for advance ruling was to have absolute clarity as to its tax obligation. Appellant sought advance ruling in respect of determination of classification, valuation and GST rates applicable to various goods dealt with by it.
  6. AAR admitted the appellant’s application in preliminary hearing held on 28.11.2018.
  7. AAR passedorder no. GST-ARA-86/2018-19/B-7 on 15.01.2019 = 2019 (6) TMI 822 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRAspecifying the classification, valuation and applicable GST rates on goods dealt by the Appellant.
  8. The gist of points on which advance ruling was sought by the Appellant and the ruling thereon given by Honorable AAR is as under:
Sr. No. Description of Goods Advance Ruling Sought by the Appellant on Ruling by AAR
1. Paintings bought from individual art collectors HSN code 9701
Applicable Rates 12%
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering painting as second hand goods following Rule32 (5) of the CGST Rules, 2017. Rule 32 (5) is not applicable. Appellant to pay tax at 12% on the sale value of the paintings.
2. Old cars HSN code 8703
Applicable Rates 18% provided conditions mentioned in Notification No. 8/2018 – CT(R) dated 25.01.2018 are complied with
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering old cars as second hand goods following Rule 32(5) of the CGST Rules, 2017. Rule 32(5) is applicable subject to the conditions of the Notification No. 8/2018 dated 25.01.2018 are complied with.
3. Old jewellery HSN Code 7113
Applicable Rates As applicable to the above HSN Code
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering old jewellery as second hand goods following Rule 32 (5) of the CGST Rules, 2017. Rule 32 (5) of the CGST Rules, 2017 is applicable
4. Antique Jewellery HSN code 9706 00 00
Applicable Rates 12%
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering old jewellery as second hand goods following Rule 32(5) of the CGST Rules, 2017. Rule 32(5) is not applicable. Appellant to pay tax at 12% on the sale value of the Antique Jewellery.
5. Old Watches HSN code 9101, 9102
Applicable Rates 18%
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering old watches as second hand goods following Rule 32(5) of the CGST Rules, 2017. Rule 32(5) of the CGST Rules, 2017 is applicable. Tax will be paid on difference between the sale price and purchase price.
6. Antique Watches HSN code 9706 00 00
Applicable Rates 12%
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering Antique Watches as second hand goods following Rule 32(5) of the CGST Rules, 2017. Rule 32(5) is not applicable. Appellant to pay tax at 12% on the sale value of the Antique Watches.
7. Collectibles and HSN code In absence of specific details of goods covered under this, AAR did not answer to the question posed to them.
Applicable Rates
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering Collectibles and HSN Code as second hand goods following Rule 32(5) of the CGST Rules, 2017.
8. Collectible Books HSN Code If it is in the form of printed books, newspapers, pictures, etc., it will fall under various sub-headings of chapter 49 of GST Act. In absence of various details AAR did not answer to the query posed to them.
Applicable Rates
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering Collectible Books as second hand goods following Rule 32(5) of the CGST Rules, 2017.
9. Antique Books HSN Code Antique Books under 100 years is dealt with by AAR will be classified under appropriate heads.

In absence of specific details and description, AAR did not answer the query posed to them.

Applicable Rates
Whether Appellant can discharge the tax liability on difference between sales and purchase price considering Antique Books as second hand goods following Rule 32(5) of the CGST Rules, 2017.
  1. Apart from buying paintings from individual art collectors, Appellant also procures paintings from other art dealers and directly from painters. Appellant has sought advance ruling on such items. Appellant also purchases paintings, collectibles, and antiques from other art dealers. Appellant pays full tax on sale value of such paintings, collectibles and antiques. Appellant neither sought advance ruling on such goods nor it is a subject matter of order of AAR.
  2. Appellant sincerely thank Hon’ble AAR for very considered decision on certain issues relating to following goods.
Ref. No. of the table given at point no. 10 Description of goods Remarks
2. Old cars Appellant accepts ruling of AAR on this point in toto i.e. HSN Code, Classification, Applicable Tax Rate, Valuation and Applicability of Notification No 8/2018-CT(R) dated 25.01.2018.
3. Old Jewellery Appellant accepts ruling of AAR on this point in toto i.e. HSN Code, Classification, Applicable Tax Rate, and applicability of Rule 32(5) of the CGST Rules.
5. Old Watches Appellant accepts ruling of AAR on this point in toto i.e. HSN Code, Classification, Applicable Tax Rate, and applicability of Rule 32(5) of the CGST Rules.
  1. Appellant further partially accepts the verdict of Hon’ble AAR on following goods;
Ref. No. of the table given at point no. 10 Description of goods Remarks
1. Paintings bought from individual art collectors Appellant accepts ruling of AAR on this point as to HSN Code, Classification, Applicable Tax Rate. However, Appellant respectfully disagrees with AAR ruling that Rule 32 (5) is not applicable and Appellant is obliged to pay tax at 12% of sale value of such paintings. Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such paintings and Appellant is liable to discharge tax on difference between the sales price and purchase price.
4 and 6 Antique Watches and Antique Jewellery purchase from individual collectors and users Appellant accepts ruling of AAR on this point as to HSN Code, Classification, Applicable Tax Rate. However, Appellant respectfully disagrees with AAR ruling that Rule 32 (5) is not applicable and Appellant is obliged to pay tax at 12% of sale value of such goods. Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such goods and Appellant is liable to discharge tax on difference between the sales price and purchase price.
7 and 8 Collectibles (including books) purchased from individual collectors and users Hon’ble AAR did not answer the question raised. Appellant does not wish to contend on points as to HSN Code, Classification and Applicable Tax Rate. However, the Appellant would like to contest further in respect of applicability of Rule 32(5) of the CGST Rules, 2017.
9 Antiques Books purchased from individual collectors and users. Appellant accepts ruling of AAR on this point as to HSN Code, Classification, Applicable Tax Rate. However, Appellant respectfully disagrees with AAR ruling that Rule 32 (5) is not applicable and Appellant is obliged to pay tax at 12% of sale value of such books. Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such books and Appellant is liable to discharge tax on difference between the sales price and purchase price.

Being aggrieved by unfavorable portion (as stated in remark column of above table) of ruling of Hon’ble AAR, Appellant is approaching Appellate Authority for Advance Ruling (“AAAR”) for final clarity on all these issues.

GROUND OF APPEAL

  1. On the facts of thecaseand in law, Advance Ruling Authority has erred in holding that Rule 32(5) of CGST Rules,2017 does not apply to sale of paintings, antique jewellery, antique watches, collectibles, other antiques bought from individual collectors and users and full sale value- of such goods is liable to tax.

Detailed submissions:

  1. Rule 32 (5) of Central Goods and Service Tax Rules,2017 (“CGST Rules”) deals with determination of value of second hand goods. The relevant extract of Rule 32(5) of CGST Rules is as under:

“Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e. used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.”

  1. The term “second hand goods” for Rule 32(5) of CGST Rules would mean used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on purchase of such goods.
  2. Paintings, antique jewelry, antique watches and collectibles are used goods. It is coming for sale after being used by the seller or the earlier owners of such goods. Appellant does not perform any process on such goods which changes the nature of such goods.
  3. Appellant is not claiming any input tax credit when such goods are procured from individual collectors or users, as such sellers are not registered suppliers.
  4. In light of above discussion, Appellant humbly submits that the goods for which this appeal is filed are “second hand goods” as defined under Rule 32 (5) of CGST Rules. Hence, the value of such goods should be difference between the sale price and the purchase price. The tax is chargeable at applicable rate on such difference only and not on sale value/transaction value of such goods.
  5. Rule 32(5) of CGST Rules applies to the “second hand goods” or “used goods”. The terms “second hand goods” and “used goods” are not defined in the CGST Act or CGST Rules. Even General Clauses Act does not defined these terms. Hence, one has to go by the dictionary meaning or common parlance meaning of the word “second hand goods” or “used goods”.
  6. The meaning of the terms “second hand goods” and “used goods” as per various dictionaries are as under:

Second Hand Goods:

  1. Second-hand things are not new and have been owned by someone else (Collins Dictionary)
  2. having had a previous owner; not new (English Oxford Dictionary)

iii. not new; having been used in the past by someone else {Cambridge English Dictionary)

  1. acquired after being used by another {Merriam Webster)
  2. previously used or owned (Dictionary.com)

Used Goods:

  1. already owned or put to a purpose by someone else; not new (Cambridge Dictionary)
  2. that has endured use {Merriam Webster)
  3. Usually market is divided into two main segments i.e. primary market and secondary market. A primary market means market where goods comes for the first time at a retail shop or any other way for reaching ultimate consumers. This is the time when the price for the goods is established for the first time. Once the goods are purchased from the primary market and when such purchaser (whether a collector or consumer) decides to sell it, such goods enters the secondary market as used goods or second hand goods.
  4. Appellant is a player in the secondary market procuring second hand or used goods from the individual collector or users.
  5. It seems that Hon’ble AAR perhaps felt that paintings are not “used goods” per se. There is a subtle difference between the term “used” and “consumed”. Paintings are essentially a work of art made on a piece of paper or any other material. The person acquires paintings as his hobby or for social status. Individual collector or user usually displays the paintings at his home or office. It is a status symbol for the owner of painting. What is stated here, for paintings, applies to antiques, collectibles, memorabilia, etc. The main purpose and usage of such goods is to elevate the social status of the owner. There are fair chances that the individual selling these goods to the Appellant might have used the antique jewelry, watches, etc. on various occasions for personal use. Even if such goods are displayed, it is usage of such goods enhancing social status of such collector. Just because not all above items can be consumed, one cannot say that it is not “used”. Clothes are “used” whenever they are worn. Similarly, furniture is used though it has a long life. Similarly, when paintings, antiques and collectibles are displayed or acquired for status symbol, the same are said to be “used”.
  6. One of the condition in Rule 32(5) is that “no input tax credit should have been availed on the purchase of such second hand or used goods”.

Usually the dealer in second hand goods or used goods purchases such goods (personal effects) mainly from individuals not registered under GST. Sellers of such goods (being not liable to GST) do not charge tax on goods sold by them to second hand goods dealer. In absence of any tax charged, the question of availing input tax credit by dealer (appellant in given case) does not arise. In such case, dealer has not taken any credit of tax and hence Rule 32(5) clearly and squarely applies on sale of such goods.

  1. One may tend to take a view that Rule 32(5) applies only to sale of goods, which are purchased on payment of GST and where credit of such tax is not availed. This interpretation will make Rule 32(5) redundant in majority of transactions as such second hand or used goods are normally purchased from individuals not liable to tax as such goods are not sold by them in course of business.
  2. The question may arise in which circumstances the phrase ‘‘where no input tax credit has been availed on the purchase of such goods” shall apply. The purpose of this phrase seems to prevent the dealer purchasing second hand goods or used goods from registered person on payment of GST and availing dual benefit of paying the tax on margin and claiming input tax credit simultaneously.

The GST is a value added tax and each person in the value addition chain is expected to pay tax on the value addition made by him in the transaction. The intention of promulgating Rule 32 (5) is to ensure that a dealer operating in unorganized sector (buying second hand or used goods from unregistered persons or non-business entities) is not saddled with tax liability disproportionate to value addition done by him in transaction chain. In majority of the cases, the margin of such second hand goods dealer is less than the tax leviable on such goods under normal scheme of taxation and hence need for such provision.

If paintings and ancient jewellery are interpreted to not mean “used goods” then the whole purpose of the GST legislation will be defeated as the tax is sought to be charged on value addition and not on the price addition of such goods.

  1. It is settled principle of interpretation that if a statutory provision is open to more than one interpretation, one has to choose that interpretation which represents the true intention of the legislature. A statute is to be construed according to the intent of them that make it and the duty of judicature is to act upon the true intent of the legislature i.e. mens or sentential legis (Salmond: “Jurisprudence” 11th Edition). This principle of interpretation has been enshrined in various judicial pronouncements including the following:
  1. It appears that Hon’ble AAR have given undue weightage to the high value of paintings, antiques and collectibles sold by the Appellant. Rule 32(5) of CGST Rules, does not put any restriction or cap on value of goods. The Rule applies to any second hand or used goods irrespective of value of such goods.
  2. The order of Hon’ble AAR does not give any specific or elaborate reasons for denying benefit of Rule 32(5) of CGST Rules to goods under consideration. AAR order, to this extent, is cryptic and non-speaking. Hon’ble AAR has simply said in observations part of its order that value of antique goods, paintings, etc. increases with time and hence cannot be treated as “used goods” under Rule 32(5) of CGST Rules. Simply because value of such goods increases with a passage of time, it cannot be said that it is not used goods. Classic example is that of flat in which one resides. The value of the flat increases with years passing by but one cannot say that flat is not used.
  3. Moreover, there is no stipulation in the Rule that the goods whose value increases with the passage of time is not “used or second hand goods”. It is a settled jurisprudence that tax authorities cannot read any word or phrase into the legal provisions.
  4. Appellant humbly submits that it is settled jurisprudence principle that when the words of a statue are clear, plain or unambiguous i.e. they are reasonable susceptible to only one meaning, the courts are bound to give effect to that meaning irrespective of consequences. Moreover, if the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. This rule of interpretation is followed in plethora of judgements. Few of such judgments are as under:
  5. Nelson Matis v/s Union of India (AIR 1992 SC 1981) = 1992 (9) TMI 355 – SUPREME COURT
  6. Gurudevantt VKSSS Maryadit V /s State of Maharashtra (AIR 2001 SC 1980) = 2001 (3) TMI 976 – SUPREME COURT

iii. Swedish Match AB v/s Securities and Exchange Board of India (AIR 2004 SC 4219) = 2004 (8) TMI 389 – SUPREME COURT

  1. Government of Andhra Pradesh V/s Road Rollers Owners Welfare Association [2004 (6) SCC 210] = 2004 (4) TMI 602 – SUPREME COURT

In given case, Hon’ble AAR is reading certain words and phrase not there in the statute. Such an attempt is legally not tenable as it is contrary to all rules of construction to read words into an Act.

  1. Rule 32 (5) is presumptive scheme of valuation. Such presumptive schemes are promulgated for trade facilitation or for convenience of tax administration. Once such valuation scheme is on the statue book, it is mandatory for assessee as well as tax authorities to follow it in letter and spirit, irrespective of revenue considerations. Once the goods are second hand or used goods, Rule 32(5) is applicable irrespective of value of such goods and irrespective of nature of such goods.
  2. Hon’ble AAR is perhaps under misconception that as the value of paintings, antiques, collectibles, memorabilia etc. increases with the passage of time. Hence, such goods are not second hand goods entitled to benefit of Rule 32(5) of CGST Rules. Rule 32(5) of CGST Rules provides an option to a second hand goods dealer to pay tax on the margin of the selling price and purchase price if positive. It is clear from above provision that the Government’s intention is to levy tax only on those transactions wherein the selling price of goods exceeds the purchase price. This is possible only when the sale value of old goods increases with passage of time. We strongly contend that the Hon’ble AAR has erred in concluding that Rule 32(5) is not applicable to those goods whose value increases with the passage of time.
  3. AAR appears to be under misconceived notion that sale value of second hand or used goods should always diminish with passage of time. If one accepts this notion of AAR, it will make entire Rule 32 (5) virtually futile. If value of used or second hand goods diminishes with time then the government will never be able to collect tax under Rule 32{5) of the CGST Rules. The position taken by Hon’ble AAR is absolutely contrary to the legal provisions.
  4. Appellant is an auctioneer dealer mainly deals in “old personal effects” such as jewellery, paintings, antiques, memorabilia, collectibles etc. Most of these are articles used by the seller of the goods or previous owners of such goods. Appellant buys above goods. It does not perform any process on such goods, which changes its nature. Appellant does not claim input tax credit of tax paid on procurement of such goods. Rule 32(5) of CGST Rules clearly and unambiguously applies to person dealing in second hand goods. As stated in facts ofcase, Appellant is mainly dealing in old jewellery, paintings and antiques and hence same should apply to paintings, antiques, collectibles, memorabilia, etc. bought by Appellant from individual collectors or users. In light of above submissions, Appellant humbly submits that valuation of supply of paintings, antique jewelry, antique watches, other antiques, collectibles, memorabilia, etc should be done in accordance with Rule 32(5) of CGST Rules.

Respondent’s Submissions

  1. The issues raised by the applicant have been decided byARA vide order dated 15/01/2019 = 2019 (6) TMI 822 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA. The dealer has filed appeal before AAA, Maharashtra. The main issue in appeal proceedings isWhether Applicant is entitled to value following goods in accordance with Rule 32(5) of Central Goods and Service Tax Rules, 2017 or otherwise under different situation and for different commodities. The submission is as under:
  2. The appellant has partially accepted the verdict of AAR on following goods:
Ref. No. Description of goods Appellant contention in appeal proceedings. AAR HELD THAT:
1 Paintings bought from individual art collectors Appellant accepts ruling of AAR on this point as to HSN Code, Classification and Applicable Tax rate.

However, Appellant respectfully disagrees with AAR ruling that Rule 32(5) of CGST Rules, 2017 is not applicable and Appellant is obliged to pay tax at 12% on sale value of such paintings.

Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such paintings and Appellant is liable to discharge tax on difference between the sales prince and purchase price.

The applicant has requested for valuation of paintings bought from individual art collectors. The Chapter 9701 of the GST Tariff, 2017 covers “Paintings, drawings and pastels, executed entirely by hand, other than drawings of heading 4906 and other than hand-painted or hand-decorated manufactured articles; collages and similar decorative plaques”. If the said paintings as mentioned by the applicant answer the description of item mentioned in Heading 9701, then the goods will be covered under this Heading and will attract a rate of 12%. Paintings cannot be treated as used and therefore the applicant must pay GST of 12% on the sale value, if their goods answer the description of Heading 9701.
4 and 6 Antique Watches and Antique Jewellery purchased from individual collectors and users Appellant accepts ruling of AAR on this point as to HSN Code, Classification and Applicable Tax rate.

However, Appellant respectfully disagrees with AAR ruling that Rule 32(5) of CGST Rules, 2017 is not applicable and Appellant is obliged to pay tax at 12% on sale value of such goods.

Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such goods and Appellant is liable to discharge tax on difference between the sales prince and purchase price.

Antique jewellery of age exceeding 100 years – HELD THAT:- Tariff item 9706 00 00 covers ‘Antiques of an age exceeding 100 years’.

Antique jewellery of age exceeding 100 years will fall under this tariff item and will be liable to tax @ GST. The provisions of Rule 32(5) of CGST Rules will not be applicable to them in this case.

Antique watches of age exceeding 100 years – HELD THAT:- Tariff item 9706 00 00 covers ‘Antiques of an age exceeding 100 years’.

 Antique watches of age exceeding 100 years will fall under this Tariff item and will be liable to tax @ 12% GST. The provisions of Rule 32(5) of CGST Rules will not be applicable to them in this case.

7 and 8 Collectibles (including books) purchased from individual collectors and users. Hon’ble AAR did not answer the question raised. Appellant does not wish to contend on points as to HSN Code, Classification and Applicable Tax Rate.

However, Appellant would like to contest further in respect of applicability of Rule 32(5) of CGST Rules, 2017.

The specific details and description of ‘collectibles (books)’ has not been mentioned by the applicant and in the absence of specifics the question cannot be answered.
9 Antique Books purchased from individual collectors and users Appellant accepts ruling of AAR on this point as to HSN Code, Classification and Applicable Tax rate.

However, Appellant respectfully disagrees with AAR ruling that Rule 32(5) of CGST Rules, 2017 is not applicable and Appellant is obliged to pay tax at 12% on sale value of such books.

Appellant wish to contest that Rule 32(5) of CGST Rules, 2017 is applicable to sale of such books and Appellant is liable to discharge tax on difference between the sales prince and purchase price. 

Antique Books -Such articles will be covered under Tariff item 9706 00 00 only they are exceeding 100 years of age.

If the antique books are under 100 years of age then they will be classified under the appropriate heading of the GST Tariff. Antique books of less than 100 years of age, if it is in the form of printed books, newspapers, pictures, etc, will fall under the various sub headings of Chapter 49 of the GST Tariff as the case may be. Since the specific details and description of ‘collectibles (books)’ has not been mentioned by the applicant, in the absence of specifics the question cannot be answered.

  1. Whether Applicant is entitled to value following goods in accordance with Rule 32(5) of Central Goods and Service Tax Rules, 2017(hereinafter referred to as “CGST Rules”):
  2. a) Paintings bought from individual collectors and connoisseur
  3. b) Antique jewellery, watches and books
  4. c) Collectibles and Memorabilia

The Rule 32(5) of CGST Rules, 2017 reads as under:-

Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

Paintings bought from individual collectors and connoisseur / Collectibles and Memorabilia:-

The applicant has requested for valuation of paintings bought from individual art collectors. The Chapter Headings 9701 of the GST Tariff, 2017 covers “Paintings, drawings and pastels, executed entirely by hand, other than drawings of heading 4906 and other than hand-painted or hand-decorated manufactured articles; collages and similar decorative plaques”. If the said paintings as mentioned by the applicant answer the description of item mentioned in Heading 9701, then the goods will be covered under this Heading and will attract a rate of 12%. The Paintings cannot be treated as used and therefore the applicant must pay GST of 12% on the sale value, if their goods answer the description of Heading 9701.

The applicant cannot establish that the paintings/ collectibles have been purchased by his vendor at some time and then used to treat it as second hand goods.

  1. The nature of schedule entry and rate of tax prescribed under GST ACT, 2017,

Schedule II – 6%

S. No. Chapter/Heading/Sub-heading/Tariff item Description of Goods
(1) (2) (3)
236. 9701 Paintings, drawings and pastels, executed entirely by hand, other than drawings of heading 4906 and other than hand-painted or hand-decorated manufactured articles; collages and similar decorative plaques.
237. 9702 Original engravings, prints and lithographs
238. 9703 Original sculptures and statuary, in any material
239. 9705 Collections and collectors’ pieces of zoological, botanical, mineralogical, anatomical, historical, archaeological, paleontological, ethnographic or numismatic interest [other than numismatic coins]
240. 9706 Antiques of an age exceeding one hundred years
  1. The Antique goods means:-

The collectable objects have a high value because of its age and quality. The value of antiques is affected by many different factors. The Age, Quality of work and material rarity, condition, Market demand, or kiln mark or autograph of legend. Antiques that are highly wanted after but are scarce can usually command a better price. In individual situations another factor is the value attributed to a specific antique by its owner, and the price a collector is willing to pay to obtain it for his/her collection. In other words, this is dependent on the demand and supply situation on the antique market. Therefore, the actual value of an antique may never be the same at two points in time, or in two or more different sales locations.

  1. The Antique goods are very special in characterand have inherent value cannot be treated as second hand goods. These goods being antique in nature, attend to and represent the specific/ separate class of goods having separate identity, class, value, nature etc.
  2. Moreover, the applicant cannotestablish that the goods have been purchased by his vendor were Antique at some time and then used to treat it as second hand goods. Under GST ACT, 2017 the specific class of antique goods has been incorporated in schedule -II, Hence, the Rule 32(5) of CGST Rules, 2017 is not applicable.

PERSONAL HEARING

  1. A personal Hearing in the matter was conducted on 04.10.2019, which was attended by Shri Naresh Shah, C.A., representative of the Appellant, as well as by Shri V.V. Kulkarni, the Jurisdictional Officer and the respondent in the instant matter, who tendered oral submissions in support of their cases besides reiterating their respective written submissions filed before us.

Discussions and Findings

  1. We have examined the contention of the appellant. We have also gone through the written submission presented by them. We have also examined the contention of the jurisdictional officer. The issue raised in the Advance Ruling can be conceptualized in the following table:-
Sr. No. Description of goods Advance ruling sought by the appellant on Ruling of AAR
1 Paintings bought from individual art collectors HSN Code 9701
Applicable rate 12%
Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule32 (5) of CGST Rules 2017 Rule 32 (5) is not applicable. Appellant to pay tax at 12% on sale value of painting.
2 Old Cars HSN Code

Applicable rate Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST

 8703

18% 32(5) Rule is applicable. Appellant to pay tax at 12% on sale value of painting

3 Old Jewellery HSN Code

Applicable rate Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

7113

Rule 32(5) is applicable. Appellant to pay tax at 12% on sale value of painting

4 Antique Jewellery HSN code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

9706

12% Rule 32(5) is not applicable. Appellant to pay tax

at 12% on sale value of painting

Old watches HSN Code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

9101,9102

18%

32(5) Rule is applicable. Tax will be paid on the difference between the sale price and the purchase price.

5 Antique Watches HSN code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32 (5) of CGST Rules 2017

9706.00 00

12%

Appellant to pay 12% on sale value of antique watches. Rule 32(5) is not applicable. Appellant to pay tax at 12% on sale value of painting

6 Collectibles and Memorabilia

 

HSN Code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

Chapter 49 absence of In specific details AAR did not answer to the query posed by them
Collectible Books HSN code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

If it is the form of printed books, newspapers, pictures etc it will fall under various of sub-headings Chapter 49 of GST.

In absence of specific details AAR did not answer to the query posed by them

7 Antique Books HSN Code

Applicable rate

Whether appellant can discharge the tax liability on difference between sales price and purchase price considering painting as second hand goods following Rule 32(5) of CGST Rules 2017

In absence of specific details AAR did not answer to the query posed by them
  1. The applicant has stated that apart from buying paintings from individual art collectors, appellant also procures paintings from other art dealers and directly from painters. The applicant also purchases paintings, collectibles and antiques from other art dealers. The applicant accepts the ruling of the AAR on old cars/old jewelry/ old watches in toto. In the above table, which is classified into 9 items, the appellant has accepted the verdict of the AAR as far as the HSN code classification and applicable tax rate is concerned of all of the commodities except collectibles and memorabilia (Item no 6) and Collectible books (Item no 7). Though AAR has not given any decision on the classification as well as applicability of rule 32 (5) on the above two categories, i.e. Item no 6 and 7, the appellant has expressed his wish not to contend the issue of classification (HSN code,. Therefore, we have to decide in all of the above 9 items, the limited issue of the applicability of rule 32(5) of the CGST Rules.
  2. The applicant has filed an appeal before the AAAR contending that Rule 32 (5) is applicable to Paintings bought from individual art collectors/Antique watches/Antique Jewelry /Collectibles are purchased from individual collectors and users. However, the AAR has held that Paintings/Antique jewelry/ Collectibles/Antique watches cannot be called as ‘used goods’ and therefore the Rule 32(5) is not applicable here.
  3. The said rule is reproduced below:-

(5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored:

Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

  1. The contentions of the appellant can be summarized as follows:-

1) Paintings/Antique jewellery/Collectibles and emorabilia/Collectibles/Antique watches/Antique Books are used goods. It is coming for sale after being used by the seller or the earlier owners of such goods. The applicant does not perform any process on them.

2) The applicant is not claiming any ITC when such goods are procured from individual collectors or users as such sellers are URPs.

3) The terms ‘used goods’, ‘second hand goods’ are not defined anywhere in the Act.

4) Just because the items are not consumed it cannot be said that they are not used.

5) The intention of promulgating Rule 32 (5) is to ensure that the dealer operating in the unorganized sector is not saddled with tax liability disproportionate to value addition done by him.

6) If paintings/antique jewellery are not interpreted to mean ‘used goods’ then the whole purpose of GST legislation will be defeated as the tax is sought on value addition,

7) The value of the goods should not be a determinant factor in the issue.

  1. Ongoing through the wordings of rule 32(5) of the CGST Rules, we find it difficult to agree with the conclusion drawn by the AAR for the following reasons:-

The rule as it stands does not have any qualification to the words ‘used’ or ‘second hand’. The words themselves are also not explained in the rule. Therefore, they have to be understood as they are used in common parlance. Definition of ‘used’ as given in the various dictionaries are as follows: –

  • Second-hand things, not new and have been owned by someone else (Collins Dictionary).
  • Having a previous owner, not new (English Oxford Dictionary).
  • Not new; having been used in the past by someone else (Cambridge English Dictionary).
  • Acquired after being used by another (Merriam Webster)
  • Previously used or owned (dictionary.com)
  • Used goods – Already owned or put to it for a purpose by someone else (Cambridge English Dictionary).
  • Previously used or owned; second-hand (dictionary.com).
  • Employed in accomplish something, that has endowed used (Merriam Webster)
  • Second-hand owned not new (Collins Dictionary).
  1. It is seen from the above, that the terms ‘second-hand’ and ‘used’ are synonymous words. Goods can be called as second-hand’ or ‘used’ when they are not new. It is used by someone else or by the original owner before they are sold. In the instantcase, the appellant is an auction dealer whose main business is to sell jewelry, car, watches, antiques etc. It is their contention that most of these are articles used by the original owners or persons selling such goods to the appellant. It is also submitted by them that they do not perform any process on such goods. It is seen from the web-site of the appellant – astaguru.com that the appellant sells vintage collectible and rare antiques such as sculptures, paintings, writing instruments, vintage cars etc. They are players in the secondary market. A primary market refers to any goods when they come to the market for the first time. The appellant being an auctioneer dealer sells personal effects or such other goods in an auction which have not come in the market for the first time and therefore it is called a secondary market.
  2. Rule 32(5) gives the benefit of the margin scheme to the second-hand or used goods and the rule is made up of the following parts:-

The taxable supply is provided by a person dealing in buying and selling; of second-hand i.e. used goods;

as such or after minor processing which does not changed the nature of goods; where no ITC has been availed on the purchases of such goods,

A reading of the rule says that the value for tax purpose will be the difference between the selling price and purchase price. In the said case, the appellant fulfills all the conditions of the rule.

1) The appellant is a seller dealing in buying and selling second-hand goods.

2) The goods sold by them are, as per their contention, second-hand or used goods which have not come for sale for the first time in the market.

3) The appellant has sold the goods as such and has done no processing on them. 4) No ITC is availed by them on the purchase of those goods.

  1. Therefore, if all the above conditions are fulfilled by the appellant there seems to be no reasons in denying them the benefit of the margin scheme contained in rule 32(5) of the CGST Rules. The AAR has given the benefit to old cars, old jewelry and old watches but have denied the benefit to paintings, antique jewelry and antique watches. The only reason given by the AAR for coming the said conclusion is that ‘paintings’ cannot be treated as used but have given no further explanation as to why they should not be treated as used. Also no reason is advanced in the order for denying the benefit to antique jewelry and antique watches. As for ‘antique books’ no ruling is given, citing the reason as “absence of specific details”. The only conclusion we can draw from the order of the AAR is that they seem to have been swayed by the fact that antique watches, painting and jewelry are valuable products which cannot be classified in the category of ‘second-hand or used’. Also the fact that there is a separate tariff heading for ‘Antiques’ in the form of tariff heading code 97060000 covering ‘Antiques exceeding 100 years’ seems to have influenced them. However, we wish to point out that the classification of the goods does not have anything to do with the application of rule 32 (5). The question of whether the rule will apply has to be decided independently of the fitment of the product. There is nothing in rule 32 (5) which says that it is not applicable to valuable or precious objects or objects having antique value. It is a settled principle of jurisprudence that when the words of a statute are unambiguous and only one reasonable meaning can be given to it, then the courts are bound to give effect to that meaning. Such words have to be interpreted in their natural and ordinary sense. Therefore, the term ‘second-hand and used’ has to be given its ordinary meaning and nothing more is to be attributed to it especially when the legislature has not chosen to expand or contract its meaning. Antique pieces are also second-hand and used by people before they come in the market. The paintings are bought by the appellant from individual art collectors. It presupposes that the art collectors have bought it second-hand or used and then sold it to the appellant. It would be an entirely different thing if the appellant has bought the paintings from the artists themselves. However, this is not the fact before us and we go entirely by the submissions of the appellant that they have bought it from individual art collectors. If such is thecase, then there are no grounds to say that they are not second-hand or used. All the categories- valuable paintings, antique watches, antique jewelry, though falling under the category of valuable goods, are at the same time also ‘second hand or used goods’ and therefore they cannot be denied the benefit of rule 32(5). We feel that the term ‘antique books’ is evocative enough to describe what it contains and the appellant can apply Rule 32(E) to it.
  2. The AAR has not given any ruling on collectibles/memorabilia and collectible books; the reason being given is that no specific details of such goods are given. In the grounds of appeal presented before the AAR, the appellant has described such goods as only ‘collectibles’ and ‘memorabilia and collectibles’. They have not dwelt at length as to what commodities are covered in that category. The appellant has stated that ‘collectibles and memorabilia’ encompasses clothing, support equipment, spectacles, accessories etc. The above description is of general nature. The appellant has not given any further description as to whether they are bought from individual art collectors or not. Also, the appellant has asked for separate ruling on collectible books and antique books. It is not known whether they are same or not. Also no specific explanation is given as to what is the difference between collectible books and antique books. For the above reason, we agree with the Ruling of the AAR.

In view of the above deliberation, we hold the following: –

ORDER

The appellant is eligible to take benefit of rule 32(5) for the products in TABLE 1 placed by them before us except items placed at 7 & 8. We cannot give any ruling on items 7 & 8 and we agree with the observations of the AAR on 7 & 8, that in absence of any specific description of the products contained in them, no ruling can be given.

M/S. ORDNANCE FACTORY BHANDARA

Central Government or not – appellant is Ordnance Factory Bhandara – AAR observed that the Appellant cannot be construed as Central Government on the ground that the same had not been created by the Constitution of India as a legislative, executive or judicial authority of the country – HELD THAT:- Where the Appellant is charging some rent/consideration from their employees for providing accommodation facility in the residential colony maintained by it, which renders the said activity of the Appellant as supply of residential services, which is an exempt supply in itself in terms of the provisions made at Sr. 12 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017. Further, the education services provided by the factory school to the children of the employees, renting of the recreational halls to the employees for organizing some family functions against certain considerations are exempt supply.

Since, all the aforementioned supplies made by the Appellant are exempt supply, any inputs or input services viz. maintenance, upkeep, repair, providing security, garbage collection, sewage treatment, civil construction, sweeping & cleaning, etc., pertaining to the residential quarters of employees of Ordnance Factory Bhandara & other allied organisations, market area, places for worship of God, gardens, parks, playgrounds, swimming pool, footpaths, street lightings, which are used inside the residential colony will not be available to the Appellant for ITC in accordance with the provision of Section 17(2) of the CGST Act, 2017.

Shops that are given on rental basis for commercial purposes – HELD THAT:- As per the provision of section 16(1) of the CGST Act, 2017, the Appellant is entitled to avail ITC in respect of expenditures incurred on the input services used in the taxable supply of the renting of immovable property for commercial purposes.

Inter-connected roads between various establishments and facto premises – HELD THAT:- It is observed that the construction and maintenance of the roads in the factory estate is mandatory for the Appellant to carry out their business operation. Without the proper road, the transportation of inputs, capital goods, and the finished products of the Appellant will not be able to take place. Thus, as per section 16(1) of the CGST Act, 2017, the expenditures incurred on the construction and maintenance of the road from the factory’s main gate to the factory premises where the manufacturing activities take place is eligible for ITC, since the same is incurred on the input services, which are used in the course or furtherance of business – However, the construction and maintenance of the roads within the residential complex of the factory estate are in relation to the supply of the accommodation facility to the employees in the residential colony maintained by the Appellant, which are an exempt supply as discussed above, therefore, ITC in respect of such expenditures on the construction and maintenance of road inside the residential colony will not be available to the Appellant in accordance with the provision of section 17(2) of the CGST Act, 2017.

Land that is currently not used for any purpose whatsoever – HELD THAT:- The ITC in respect of the health services are available to a registered person subject to the condition that the employer i.e. the registered person, is under obligation to provide such health services to its employees in terms of the provisions of any law for the time being in force. In the present case, it is obligatory for the Appellant to provide the health services to its employees and their dependents as per the Ordnance Factory Medical Regulation. Hence, the ruling pronounced by the AAR in this regard is erroneous, and warrants to be set aside.

ITC – input services pertaining to maintenance and upkeep of guest houses maintained by them – HELD THAT:- As the Appellant is charging rent from the guests availing the guest house facilities, which may be considered as exempt supply in terms of Sr. NC. 6 of the Notification no. 12/2017- Central Tax-(Rate) dated 28.06.2017 as the Appellant, as discussed above, has been held to be the Central Government. Therefore, No ITC is available against the said exempt supply in terms of the provision of section 17(2) of the CGST Act, 2017. Therefore, the ITC in respect of the inputs and input services pertaining to the guest houses will not be available to the Appellant.

Whether they were eligible to avail ITC in respect of the expenditure related to purchase of LPG cylinders used within industrial canteen? – HELD THAT:- Input Tax Credit in relation to LPG cylinders that are re-filled for use in industrial canteen should be allowed as per amended section 17(5) (b) & 16(1) of the CGST Act, 2017.

Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues? – HELD THAT:- The transaction related to L.D. is being recorded in separate accounting code. Maintenance of such accounting codes by the Appellant clearly shows that the Appellant is paying the actual taxable amount and GST thereon to its suppliers, as mentioned in the tax invoices raised by its suppliers. Further, the reflection of the illustrated sample invoices in the GSTR -2A of the Appellant further substantiates the Appellant’s claim that the suppliers are also aware of their liability to pay the actual GST and not the lesser amount of GST are being paid by the suppliers, even in the cases where there is deduction of liquidation damages from the payment made to such suppliers – the Appellant was rightful in challenging the ruling pronounced by AAR in this regard, and accordingly, they are not required to reverse the ITC on account of the deduction of L.D. from the payment made to the suppliers.

No.- MAH/AAAR/SS-RJ/13/2019-20

Dated.- October 18, 2019

Citations:

  1. Rane TRW Steering System Ltd. Versus The Commissioner of Central Excise and Central Tax, Chennai Outer Commissionerate – 2018 (2) TMI 1745 – MADRAS HIGH COURT
  2. COMMISSIONER OF CUS. & C. EX., HYDERABAD-III Versus ITC LIMITED – 2011 (11) TMI 516 – ANDHRA PRADESH HIGH COURT
  3. M/s. Coca Cola India Pvt. Ltd. Versus The Commissioner of Central Excise, Pune-III – 2009 (8) TMI 50 – BOMBAY HIGH COURT
  4. In Re: M/s. General Manager Ordnance Factory Bhandara – 2019 (6) TMI 1236 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
  5. In Re: M/s. Goodwill Industrial Canteen – 2018 (9) TMI 1335 – AUTHORITY FOR ADVANCE RULING, TAMILNADU
  6. In Re : VPSSR Facilities – 2018 (5) TMI 904 – AUTHORITY FOR ADVANCE RULING – DELHI
  7. M/s. Mukesh Kalway Versus Commissioner of Central Excise, Bhopal – 2017 (3) TMI 615 – CESTAT NEW DELHI
  8. M/s Orient Bell Limited Versus Commissioner of Central Excise, Noida – 2017 (1) TMI 840 – CESTAT ALLAHABAD
  9. CCE, Delhi-III Versus M/s Suzuki Motorcycle India Private Limited (Vice-versa) – 2016 (9) TMI 576 – CESTAT CHANDIGARH
  10. M/s Lifelong Meditech Ltd. Versus CCE & ST, Gurgaon-II – 2016 (7) TMI 468 – CESTAT CHANDIGARH
  11. Reliance Industries Ltd. Versus Commissioner of CE & ST (LTU) , Mumbai – 2015 (11) TMI 100 – CESTAT MUMBAI
  12. M/s Mangalam Cement Ltd. Versus CCE & ST, Jaipur-I – 2015 (10) TMI 2524 – CESTAT NEW DELHI
  13. C.C.E. Meerut Versus M/s. Bajaj Hindustan Ltd. – 2015 (9) TMI 1216 – CESTAT NEW DELHI
  14. M/s HCL Technologies Ltd Versus C.C.E. Noida – 2015 (8) TMI 595 – CESTAT NEW DELHI
  15. M/s ISMT Ltd. Versus Commissioner of Customs And Central Excise, Aurangabad – 2015 (10) TMI 1540 – CESTAT MUMBAI
  16. M/s Mukand Ltd. Versus Commissioner of Central Excise, Belapur – 2015 (9) TMI 944 – CESTAT MUMBAI
  17. L’OREAL INDIA PVT. LTD. Versus COMMISSIONER OF C. EX., PUNE-I – 2010 (11) TMI 143 – CESTAT, MUMBAI
  18. Commissioner of Central Excise, Visakhapatnam Versus Hindustan Zinc. Ltd. – 2009 (4) TMI 129 – CESTAT, BANGALORE

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Ordnance Factory Bhandara (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA79/2018-19/B-168 dated 24.12.2018.

Brief Facts of the Case

  1. M/s. Ordnance Factory, Bhandara (hereinafter referred to as ‘Appellant’ or OFBa interchangeably) having its corporate head office at, Jawahar Nagar, Bhandara, Maharashtra – 441906 is a unit of Ordnance Factories Board (OFB) functioning under the Department of Defence Production and Supply of Ministry of Defence, Government of India. There are 41 Ordnance factories in India in total, each engaged in different activities like production of finished products and their parts relating to arms, ammunitions, explosives, military clothing, etc. Established in the year 1960, the main business of the Appellant is to manufacture propellants and commercial explosives for use by sister factories for production of finished products like arms and ammunitions, which are ultimately supplied to Indian defence and military forces. Thus, the Appellant acts as a feeder factory for goods such as explosives and propellants for its sister Ordnance Factories that use such goods for production of finished goods. However, some of the manufactured goods are also directly supplied to depots and units of defence and military forces, as per requirement. The Appellant also sells a small part of its manufactured goods to state police and private firms. Supplies to Defence Public Sector companies like Bharat Dynamics Ltd. etc. and defence laboratories like Defence Research & Development Laboratory are also there.
  2. The manufacturing process involves procurement of various raw materials from sister Ordnance factories and private entities. Majority of the purchase is from private entities. The output is then transferred to sister Ordnance factories/units of armed forces as per order. The consideration for transfer is fixed by OFB and is booked in the financial accounts of our organisation and the adjustment is done through book transfer. Money consideration is involved only for a small portion of the produce, where the goods are sold to units under Ministry of Home affairs. paramilitary forces like BSF, units of state police, defence PSU’s and private entities.
  3. The goods are sent in finished condition to proof establishments (such as PXE Balasore, CPF [tarsi] for testing purpose. Such proof establishments are located outside the factory premises across the country and they also function under the Ministry of Defence, Government of India. Such sample goods are destroyed during testing process. The value of the raw materials used in the supply goods are destroyed is included in the value of the finished goods that are manufactured & thus, included in the alue of taxable goods supplied.
  4. Apart from sale/transfer of manufactured goods. the factory also sells the scrap generated during the manufacturing process and other used and waste goods to private entities through auction process.
  5. Employees of the factory from all over tile country come down and reside in the factory estate to help run the factory and it is the obligation of the factory to provide them with residential quarters for accommodation and to maintain and upkeep their residential quarters along with maintenance of estate including playground, community hall, hospital, roads, school etc. Monthly License fee is collected from the employees in respect of such accommodation.
  6. There are 2 guest houses in the factory estate. Expenditure on maintenance of guest houses for stay of various pel sons visiting the factory is incurred by our organisation. Guest houses are used to provide accommodation services to various guests including employees on tour. Room charges are recovered from such guests for their stay on per day basis that are different for such different guest houses.
  7. The factory estate is huge and some portion of it has been let out on leasehold basis for commercial purposes like daily needs shops, banks, etc. Our organisation collects lease rentals from the tenants of such let out immovable property.
  8. Other ailied establishments like local accounts office & SQAE arc also functioning for the factory & within the factory. These organisations though a separate entity, they are units of the Central Government and function for OFBa. Local accounts office provides services related to accounting of transactions of OFBa. Payment of bills of OFBa etc. to OFBa & SQAE provides service related to quality control & checking of products of OFBa. The cost of salary & other expenses related to such allied establishments is included in the total cost of manufacturing of final products of OFBa &. thus, forms part of the value of taxable supply. Employees of such establishments are also provided residential quarter for accommodation and monthly license fees is collected from them in respect of such accommodation. The employee strength of such organisations is extremely small in comparison to the employee strength of OFBa.
  9. The whole of OFBa estate is divided into two parts-
  10. a) Factory premises.It consists of the factory where manufacturing activity is carried out & the administration building.
  11. b) Estate area:It consists or the area other than factory premises. Residential quarters of employees of OFBa and allied establishments, gardens, parks, playground, factory school for children of employees, hall for recreational activities, places of worship of God, market area, guest houses, school for children of employees, factory hospital & open land is included is included in such estate area
  12. Ordnance Factory Bhandara had sought Advance Ruling on eight questions mentioned below before the AAR, Maharashtra. Question no. 8 was withdrawn later on by Ordnance Factory Bhandara.

1) Being a part of the Ministry of Defence, Government of India, whether our organization Ordnance Factory Bhandara is liable to pay GST on the following supply of services: –

  1. a) Liquidated damages deducted from the payments to be made to suppliers incaseof delayed delivery of goods or services.
  2. b) Amount of Security deposit forfeited of suppliers due to non-fulfillment of certain contract conditions.
  3. c) Security deposit left unclaimed by the suppliers and recognized as income after 3 years.
  4. d) Food and beverages supplied at industrial canteen inside the factory premises.
  5. e) Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.
  6. f) School bus facility provided to children of the employees.
  7. g) Conducting exams for various vacancies.
  8. h) Rent recovered from residential quarters of employees.

2) Whether Input Tax Credit on expenditure on the goods and services consumed by our organisation in following activities shall be available: –

  1. a) Maintenance of garden inside the factory premises.
  2. b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.
  3. c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.
  4. d) Expenditure related to maintenance and upkeep of guest houses maintained by organisation.
  5. e) Expenditure related to purchase of LPG cylinders used within industrial canteen.

3) Whether the exemption to a ‘defence formation’ for preparation and generation of E-way bills is applicable to Ordnance factories & other Central Government & public sector Undertakings (PSU’s) that function under the Ministry of Defencc, Government of India?

4) Whether exemption on payment of GST on transport of ‘military or defence equipment through a goods transport agency applicable to goods transported by our organisation?

5) Whether Input Tax Credit is to be reversed on finished goods that are destroyed during testing?

6) Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues?

7) Being a part of the Ministry of Defence, Government of India, whether the following notifications are applicable to our organisation and what shall be the impact of such notifications: –

  1. a) Notification No. 2/2018-Central Tax (Rate), in relation to services by an arbitrator or an advocate to our organisation.
  2. b) Notification No. 3/2018-Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.
  3. c) Notification No. 36/2017 – Central Tax (Rate), in relation to payment of tax on reverse charge mechanism on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

8) Whether Input Tax Credit on services of passenger vehicles hired by our organisation is available?

Advance Ruling dated 24.12.2018 passed by AAR, Maharashtra

  1. The AAR passed theAdvance Ruling No. GST-ARA-79/2018-19/B-168 dated 24.12.2018 = 2019 (6) TMI 1236 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA in respect of the seven questions enumerated above, except the question no, 8, which was withdrawn by the Appellant later on from their advance ruling application itself.
  2. Aggrieved by the above rulings passed by the AAR, the appellant has preferred appeal in respect of questions 1,2,6 & 7 only on the basis of the grounds mentioned hereinunder:

Grounds of Appeal

  1. Appeal against ruling pronounced for question No. 1: –

The Question No. 1 that was asked for in Form ARA-01 is as follows: –Being a part of the Ministry of Defence, Government of India, whether our organization Ordnance Factory Bhandara is liable to pay GST on the following supply of services:

  1. a) Liquidated damages deducted from the payments to be made to suppliers incaseof delayed delivery of goods or services.
  2. b) Amount of Security deposit forfeited of suppliers due to non-fulfillment of certain contract conditions.
  3. c) Security deposit left unclaimed by the suppliers and recognized as income after 3 years.
  4. d) Food and beverages supplied at industrial canteen inside the factory premises.
  5. e) Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.
  6. f) School bus facility provided to children of the employees.
  7. g) Conducting exams for various vacancies.
  8. h) Rent recovered from residential quarters of employees.

All the above matters pertain to certain notifications that provide exemptions from payment of GST to “Central Government” on transactions specified in such notifications.

The ruling has not gone in favor of Ordnance Factory Bhandara in respect of all the matters raised from Sr. nos. a) to h) above except Sr. nos. c) & h). So, this appeal is against all Sr. nos. from a) to h) except Sr. nos. c) & h).

  1. The reason of such ruling not being pronounced in favor of Ordnance Factory Bhandara for the aforementioned matters is that the AAR, Maharashtra has failed to recognize Ordnance Factory Bhandara as “Central Government”. This failure is despite the fact that it was clearly mentioned in the application to AAR, Maharashtra, that Ordnance Factory Bhandara is “Central Government” on the following grounds: –

“As per section 2(53) of the CGST Act, 2017, ‘Government’ means the Central Government. As per clause (23) of section 3 of the General Clauses Act, 1897 the ‘Government’ includes both the Central Government and any State Government. As per clause (8) of section 3 of the said Act, the ‘Central Government’, in relation to anything done or to be done after the commencement of the Constitution, means the President. As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officer subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.”

  1. The aforementioned definition & explanation of “Central Government” has been extracted from FAQ’s on Government Services issued by the CBIC under the sectoral series on GST. Question No. 3 of such FAQ’s issued by CBIC deals with the question – What is the meaning of “Government” and the aforementioned Para has been provided as an answer to such question.
  2. It is pertinent to note here that Ordnance Factory Bhandara is an organisation under the Ordnance Factories Board(OFB) functioning under the Department of Defence Production and supply, Ministry of Defence, Government of India.Ordnance Factory Board (OFB)consisting of the Indian Ordnance Factories, is an industrial organisation, functioning under the Department of Defence Production of Ministry of Defence, Government of India. It is engaged in research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems. OFB comprises of forty-one Ordnance Factories, nine Training Institutes, three Regional Marketing Centres and four Regional Controllerates of Safety, which are spread all across the country. OFB is the world’s largest government-operated production organisation, and the oldest organisation run by the Government of India. It has a total workforce of about 164,000. It is often called the “Fourth Arm of Defence”, and the “Force Behind the Armed Forces” of India. OFB is the 37th largest defence equipment manufacturer in the world, 2nd largest in Asia, and the largest in India. Ordnance Factory Bhandara is a manufacturer of Propellants and Explosives for use by sister factories for production of finished products like arms and ammunitions that are ultimately supplied to Indian defence and military forces. Thus, Ordnance Factory Bhandara majorly acts as a feeder factory for goods such as explosives and propellants for its sister Ordnance Factories that use such goods for production of finished goods.
  3. Going by the industrial nature of Ordnance Factory Bhandara & having an apex body in the Ordnance Factory Board, the legal opinion of the Department was that Ordnance Factory Bhandara cannot be treated as “Government” defined under section 2(53) of the CGST Act, 2017. Such opinion of the Department was accepted by the AAR, Maharashtra & it ruled that Ordnance Factory Bhandara cannot be treated as “Government” since Ordnance Factory Bhandara is not created by the constitution of India as a legislative, executive or judicial authority of the country.
  4. It seems that the AAR, Maharashtra has not properly analyzed the meaning of “Government”. It has contended that Ordnance Factory Bhandara is not “Government” since it is not created by Constitution of India as a “legislative, executive or judicial authority” of the country. However, AAR, Maharashtra did not take cognizance of the fact that the Constitution of India need not “create” the organisations intended for functioning of the country. The Constitution only lays down the framework demarcating fundamental political code, structure, procedures, powers, and duties of government institutions and sets out fundamental rights, directive principles, and the duties of citizens. The responsibility & decision of formation of organisations like Ordnance Factory Board & the associated Ordnance Factories under the Board is of the Union Government of India. The executive power of the Union Government is vested in the President.

Thus, it becomes necessary to re-iterate the following: –

“As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.”

  1. AAR, Maharashtra has ruled that Ordnance Factory Bhandara is not “Government” since it is engaged in research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems and is having an industrial status and functions under Ministry of Defence.
  2. Kindly note that such ruling is not proper in our knowledge. Nowhere under law is it mentioned that “Government” cannot undertake activities relating to “research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems”. “Having an industrial status” is the result of the nature of activities carried out by Ordnance Factory Bhandara and “functioning under the Ministry of Defence and being controlled by an apex body (Ordnance Factory Board)” is a result of the organizational structure put in place to govern the functioning of Ordnance Factories. So, these aspects should not be taken into consideration while analyzing whether Ordnance Factory Bhandara is “Government” or not as they are totally irrelevant.
  3. The only important factor to be analyzed is that whether Ordnance Factory Bhandara falls into the definition of “Central Government” as per the aforementionedclause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India.

“As per clause (8) of section 3 of the General Clauses Act, 1897, the ‘Central Government’, in relation to anything done or to be done after the commencement of the Constitution, means the President. As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officer’s subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.”

  1. Thus, from a joint reading of all the above, it becomes quite obvious that “Central Government” is one where the President exercises the executive powers by himself or the officers subordinate to the President exercise the executive powers of the Union vested in the President in the name of the President.
  2. It is pertinent to note here that all the powers provided to Ordnance Factory Bhandara’s officers and decisions taken in Ordnance Factory Bhandara are on behalf of the President of India. Even the recruitments in the Indian Ordnance Factories as a Group A gazetted officers are made through union public service commission on behalf ofPresident of India.
  3. Ordnance Factory Board Procurement Manual is a manual issued by the Ordnance Factory Board for procurement Of stores for production in Ordnance Factories. This has been finalized by MOD in consultation with Integrated Defence Finance and has the approval of Hon’ble Raksha Mantri.

Para 7.12 of the “Ordnance Factory Board Procurement Manual” states that-

“The parties to the contracts into by ordnance factories are the President of India as the purchaser, acting through the authority signing the contract/ agreement/ purchase order etc., and the supplier named in the contract.”

Para 7.25 of the “Ordnance Factory Board Procurement Manual” states that-

“All defence contracts are in the name and on behalf of the President of India.”

Para 14 of Annexure-2 of the “Ordnance Factory Board Procurement Manual” defines the term purchaser as follows-

  1. Purchaser:The President of India acting through the Authorityissuing the purchase/supply orders or signing the Contracts/Memo of Understanding/Agreements is the Purchaser in all cases of procurement on behalf of the Government of India.

Enclosed herewith is a copy of a Supply Order placed on a vendor wherein it can be seen that the Supply Order has been placed on & -signed on behalf of the President of India by the concerned officer of Ordnance Factory Bhandara.

Also enclosed is an appointment letter of an officer of Ordnance Factory Bhandara, wherein it can be seen that the recruitment has been done on behalf of the President of India. Thus, to summarize, all the executive functions of Ordnance Factory Bhandara like recruitment, procurement etc. are done on behalf of the and in the name of the President of India while exercising the executive powers of the Union vested in the President. Thus, Ordnance Factory Bhandara is not merely a Government organization, it is “Central Government” itself since as explained above, it satisfies the conditions of being called “Central Government” as per the aforementioned clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 oi the Constitution of India.

  1. It is pertinent to mention here that the order-in-appeal did not counter such definition & explanation of “Central Government” in detail whereas similar proofs that Ordnance Factory Bhandara is a “Central Government” were provided to AAR, Maharashtra during hearing proceedings.
  2. Kindly also take note of the fact that the AAR, Maharashtra during hearing proceedings had orally agreed to on the basis of the facts of thecasethat Ordnance Factory Bhandara is “Central Government”. However, it ruled to the contrary in its final order.
  3. Also, AAR, Maharashtra should have clearly spelt out the status of Ordnance Factory Bhandara in its order, that is, if AAR, Maharashtra ruled that Ordnance Factory Bhandara is not “Government”, then what should be the status of Ordnance Factory Bhandara as AAR, Maharashtra should have mentioned in its order which was not so done.
  4. It is worth mentioning here that the PAN of Ordnance Factory Bhandara is also a proof of the legal status of Ordnance Factory Bhandara. The PAN of Ordnance Factory Bhandara is “AAAGG0001Q”, that is, the 4thletter of the PAN is “G” which stands for “Government.” Accordingly, the constitution of business as mentioned in GST registration of Ordnance Factory Bhandara is “Government Department.”
  5. Also, worth mentioning here is an appeal filed in the office of the Hon. Commissioner (Appeals), Customs, Central Excise & GST, Nagpur by Ordnance Factory Bhandara against the order-in-original of Assistant Commissioner, CGST and Central Excise, Division – Bhandara reiating to erstwhile law of Service Tax. Para no. 19 of the order-in-appeal (that is enclosed herewith) of the Hon. Commissioner (Appeals), Customs, Central Excise & GST, Nagpur bearing order no. NGP/EXCUS/000/APPL/367/18-19/2544 dtd. 28/12/2018, relying upon the facts of thecasestated that-

“As regards the imposition of penalty, I find that the appellant is a Govt. of India organization working under the Ministry of Defence. As per the various judgments of the judicial forums, mens rea cannot be attributed to a Govt. body and hence I feel that no penalty is imposable on the appellant.”

Thus, the order-in-appeal of the Hon. Commissioner (Appeals) treats Ordnance Factory Bhandara to be a Govt. body, which is a further proof in our claim that Ordnance Factory Bhandara is “Government.”

  1. Kindly also note that a certificate was issued by the Jt. Secretary, Ministry of Defence, Department of Defence Production dtd. 18/04/2006 for Sales Tax purposes in which it was stated as follows: –

“It is certified that the Indian Defence Forces and Indian Ordnance Factories are integral part of the Ministry of Defence, Government of India. Funds for meeting the expenditure on salaries and wages, stores etc. are drawn from the Defence Services Estimates of the Union Budget.”

Thus, it can be seen from the above that the Ministry of Defence has certified that Indian Ordnance Factories are integral part of the Government of India which in other words means that Ordnance Factory Bhandara is “Government” for all practical purposes.

In light of all of the above, the appeal against the ruling pronounced for the subquestions in Question No. 1 is as follows: –

  1. Being a part of the Ministry of Defence, Government of India, whether our organisation Ordnance Factory Bhandara is liable to pay GST on the following supply of services: –
  2. a) Liquidated damages deducted from the payments to be made to incaseof delayed delivery of goods or services: –

Ordnance Factory Bhandara deducts liquidated damages (L.D) from the payments to be made to its suppliers in case of delayed delivery of goods or services. As per para 5(e) of Schedule Il to the CGST Act, 2017, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” is an activity that shall be treated as a supply of service.

However, Sr. No. 62 of the exemption list on supply of services as per notification no. 12/2017- Central tax (Rate)(enclosed herewith) specifies that, “Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract” shall attract NIL rate of tax. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”. However, as explained above, Ordnance Factory Bhandara is “Central Government” and hence the aforementioned exemption in respect of payment of GST to “Central Government” on services provided by it by way ot tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government should be applitable to Ordnance Factory Bhandara and hence Ordnance Factory Bhandara need not pay GST on the Liquidated Damages deducted from the payments to be made to suppliers in case of delayed delivery of goods or services.

  1. b) Amount of Security deposit forfeited of suppliers due to non-fulfillment of certain contract conditions: –

Ordnance Factory Bhandara also forfeits security deposit of its suppliers due to non-fulfillment of certain contract conditions. Such forfeiture though not in the form of L.D, it can be considered as a form of ‘fine’ that is recovered from suppliers’ dues in the form of forfeiture of their deposit. Thus, exemption as per aforementioned Sr. No. 62 of the exemption list on supply of services as per notification no. 12/2017- Central tax (Rate) should be applicable on such forfeiture of deposit and hence Ordnance Factory Bhandara need not pay GST on the Liquidated Damages deducted from the payments to be made to suppliers in case of delayed delivery of goods or services as Ordnance Factory Bhandara is “Central Government”. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. c) Security deposit left unclaimed by the suppliers and recognised as income after 3 years: –

No appeal is preferred against the ruling prescribed in sub-question c) of Question No. 1.

  1. d) Food and beverages supplied at industrial canteen inside the factory premises: –

As per Clause 6 of Schedule II to the CGST Act, 2017, “supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration” shall be treated as a supply of services. There is an industrial canteen inside the factory premises that serves food and beverages to employees of the factory. Neither is alcoholic liquor served in the industrial canteen nor is the industrial canteen air conditioned. Nominal charges for such food and beverages are recovered from. the employees on no profit basis in order to cover the day-to-day expenditure of the canteen. Such industrial canteen is run by the factory itself and no outdoor caterer is involved in providing services related to supply of food and beverages. Thus, such supply of food and beverages by the factory to factory employees inside the industrial canteen falls within the category of ‘services’ as per the aforementioned clause 6 of Schedule II to the CGST Act, 2017. However, in terms of the aforementioned Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central Tax (Rate), supply of services by the Central Government to non-business entities attract ‘NIL’ rate of tax. Thus, since such supply of food and beverages is done to factory employees that are non-business entities, the charges recovered by the factory from such employees for such supply attracts ‘NIL’ rate of tax since Ordnance Factory Bhandara is “Central Government” as explained above. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. e) Community hall provided on rental basis to employees of the factory:

There is a community hall within the factory estate that is let to be used by the factory to its employees for their personal purposes like family gatherings, marriages, other social functions etc. Charges in terms of monetary consideration are recovered by the factory from its employees in lieu of such use. As per clause (zz) of the definitions contained in notification no. 12/2017Central tax (Rate), “Renting in relation to immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property. Thus, the service provided by the factory to its employees for letting them use cultural hall for their personal purposes falls within the definition of “Renting in relation to immovable property”. However, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central tax(Rate), such services provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services(factory employees) are non-business entities. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”

  1. f) School bus facility provided to children of the employees:

Ordnance Factory Bhandara provides the service of pick and drop of the children of its employees from school located outside the factory via bus owned by the factory. Charges in terms of monetary consideration are recovered by the factory from its employees in lieu of such service provided to them. So, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017-Central tax(Rate), such services provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services(factory employees) are non-business entities. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. g) Conducting exams for various vacancies in the factory:

For conducting examinations to fill up various staff vacancies in Ordnance Factory Bhandara, it collects fees from the candidates who wish to appear in such examinations. So, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central tax (Rate), such services of conducting examinations provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services(candidates) are nonbusiness entities. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. h) Rent recovered from residential quarters of employees:

No appeal is preferred against the ruling prescribed in sub-question h) of Question No. 1.

  1. Appeal against ruling pronounced for Question No. 2:-The Question No.2 that was asked for in Form ARA-01 is as follows: –

Whether Input Tax Credit on expenditure on the goods and services consumed by our organisation in following activities shall be available:

  1. a)Maintenance of garden inside the factory premises.
  2. b)Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.
  3. c)Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.
  4. d)Expenditure related to maintenance and upkeep of guest houses maintained by organisation.
  5. e) Expenditure related to purchase of LPG cylinders used within industrial canteen.

The AAR, Maharashtra ruled that Input Tax Credit on all of the above shall not be available to Ordnance Factory Bhandara except sub-question e), that is, expenditure related to purchase of LPG cylinders used within industrial canteen.

The explanation that AAR, Maharashtra gave for denying such credit was that the goods/services used in such activities are not used or intended to be used by Ordnance Factory Bhandara in furtherance of its business.

  1. Input Tax Credit in relation to sub-question e), that is, expenditure related to purchase of LPG cylinders used within industrial canteen was allowed by AAR, Maharashtra on the pretext that the output supply of food and beverages to employees in industrial canteen is taxable.
  2. We wish to counter the ruling of AAR, Maharashtra denying the Input Tax Credit on such activities on the following grounds:

The basic question that is being asked here is that whether the following goods/services received by the factory are covered under the definition of “input” and “input services” as per section 2(59) & 2(60) of the CGST Act, 2017 respectively & whether such goods/services can be considered to be falling within the scope of “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017 so as to entitle Ordnance Factory Bhandara to avail Input Tax of the said goods/services. It is worthwhile to note here that Hon. Finance Minister of India stated at paragraph 5(b) of the Statement of Objects & Reasons while introducing the Central Goods & Services Tax (“CGST”) Bill, 2017 in the Parliament as under: –

“5. The Central Goods and Services Tax Bill, 2017, inter alia, provides for the following, namely: –

(b) to broad base the input tax credit by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business.”

Hence a clear intent to broad base the input tax credit is evident from the above. Also, the term “used or intended to be used in the course or furtherance of business” has been used to expand the scope of inputs & input services to those activities that have some direct or indirect nexus to business of the supplier.

  1. So, it requested to the Hon. Appellate Authority for Advance Ruling to decide upon the admissibility of Input Tax Credit in relation to the following services keeping in view the aforementioned intention of the Hon. Finance Minister of broadening the Input Tax Credit base. Even in the erstwhilelawsrelating to Excise Duty & Service Tax, the essential requirement of a service to be considered as “Input Service” for availing CENVAT Credit of the same as per Rule 2(1) of the CENVAT Credit Rules, 2004, was that such service should be used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. There is a plethora of decisions by various High Courts &various benches of Tribunal (CESTAT) in which it was adjudged that CENVAT Credit of Service Tax in relation to the following services was allowable on the pretext that such services were used by the manufacturer, whether directly or indirectly, in or in relation to the business of manufacture of final products.

In the case of Coca Cola India Pvt. Ltd. vs. CCE reported in 2009 = 2009 (8) TMI 50 – BOMBAY HIGH COURT, a Division Bench of the Hon. Bombay High Court held that the expression ‘activities in relation to business’ in the inclusive part of the definition of ‘input service’ further widens the scope of input service so as to cover all services used in the business of manufacturing the final products and that any service used in relation to the business of manufacturing the final product would be an eligible input service for availing CENVAT Credit. It was also held that the cost of any input service that forms part of value of final products would be eligible for CENVAT credit. Thus, it can be construed to mean from such decision that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable. Therefore, applying the same logic, in the GST regime, the said following services can be said to be satisfying the twin necessities for availing Input Tax Credit of GST in respect of expenditure on the said services; that is “input services” and “used or intended to be used in the course or furtherance of business” since as per section 2(17) of the CGST Act, 2017, the term “business” includes ‘manufacture”. In fact, the scope of availing Input Tax Credit has been further widened under the GST regime to include all inputs and input services used in the course or furtherance of business vis-a-vis erstwhile CENVAT Credit Rules where admissibility of CENVAT Credit was restricted to input services used directly or indirectly, in or in relation to manufacture of final product.

  1. a)  Maintenance of garden inside the factory premises: –

Here ‘factory premises’ means plant area where manufacturing activity is carried out and administrative building. The services of maintenance & upkeep of gardens that are located within the factory premises should be considered to be an “input service” as per section 2(60) of the CGST Act, 2017 and should also be considered to be “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017 and Input Tax Credit should be available in respect of expenditure done on such services on the following counts:-

  1. i) Gardening is essential & mandated by Maharashtra Pollution Control Board to maintain quality of ambient air & prevent air& water pollution and also a condition precedent as laid down by the said Board, without which Ordnance Factory Bhandara cannot resort to its business activity of manufacturing.
  2. ii) Garden creates better atmosphere and environment which increases working efficiency and thus its maintenance is essential in the course of business for better running & furtherance of business.

iii) Cost of such ‘gardening expenses’ forms part of the cost of the final products and thus forms part of the value of taxable supply.

  1. iv) Reliance is placed on the following judicial pronouncements of the Tribunal (CESTAT) & various High Courts, wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to maintenance & upkeep of gardens in the factory: –

In M/s. Rane TRW Steering System Ltd. vs The Commissioner of Central Excise and Central Tax (2018), the Hon. Madras High Court = 2018 (2) TMI 1745 – MADRAS HIGH COURT held that garden maintenance service would fall within the definition of input service, in terms of Rule 2 (l) of the Cenvat Credit Rules, 2004.

In Mukand Ltd’s case Vs. Commissioner of Central Excise, Belapur {2016 (42) STR 88 (Tri-Mumbai)} = 2015 (9) TMI 944 – CESTAT MUMBAI, it was held by the Hon. Tribunal that the credit on ‘gardening expenses’ is fully allowable as the same is required for maintaining the good atmosphere in the manufacturing area and also a condition precedent as laid down by the State Pollution Control Board, without which the appellant cannot resort to manufacturing Activity.

In HCL Technologies Ltd., Vs. Commissioner of Central Excise, Noida {2015 (4) STR 369 (Tri-Del) = 2015 (8) TMI 595 – CESTAT NEW DELHI, it was held by the Hon. Tribunal that Garden Maintenance Services qualify as input services.

In Lifelong Meditech Ltd., Vs. Commissioner of Central Excise and Service Tax, Gurgaon II {2016 (44) STR 626 (Tri-Chan)} = 2016 (7) TMI 468 – CESTAT CHANDIGARH, it was held by the Hon. Tribunal that “horticulture services are directly related to the manufacturing activity by the appellant as without maintaining the garden, the appellant cannot run their factory. Therefore, I hold that the appellant is entitled to avail CENVAT Credit for horticulture services.’

In M/s, Orient Bell Ltd., Vs. Commissioner of Central Excise, Noida, reported in 2016 SCC Online CESTAT, 7923 = 2017 (1) TMI 840 – CESTAT ALLAHABAD, it was held by the Hon. Tribunal that so far as garden maintenance is concerned, the same is input service as it is a pollution control requirement and improves the aesthetics and overall atmosphere and thus is an expenditure in or in relation to manufacture.

In Commissioner of Central Excise, Delhi III, Suzuki Motor Cycle India Private Limited {2017 (47) STR 85 (Tri-Chan) = 2016 (9) TMI 576 – CESTAT CHANDIGARHit was held by the Hon. Tribunal that the assessee is entitled to avail the credit of gardening service.

All the aforementioned arguments and case laws were presented before the AAR, Maharashtra. Even the Department agreed to the admissibility of such Input Tax Credit on maintenance of garden inside the factory premises in its legal submission to AAR, Maharashtra. However, AAR, Maharashtra ruled that “maintenance of garden is not a supply that can be considered as a supply used or intended to be used in the course of furtherance of business of the applicant which is to manufacture Propellants and Explosives. Hence the applicant is not eligible to avail ITC of the tax paid by them on the same. The services availed in relation to plantation and gardening within the plant area will not qualify for Input Tax Credit. {n an appeal filed by the Commissioner of Commercial Taxes and GST, Odisha against an order of the AAR, Odisha, the Hon. AAAR, Odisha held that availing input tax credit for services in relation to plantation and gardening within the plant area, including mining area and the premises of other business establishments is allowed. Thus, it is our contention against the order of AAR, Maharashtra that availment of Input Tax Credit in relation to maintenance of garden inside the factory premises should be allowed.

  1. b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities! residential quarter buildings of employees roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate: –

As explained above, the term ‘factory estate’ has been used to describe the area that falls within the boundaries of Ordnance Factory Bhandara and are so controlled by Ordnance Factory Bhandara but such area is outside the precincts of the area where factory & administrative building is there. Such area comprises of establishments such as residential quajters of employees of Ordnance Factory Bhandara & allied organisations, market area, places for worship of God, shops that are given on lease rental basis for commercial purposes, gardens, parks, playgrounds, swimming pool, factory school for children of employees, hall for recreational activities, footpaths, street lightings, inter-connected roads between all such establishments and factory premises and land that is currently not used for any purpose whatsoever.

The services of maintenance, upkeep, repair, housekeeping, cutting of trees & grass, civil construction, hiring of manpower for attending school bus, security services, garbage collection, sewage treatment, sweeping &cleaning etc. procured in relation to such establishments within the factory estate should be considered to be an “input service” as per section 2(60) of the CGST Act, 2017 and should also be considered to be “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017. Thus, input Tax Credit should be available in respect of expenditure done on such services in so far as they are not disallowed under any other provisions of the CGST Act, 2017. Let us analyze each establishment one by one for admissibility of Input Tax Credit: –

  1. i) Residential quarters of employees of Ordnance Factory Bhandara & allied organisations market area, places for worship of God, gardens, parks, playgrounds, swimming pool, footpaths, street lightings, factory school for children of employees, hall for recreational activities: –

Services like maintenance, upkeep, repair, providing security, garbage collection, sewage treatment, civil construction, sweeping & cleaning etc. are procured in relation to the aforementioned establishments. The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure A”. We wish to submit that all such services are used by the employees of the factory. The Ordnance Factory Board decided to develop such residential facilities within the factory estate since the factory is located at a remote area and employees from different parts of the country are recruited to work over here in Ordnance Factory Bhandara. The residential colony is an l industrial township’ and the appellant is responsible to provide all types of municipal services in the colony. If the employees are not provided a proper residential colony with all the aforementioned facilities and establishments, there would be no availability of proper staff and labor required for continuous manufacturing activities. Thus, such services procured in relation to such establishments are necessary for furtherance of business of our organization since these services help in maintaining the basic living standard of the employees who in turn are responsible for running the day-to-day business of the factory. Cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply. Reliance is placed on the following judicial pronouncements of various High Courts & Tribunals wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to services procured in relation to residential colony for the employees:

In the case of CCE vs ITC Ltd. in the year 2012 = 2011 (11) TMI 516 – ANDHRA PRADESH HIGH COURT, the Hon. Andhra Pradesh High Court held that CENVAT credit of service tax paid on the taxable services used in the residential complex shall be available to the manufacturer. The relevant paragraph of the said judgment is extracted herein below.

“The Commissioner’s Order-in-Appeal dated 27-5-2008 reflects that he accepted that the efficiency of the employees of an organization would be dependent on various factors, one such being the provision of a housing colony. He further conceded that these facilities would contribute to the enhancement of the productivity of the organization. Having stated so, the appellate authority surprisingly took the view that maintenance of the residential colony by the respondent-Company was only an obligatory activity owing to situational exigencies and was not connected either directly or indirectly to the manufacture of its final products. This inherent contradiction in the Order-in-Appeal was noted by the CESTAT, which opined that if accommodation was not provided by the respondent-Company to its employees at this remote location, it would not be feasible for it to carry on its manufacturing activity. The finding of the Commissioner that providing a colony to the employees was not directly or indirectly connected with the manufacturing activity of the respondent-Company was therefore, not borne out on facts. The staff colony, provided by the respondent-Company, being directly and intrinsically linked to its manufacturing activity could not therefore, be excluded from consideration. Consequently, the services which were crucial for maintaining the staff colony, such as lawn mowing, garbage cleaning, maintenance of swimming pool, collection of household garbage, harvest cutting, weeding, etc., necessarily had to be considered as ‘input services’ falling within the ambit of Rule 2(1) of the CENVAT Rules, 2004.”

In the case of MANGALAM CEMENT LTD VERSUS COMMISSIONER OF C. EX. & S.T., JAIPUR-I = 2015 (10) TMI 2524 – CESTAT NEW DELHI, the Hon. Delhi bench of Tribunal held that the residential colony was constructed adjacent to the factory because of the reason that the factory manufacturing cement is located at a place which is away from the city. Unless the residential colony is constructed near the factory, the appellant will not be in a position to get the proper/adequate manpower for running its plant activities and thus set aside the order passed by the Id. Commissioner (Appeals) of denying CENVAT credit of service tax taken by the appellant on maintenance and repair work of their residential colony.

In the case of CCE Meerut Vs. M/s. Bajaj Hindustan Ltd. = 2015 (9) TMI 1216 – CESTAT NEW DELHI, the dispute was in relation to allowance of CENVAT Credit of Service Tax paid on construction services to the respondent for construction of residential colony/dormitory located in the precinct of the factory. The Hon. New Delhi bench of the Tribunal held that construction of residential colony/dormitory adjacent to the factory premises was the necessity because of the location of the factory in a remote area, where if the accommodation is not provided to staff/workers, the continuous/round the clock manufacturing activity will hamper. Further, the cost towards such construction has also been considered as expenditure in the books of accounts of the respondent. Therefore, such construction activity was held to be relation to the business of the respondent and therefore CENVAT Credit was allowed in relation to such services.

In the case of Reliance Industries Ltd. vs CCE & ST, Mumbai = 2015 (11) TMI 100 – CESTAT MUMBAI, the dispute was in relation to allowance of CENVAT Credit of Service Tax in respect of services like construction services, repairs and maintenance services, security service, manpower recruitment and supply services, works contract services etc. It was noticed by the lower authorities that these services on which credit was availed of service tax paid were received in their residential township constructed for the employees. It was held by the Mumbai Bench of the Tribunal that the expenses which were incurred by the appellant for the setting up of the township/colony for their employees are expenses which are in relation to the business activity of the appellant which is manufacturing of petroleum products. It was also noted that while arriving at the price of the finished goods manufactured in these factory premises, appellant has considered the expenses incurred towards the residential township/colony as expenses and included the same while arriving at the cost of production of the final products manufactured in the factory premises and accordingly CENVAT Credit was allowed in relation to such services.

(ii) Shops that are given on rental basis for commercial purposes: –

In general, services related to establishment, repair and maintenance of such shops is procured. Such shops are used for commercial purposes & commercial lease rent is recovered from the tenants of such shops on which GST is collected by Ordnance Factory Bhandara. Thus, the Input Tax Credit related to such services in relation to such shops should be admissible as such expenditure is directly related to the business of renting of immovable property unless otherwise blocked under any other provisions of the CGST Act, 2017.

(iii) Inter-connected roads between various establishments and facto premises: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure B”. In general, services related to construction, repair and maintenance of such roads is procured. Roads connect the various establishments within the factory premises; that is factory where manufacturing activity is done and administration building with various other establishments within the factory estate like residential quarters, market area and other establishments mentioned above. Thus, the Input Tax Credit related to expenses mentioned in “Annexure B” in relation to such interconnected roads should be admissible on the following grounds:

  1. a) The road ranging from the main entrance gate from where the factory estate begins up to the factory premises is used for inward and outward transportation of raw materials & finished goods and is thus used in the course or furtherance of business.
  2. b) The roads within the factory estate; that is the establishments like residential quarters, hospital, guest houses, market area and all other establishments as mentioned above are also used for the purpose of business of Ordnance Factory Bhandara since as argued above all such establishments are there for the benefit of employees of the factory& thus such roads are used in the course of business of Ordnance Factory Bhandara.
  3. c) The cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply.

(iv) End that is currently not used for any purpose whatsoever: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure C”. In general, services related to maintenance of such land are procured. Such land is located within the factory estate and consists of mainly wild grass, trees & other vegetation. It is adjacent to the roads that are used for commutation. Input Tax Credit related to expenses mentioned in “Annexure C” in relation to such land should be admissible on the following grounds:

  1. a) It is necessary to cut wild grass & other vegetation that grows in such area on regular basis in order to maintain the factory estate area neat & clean and ensure that such vegetation does not spill over to and obstruct the roads used for commutation within the factory.
  2. b) Another reason is that such wild grass & other vegetation increases the bacteria count in the environment, factory and finished product that adversely affects the manufacturing process & the quality of the final product & the environment and hence it is necessary to maintain such wild grass & other vegetation.
  3. c) The cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply.
  4. d) Reliance is placed on the following judicial pronouncement of the Tribunal (CESTAT), wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to jungle cutting services to keep environment, factory and finished product bacteria free: –

In the case of L’Oreal India Pvt. Ltd. vs. CCE (2011) 22 STR 89 (Tri. – Mum.) = 2010 (11) TMI 143 – CESTAT, MUMBAI, the Hon. Mumbai bench of the Tribunal held that CENVAT credit of service tax paid on jungle cutting services to keep environment, factory and finished product bacteria free are to be allowed as they have nexus with business activity of Appellant.

All the aforementioned arguments and case laws were presented before the AAR, Maharashtra.

However, the AAR, Maharashtra ruled that “the activities listed by the applicant are carried out outside the factory premises. These activities at best can be termed as welfare or social activities and they are not carried out in furtherance of the business and have no nexus to their manufacturing activity. Since these activities are not used or intended to be used by the applicant in furtherance of business, ITC on the same are not available to them.”

We wish to appeal against such ruling of AAR, Maharashtra based on the aforementioned arguments and case laws and contend that availment of Input Tax Credit on maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate should be allowed.

  1. c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure D”. Hospital is run by Ordnance Factory Bhandara and is also located within the factory estate but outside the precincts of the area where factory & administrative building is there. The medicines and other facilities are provided to employees of the factory without any consideration. Input Tax Credit on the inputs like medicines and others mentioned in “Annexure D” purchased by the factory for the hospital and expenditure on maintenance, upkeep and other activities also mentioned in “Annexure D” relating to such hospital should be admissible on the following grounds: –

  1. i) Hospital helps in keeping the employees fit and healthy, so that they can contribute for furtherance of business of Ordnance Factory Bhandara.
  2. ii) As a part of welfare measure, it is necessary to provide the employees basic medicinal facilities within the factory estate itself since the factory is located at a remote location.

iii) Cost of such medicines and expenditure on maintenance, upkeep and other activities relating to such hospital forms part of the cost of the final products and thus forms part of the value of taxable supply.

  1. iv) Reference to the judicial pronouncements mentioned in above questions can be drawn in so much so that hospital has been set up for the benefit of the employees and it too forms a part of residential colony of Ordnance Factory Bhandara.

All the aforementioned arguments and case laws were presented before the AAR, Maharashtra.

However, the AAR, Maharashtra ruled that – “we find that hospital/dispensary maintained by the applicant for its employees and their dependents come within the definition of “clinical establishment” as defined under the said Notification at definition mentioned at Sr. No. 2(s) and such supply of service is exempted under Sr. No. 74, heading 9993 of the Notification No. 12/2017- Central Tax(Rate) dated 28th July, 2017. Thus, ITC on such exempted supply of services is not available to applicant under sub-section (2) of Section 17 of the CGST Act, 2017 in respect of services and goods procured for maintenance of hospitals and pharmacy outlet as such services, being nil rated, fall under exempt supplies.”

Kindly also note that as per section 9 of the CGST Amendment Act, 2018, that is in force from 01/02/2019, an amendment in section 17(5) (b) of the principal CGST Act, 2017 has been brought about where input tax credit shall not be available in respect of supply of health services except where the same is obligatory for an employer to provide to its employees under any law for the time being in force.

It is submitted that as per Ordnance Factory Medical Regulations, it is mandatory for Ordnance Factories to provide occupational health services through Factory Hospital.

Thus, as per the amended section 17(5) (b) of the principal CGST Act, 2017, Input Tax Credit in respect of medicines purchased in factory hospital and other inputs and input services used in factory hospital should be allowed since such inputs and input services are used in respect of supply of health services to employees and their families that are mandatory to be provided under Ordnance Factory Medical Regulations.

We wish to appeal against such ruling of AAR, Maharashtra based on the aforementioned arguments and case laws and contend that availment of Input Tax Credit on medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents and expenditure on maintenance, upkeep and other activities relating to such hospital should be allowed.

  1. d) Expenditure related to maintenance and upkeep of guest houses maintained by organization: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure E”. Guest houses are run by Ordnance Factory Bhandara and is also located within the factory estate but outside the precincts of the area where factory & administrative building is there. Guest houses are used to provide accommodation services to various guests including employees on duty/deputation. Room charges are recovered from such guests for their stay on per day basis that are different for such different guest houses. So, inward supply of inputs and input services that are used for maintenance and upkeep of such guest houses should also be considered to be for the purpose of furtherance of business of Ordnance Factory Bhandara and Input Tax Credit should be admissible on the following grounds:

  1. i) Such guests visit Ordnance Factory Bhandara for various purposes that are related to business of our organisation and thus such guest houses are used in the course or furtherance of business of Ordnance Factory Bhandara.
  2. ii) The management, maintenance and repair service obtained from the service providers in respect of guest houses has direct benefit to the business operations of the factory & has thus direct nexus with the core business of the factory.

iii) Cost of such inputs and input services relating to such guest houses forms part of the cost of the final products and thus forms part of the value of taxable supply.

  1. iv) Reliance is placed on the following judicial pronouncement of the Tribunal (CESTAT), wherein it was adjudged that CENVAT Credit of Service Tax was allowable on various expenditure related to guest houses maintained by the assessee: –

In the case of ISMT LTD. VERSUS COMMR. OF CUS. & C. EX., AURANGABAD [2015 (40) S.T.R. 596 (Tri. – Mumbai)] = 2015 (10) TMI 1540 – CESTAT MUMBAIit was held that security service provided to the guest house in the factory is admissible input service since guest house is used for the stay of employees and auditors which has direct nexus with factory which produces excisable goods therefore CENVAT credit is admissible to the appellant.

In the case of L’Oréal India Pvt. Ltd. Vs. Commissioner of C. Ex., Pune-l [2011 (22) S.T.R. 89 (Tri.- Mumbai)] = 2010 (11) TMI 143 – CESTAT, MUMBAI, it was held that the appellant is eligible for credit of guest house maintenance services since such services have nexus or integral connection with the business of manufacturing of the final product.

In the case of Commissioner of C. Ex., Visakhapatnam Vs. Hindustan Zinc Ltd. [2009 (16) S.T.R. 704 (Tri. – Bang.)] = 2009 (4) TMI 129 – CESTAT, BANGALORE, it was held that Guest House is used for businessmen during visit to the company in connection with the business. It is indeed related to business activity. The appellants are rightly entitled for credit.

All the aforementioned arguments and case laws were presented before the AAR, Maharashtra.

However, the AAR, Maharashtra ruled that – “we find that provision of guest houses is a perquisite for their employees and therefore tax paid on maintenance and upkeep of guest houses cannot be allowed as ITC. Guest houses are generally used for temporary accommodation of employees as well as outsiders, such provision of guest house cannot be treated as an activity in course or furtherance of-its business and related to the applicant’s business. Further, we’ find that the goods, or services, or both pertaining to Guest House are used for personal consumption of the employees/guests and are not used or intended to be used in the course of furtherance of business. As such in view of provisions of section 17(5)(g), no ITC is available to the applicant. Hence, we hold that they are not eligible for ITC on taxes paid for maintenance and upkeep of guest houses.”

We wish to appeal against such ruling of AAR, Maharashtra based on the aforementioned arguments and case laws and contends that availment of Input Tax Credit on expenditure related to maintenance and upkeep of guest houses maintained by Ordnance Factory Bhandara should be allowed.

  1. e) Expenditure related to purchase of LPG cylinders used within , industrial canteen: –

The AAR, Maharashtra ruled that – “we have to state that we have already held that their canteen is providing services related to supply of food and. beverages to their employees and also charging consideration for the same and therefore such service is taxable under GST regime. The LPG cylinders are used to provide such services related to supply of food and beverages to their employees and therefore we are of the opinion that they are eligible to avail ITC on the purchase of LPG cylinders.”

We contend that allowing the availment of ITC on the aforementioned grounds by AAR, Maharashtra is incorrect in the light of the fact that Ordnance Factory Bhandara is “Central Government” and hence eligible for ‘NIL’ rate of tax on such supply of food and beverages done to factory employees that are non-business eraities as explained in question no. 1(d) above.

It should be note here that As per section 9 of the CGST Amendment Act, 2018 that is in force from 01/02/2019, an amendment in section 17(5) (b) of the principal CGST Act, 2017 has been brought about where input tax credit shall not be available in respect of supply of food and beverages except where the provision of such goods or services or both is obligatory for an employer to provide to its employees under any law for the time being in force.

As per section 46 of the Factories Act, 1948, the State Government may make rules requiring that in any specified factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or canteens shall be provided 2nd maintained by the occupier for the use of the workers.

It is submitted that more than 2500 persons have been employed by Ordnance Factory Bhandara and thus the aforementioned provision relating to maintenance of canteen is obligatory for Ordnance Factory Bhandara to provide to its employees under the Factories Act, 1948. So, an industrial canteen has been provided by Ordnance Factory Bhandara for its employees within the factory where the employees have food and beverages by paying a nominal amount of money on no-profit-no-loss basis.

Also, as per section 16(1) of the CGST Act, 2017, “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Thus, Input Tax Credit in relation to LPG cylinders that are re-filled for use in industrial canteen should be allowed as per amended section 17(5) (b) & 16(1) of the CGST Act, 2017.

  1. Appeal against ruling pronounced for question No. 6: –The Question No.6 that was asked for in Form ARA-Ol is as follows: –

Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues?

As per the provisions of GST law, Input Tax Credit on receipt of goods/services is available only when payment in respect of such receipts is made to the suppliers of such goods/services. When lesser amount is paid to the suppliers, then proportionate credit is available.

This matter had been raised before the AAR, Maharashtra to check whether lesser amount paid to suppliers due to deduction of liquidated damages from payment to be made to such suppliers shall also get covered under the aforementioned circumstances of lesser payrnent made to suppliers.

Ordnance Factory Bhandara had put forth in its submission that deduction of L.D is a manner of compensating the supplier for his dues and hence such deduction should not fall under the purview of said circumstances of “lesser payment.” It was also submitted that taxable value of goods/services does not change due to L.D deduction and the supplier Shall have to pay tax on the entire taxable amount and not on the amount after deduction of L.D.

  1. The department had put forth in its submission that as per the provisions of section 16 of the CGST Act, 2017, the ITC is available to recipient subject to actual payment equal to supply of goods made to such supplier. If the recipient makes lesser payment towards liquidated damages from supplier, the recipient is eligible to take ITC proportionally equal payment made to such supplier. Hence, applicant is required to reverse ITC to that extent.
  2. The AAR, Maharashtra ruled that L.D deduction will be construed as amount received as compensation for tolerating non-performance of supplier on account of delay in delivery of goods or services and is an activity to be treated as a supply of service as per clause 5(e) of Schedule II to the CGST Act, 2017 on which the Ordnance Factory Bhandara will have to discharge GSI.
  3. It also ruled that“ultimately Ordnance Factory Bhandara would be paying a lesser amount to their suppliers against supply of goods received, which would result in lesser payment being made by the supplier towards GST. Hence Ordnance Factory Bhandara will be eligible to take ITC proportionally equal payment made to such suppliers and is therefore required to reverse ITC accordingly.”
  4. We find that both the contentions and rulings of AAR, Maharashtra are factually and legally incorrect. Firstly, AAR, Maharashtra stated in its ruling that Ordnance Factory Bhandara shall have to pay GST on Liquidated Damages deducted from the payments to its suppliers. However, it is once again re-iterated that Ordnance Factory Bhandara is “Government” and hence it is eligible to claim exemption in respect of payment of GST to ‘Central Government” on services provided by it by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government as stated in aforementioned sub-question a) of Question No. 1 of the application.

Secondly, AAR, Maharashtra also stated that “ultimately Ordnance Factory Bhandara would be paying a lesser amount to their suppliers against supply of goods received, which would result in lesser payment being made by the supplier towards GST.” This is contention of AAR Maharashtra is factually incorrect on following two grounds:

  1. a) Ordnance Factory Bhandara would be paving a lesser amount to its suppliers against supply of goods received: –

Lesser payment in respect of L.D cases is made due to deduction of L.D from supplier’s payment. Deduction of L.D is an act of tolerating non-performance of supplier on account of delay in delivery of goods or services and is as such a manner of compensating the supplier for his dues and not lesser payment against supply of goods/services received.

We wish to confirm that Ordnance Factory Bhandara does not make lesser payment of taxable amount and GST amount to the supplier in L.D cases with the following two illustrations: –

1) Ordnance Factory Bhandara procured certain raw material from a supplier by the name of “Lakshmi Ishwar Industries” vide Tax Invoice no. 1 dated 09/04/2018 of the supplier. The taxable amount of the Tax Invoice was ₹ 5,50,200/-, IGST amount levied evas ₹ 99,036/- and thus the total invoice amount was ₹ 6,49,236/-.

Due to non-fulfillment of certain contractual conditions, Liquidated Damages @ 10% of the total invoice amount were deducted while making payment to the supplier in respect of the said invoice. Thus, 10% of ₹ 6,49,236/-, that is, ₹ 64,924/- were calculated as Liquidated Damages to be deducted from supplier’s payment.

However, while passing the accounting entry in the books of Ordnance Factory Bhandara for the transaction of paying the supplier, full amounts of ₹ 5,50,200/- & Rs, 99,036/- were recorded as taxable amount & IGST amount respectively. ₹ 64,924/- was shown as a deduction in respect of Liquidated Damages from the payment to be made to the supplier. Enclosed herewith is a copy of voucher for such transaction. The code head 01/806/01 is used for recording the taxable amount & IGST amount and the code head 01/802/01 is used for recording the L.D amount in the enclosed copy of the transaction voucher.

2) Ordnance Factory Bhandara procured certain raw material from) a supplier by the name of “K. P Instruments” vide Tax Invoice no. 57 dated 20/12/2017 of the supplier. The taxable amount of the Tax Invoice was ₹ 4,69,320/-, CGST & SGST amount levied were ₹ 42,239/- each and thus the total invoice amount was ₹ 5,53,798/-.

Due to non-fulfillment of certain contractual conditions, Liquidated Damages @ 10% of the total invoice amount were deducted while making payment to the supplier in respect of the said invoice. Thus, 10% of ₹ 5,53,798/-, that is, ₹ 55,380/- were calculated as Liquidated Damages to be deducted from supplier’s payment.

However, while passing the accounting entry in the books of Ordnance Factory Bhandara for the transaction of paying the supplier, full amounts of ₹ 4,69,320/- & ₹ 42,239/- were recorded as taxable amount & CGST/SGST amounts respective!y. ₹ 55,380/- was shown as a deduction in respect of Liquidated Damages from the payment to be made to the supplier. Enclosed herewith is a copy of voucher for such transaction. The code head 01/806/01 is used for recording the taxable amount, CGST amount and SGST amount and the code head 01/802/01 is used for recording the L.D amount in the enclosed copy of the transaction voucher.

Thus, the accounting entries for both these transactions where L.D was deducted proves that full taxable amount and GST amounts were paid to the supplier by Ordnance Factory Bhandara and L.D is merely a deduction from suppliers’ payments and a manner of penalizing the supplier for non-fulfillment of contractual obligations.

  1. b) such lesser payment to supplier made by the supplier towards GST:

The taxable value of goods/services does not change due to L.D deduction. The supplier shall have to pay tax on the entire taxable amount and not just only on the amount after deduction of CD.

In the two illustrations enumerated in a) above, both the invoices are appearing in GSTR-2A of Ordnance Factory Bhandara with filed status and no credit notes have been raised by the supplier in respect of these two invoices which means that even the supplier understands that the taxable amount does not decrease due to deduction of L.D and the supplier does not intend to pay lesser amount to the GST Department by issuing credit notes in respect of deduction of L.D from such invoices.

Another matter that should be thought about is that if such supplier of Ordnance Factory Bhandara is being audited by the Department under GST regime, then would the. Department be okay with the fact that the supplier has made lesser payment of GST to the Department due to deduction of L.D by Ordnance Factory Bhandara and wouldn’t the Department consider it as a case of short payment of GST? The answer to such question would be that the Department would consider it to be a case of short payment of tax by the supplier since the Department would contend that deduction of L.D does not decrease the taxable value of goods and hence GST should be paid on the original taxable value of goods.

Thus, it is re-iterated that such deduction of L.D from payment of suppliers towards supply of goods cr services or both cannot be classified as “failing to pay to the supplier, the amount towards the value of supply along with the tax payable thereon.” In fact, on the contrary, such deduction of L.D is a manner of compensating the supplier towards his dues in respect of supply of goods or services or both to Ordnance Factory Bhandara.

In cases where the supplier makes short delivery of goods or services or both to Ordnance Factory Bhandara and Ordnance Factory Bhandara deducts paymen of its supplier due to such short delivery goods/services, then in such cases it can be said that lesser payment has been made to the supplier in respect of supply of goods/services but not in cases where L.D is deducted from payment of supplier due to delay in supply of goods/services.

So, it requested to kindly look into this matter with generosity otherwise it may lead to loss of genuine Input Tax Credit to Ordnance Factory Bhandara.

  1. Appeal against ruling pronounced for Question No. 7: –The Question No.7 that was asked for in Form ARA-Ol is as follows: –

Being a part of the Ministry of Defence, Government of India, whether the following notifications are applicable to our rganization and what shall be the impact of such notifications: –

  1. a) Notification No. 2/2018- Central Tax (Rate), in relation to services by an arbitrator or an advocate to our organisation,
  2. b) Notification No. 3/2018- Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.
  3. c) Notification No. 36/2017 – Central Tax (Rate), in relation to payment of tax on reverse charge mechanism on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

The AAR, Maharashtra answered in the negative for all the three aforementioned sub-questions of question no. 7 of the application by contending that the notifications are not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. We wish to appeal against such ruling of AAR, Maharashtra based on the facts and explanations given for Question No. 1 that Ordnance Factory Bhandara is indeed “Government” and hence all the three aforementioned notifications in Question No. 7 to the application should be applicable to Ordnance Factory Bhandara.

Applicant’s Supplementary Submissions dt.12.10.2019

  1. Further proof that Ordnance Factor Bhandara is “Central Government” since it is established under Ministry of Defence by Government of India:

Enclosed herewith for your kind reference is a press release by Ministry of Defence, Government of India dated 15/07/2019 regarding Establishment of Ordnance Factories in India in which it is seen that Ordnance Factory Bhandara was established under Ministry of Defence by Government of India in the year 1964.

This serves as a further proof that Ordnance Factory Bhandara is “Central Government” department.

  1. Tax Invoices of suppliers attached for appeal filed in respect of question no.6:

Enclosed herewith are Tax Invoices of suppliers referred to in appeal filed against

Questionno.6 for your kind reference.

  1. Notifications for Question no. 7: –

Notification No. 2/2018- Central Tax (Rate), Notification No. 3/2018- Central Tax (Rate) & Notification No. 36/2017 – Central Tax (Rate) referred to in appeal filed against Question no. 7 are enclosed herewith your kind ready reference.

Respondents Submission dt.11.10.2019

  1. Question-(1)- Being a part of the Ministry of Defence, Government of India, whether they are liable to pay GST on the following supply of services: –
  2. Liquidated damages deducted from the payments to be made to suppliers incaseof delayed delivery of goods or services: Submission by Department: –

In the present case, the appellant submitted that the ordnance factory is functioning under Govt. of India and hence their organization is covered under the definition of “Government” defined under section 2(53) of the CGST Act, 2017. Hence, they are not liable to pay GST. The Indian Ordnance Factories is an industrial organization, functioning under the Department of Defence Production of Ministry of Defence, Government of India. It is engaged in research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems. This is the Apex board having industrial status functioning under the control of Ministry of defence. However, the Govt. of India is a union Govt. created by the constitution of India as the legisladive, executive and judicial authority of the union of India of states and union territories of the constitutionally democratic republic. On the above facts, though ordnance factory is functioning under the Ministry of defence, Govt. of India, the organization shall not be treated as “Government” defined under section 2(53) of the CGST Act, 2017, since the organization is having Apex Body and industrial status. Hence, the contention of appellant that their organization is ‘Government” is not legal and correct.

As per Sr. No. 62 (heading 9991 or 9997) of Notification No. 12/2017-Central Tax(Rate) dated 28th June 2017 provide NIL rate of Tax in respect of services provided by the Central Government, State Government, Union Territory or Local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union Territory or local authority under such contract.

Hence, the ordnance factory is not liable to get exemption under Notification No. 12/ 2017-Central Tax (rate) dated 28-06-2017.

  1. Amount of Security deposit forfeited of suppliers due to non-fulfillment of certain contract condition.

Submission by Department: –

As per the provisions of section 15 (2) (d) of CGST Act, the value of supply shall include interest or late fee or penalty for delayed payment of any consideration for any supply.

Further, as per the Section 2(31) of CGST Act, “consideration” means any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the central Govt. or state Govt.

It is noticed that the appellant has forfeited Security deposited of suppliers due to non-fulfillment of certain contract conditions, which is nothing but the additional “consideration” received by the appellant. Hence, the appellant is liable to pay on such additional consideration being the part of the value of supply of goods as defined under section 15(2) of the CGST Act,2017.

  1. Security deposit left unclaimed by the suppliers and recognized as income after 3 years.

No appeal preferred by the appellant against this question.

  1. Food and beverages supplied at industrial canteen inside the factory premises.

Submission by Department: –

As clarified in revenue submission mentioned in question 1(a) the ordnance factory functioning under the Ministry of defense, Govt. of India, shall not be treated as “Government” defined under section 2(53) of the CGST Act, 2017, since the organization is having Apex Body and industrial status. The fact of the appellant organization having industrial status has already been mentioned in their present advance ruling application and there is no need to establish separately that the appellant’s organization shall not be treated as Government. It is also noticed that, the appellant has not clarified the fact that whether they themself engage in supply of food and beverages at the canteen for their employees or they have engaged any contractor for the supply of food and beverage. They have also not clarified whether they are charging money from their employee for supply of such food and beverage in their industrial canteen. Hence in absence of such clarification, liability cannot be ascertained at this stage.

However, as per the notification 11/2017-CT dated 28.06.2017 amended by notification No. 46/2017 dated 14.11.2017, the supply of food and beverages is covered under the category of catering services, which is taxable under GST regime.

The taxability of GST on supply of food and beverages in the premises of industrial units/offices has also been confirmed by the Authority of Advance Ruling Chennai vide order No. 9/AAR/ 2018 dated 30.08.2018. Copy of same is enclosed for the ready reference.

  1. Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.

Submission by Department:

As per the schedule II (Section 7) of CGST Act 2017, renting of immovable property shall be treated as supply of service. In the appellant’s own case, they have provided Community hall (Multipurpose Hall) on rental basis to their employees shall be covered under the definition of supply of services as defined in CGST Act 2017 and hence they are liable to pay GST on the amount charged by them from their employee towards the renting of their community hall. The appellant is not entitled for any exemption under Notification No. 12/2017-Central Tax(rate) dated 28-06-2017, since their organization is not defined under government since the organization is having Apex body and Industrial status.

  1. School bus facility provided to children of the employees.

Submission by Department: –

As per Sr. No. 66 (heading 9992) of the Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017-no GST liability on Transportation of students faculty and staff. Hence as per the said provisions, the appellant is not liable to pay GST on such taxable services.

  1. Conducting of exams for various vacancies.

Submission by Department: –

For conducting any examination by the organization, no exemption available from payment of GST on examination fee charged from candidates.

  1. Rent recovered from residential quarters of employees.

No appeal preferred by the appellant against this question.

  1. Question: -2) whether Input tax credit on expenditure on the goods and services consumed by our organization in following activity shall be available:
  2. Maintenance of garden inside the factory premises.

Submission by Department: –

As per the section 16 of the CGST Act, every registered person shall be entitled to take credit of input tax charged on any supply of goods and services or both by him which are used or intended to be used in the course of furtherance of his business and said amount will be credited to the electronic credit ledger of such person. However, the appellant has received services from the service provider towards the Maintenance of garden inside the factory premises of the appellant. Such taxable service received by the appellant is not covered under the negative list of Section 18(5) and hence input tax credit shall be available to them.

  1. Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, halt for recreational activities. residential quarter building of employees, roads footpaths, street lightings and other parts of the estate orea that are located outside the factory premises but within the factory estate.

Submission by Department:

As per the section 16 of the CGST Act, every registered person Shall be entitled to take credit of input tax charged on any supply of goods and services or both by him which are used or intended to be used in the course of furtherance of his business and said amount will be credited to the electronic credit ledger of the such person. However the appellant has received services from the service provider towards the maintenance and upkeep activities relating to gardens, parks, playground, Factory school for children of employees, hall for recreational activities residential Quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate have no nexus to the manufacturing activity undertaken by the appellant. The said activities are neither relating to business nor relating to manufacture of final products and its supply. The said activity may be welfare activity undertaken while carrying on the business but to qualify as input service, the activity must have nexus with the business of appellant. The expression “in course or furtherance of business” appearing in section 16(1) of GST Act refers to activities which are integrally related to the business activity and not welfare activity. Hence, no ITC is available on such supplies of services.

  1. Medicines purchased by the hospital maintained by our organization and used for the treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.

Legal Submission by Department:

The hospital/ dispensary maintained by the appellant for its employees and their dependents come within the definition of “Clinical Establishment” and such supply of service is exempted under Sr. No. 74, heading 9993 of the Notification no. 12/2017-Central Tax (Rate) dated 28th June 2017. Consequently, the input tax credit on such exempted supply of services is not available to appellant under sub section (2) of Section 17 of the CGST Act,2017.

  1. Expenditure related to maintenance and upkeep of guest houses maintained by organization.

Submission by Department: –

As per the Section 16 of the CGST Act, every registered person shall be entitled to take credit of input tax charged on any supply of goods and services or both by him which are used or intended to be used in the course of furtherance of the business and said amount wilt be credited to the electronic credit ledger of the such person. However, the appellant has received services from the service provider towards the maintenance of guest houses maintained by organization within the factory estate. The said activities are neither relating to business nor relating to manufacture of final products and its supply. The said activities may be welfare activity undertaken while carrying on the business but to qualify as input service, the activity must have nexus with the business of appellant. The expression “in course or furtherance of business” appearing in section 16(1) of GST Act refers to activities which are integrally related to the business activity and not welfare activity. Hence, no ITC is available on such supplies of services.

  1. Expenditure related to purchase of LPG cylinders used within the industrial canteen.

Legal Submission by Department: –

As per the section 16 of the CGST Act, every registered person shall be entitled to take credit of input tax charged on any supply of goods and services or both by him which are used or intended to be used in the course of furtherance of his business and said amount will be credited to the electronic credit ledger of the such person. However, if the appellant has purchased LPG cylinders for using in their office for the preparation of foods and beverages for their employee.

The said activities are nether relating to business nor relating to manufacture of final products and its supply. The said activities may be welfare activity undertaken while carrying on the business, but to qualify as input service the activity must have nexus with the business of appellant. The expression “in course or furtherance of business” appearing in section 16(1) of GST Act refers to activities which are integrally related to the business activity and not welfare activity. Hence no ITC is available on purchase of LPG cylinder.

  1. Question: -6) Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues:

Legal Submission by Department:

As per the provisions of section 16 of CGST Act,2017, the ITC is available to recipient subject to actual payment equal to supply of goods made to such supplier. If the recipient makes lesser payment towards liquidated damages from supplier, the recipient is eligible to take ITC proportionally equal to actual made to such supplier. Hence, the appellant is required to reverse ITC to that extent.

  1. Question: -7)
  2. Being a part of the Ministry of Defence, Government of India, what is the impact of the Notification No.2/2018 Central Tax (Rate), in relation to services by an arbitrator or an advocate to their organization.

Legal Submission by Department:

As per Sr.No.45 of the Notification No. 12/2017 Central Tax (Rate) dated 28th June,2017 as amended by Notification No. 02/2018-CT(rate) dated 25-01-2018, the services provided by an arbitral tribunal to (i) any person other than a business entity or (ii) a business entity with an aggregate turnover up to twenty lakh rupees (ten lakh rupees in the case of special category states) in the preceding financial year, will be NIL in respect of intra- State Supply of Service. The said exemption is to be verified with the actual services received from advocate considering the fact that said advocate are other than a senior advocate and not having any business entity. The Ordnance Factory, Bhandara is having a specific status of business organization having annual turnover of more than ₹ 100 Crs. and hence the appellant is liable to pay GST on supply of services under reverse charge. As per applicable rate of GST.

  1. Being a part of the Ministry of Defence, Government of India, what is the impact of the Notification No.3/2018. Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.

Legal Submission by Department: –

As per the schedule II (Section 7) of CGST Act 2017, renting of immovable property shall be treated as supply of service. In the appellant ‘s own case, they are providing non-residential property on rental basis to a registered person under the Act 2017, which shall be covered under the definition of supply of services as defined CGST Act 2017 as supply of real estate services other than renting of residential dwellings and will be chargeable to tax under the GST regime.

  1. Being a part of the Ministry of Defence, Government of India, what is the impact of the Notification No. 36/2017-Central Tax (Rate), In relation to payment of tax on reverse charge mechanism on sate of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

Legal Submission by Department: –

As per Notification No. 4/2017-Central Tax (Rate) dated 28th June 2017 as amended vide Notification No. 36/2017-Central Tax (Rate) dated 13th October,2017, the recipient of supply shall pay tax on reverse charge basis. Hence appellant is liable to pay GST on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

It is further submitted that the Advance Ruling Authority, Mumbai vide order No. GST-ARA-79/2018-19/B-168 dated 24-12-2018 = 2019 (6) TMI 1236 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA already decided that the M/s. Ordnance Factory, Bhandara has not been treated as Govt. as defined under Section 2(53) of the CGST Act, 2017.

Also, the Hon’ble Central Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi vide its final Order No. 50646/2017 dated 06.02.2017 in respect of Service Tax Appeal No. ST/ 50007/2014- [DB] in the matter of M/s. Mukesh Kalway v/s C.C.E, Bhopal = 2017 (3) TMI 615 – CESTAT NEW DELHI has held at Para 09 that: –

“Regarding tax liability on cleaning activities under taken by the appellant in the premises of ordnance factory, we note that the definition covers industrial building and premises thereof. Ordnance factory premises are covered by industrial building. Even otherwise clause (ii) of the definition clearly mentions factory as one of the premises covered for tax liability. The factory in the present case is not in relation to agriculture, horticulture, animal husbandry or for dairying. As such in the absence of any exclusion from the statutory definition, we find the appellants are liable to service tax on this account.”

Even, another bench of Delhi Authority for Advanced Ruling, State Goods and Service Tax, Delhi vide Advanced Ruling No. 06/DAAR/2018 dated 23.04.2018 in the case of VPSSR Facilities = 2018 (5) TMI 904 – AUTHORITY FOR ADVANCE RULING – DELHI, 124, 1st Floor, Jaina Tower-I, District Centre, Janakpuri, New Delhi- 110058 has also held that “the cleaning services supplied by the applicant to the Northern Railways are not exempted under S. No. 3 of the Notification No. 09/2017- Integrated Tax (Rate) dated 28.06.2017, as amended by Notification No 2/2018/-Integrated Tax (Rate) dated 25.01.2018 and parallel Notification No. CGST and SGST.”

Hence, no comments on the above additional submission made by the appellant.

Personal Hearing

  1. A personal Hearing in the matter was conducted on 14.10.2019, which was attended by Shri Sagar Sahajwani, C.A., on behalf of the Appellant, wherein he reiterated the written submissions, and relied upon various legal provisions and judicial pronouncement in support of their contentions. In the aforesaid hearing, the Department was represented by Shri Hrishikesh Deep, Asst. Commissioner, who also reiterated the written submissions, filed before us.

Discussions and Findings

  1. have gone through the facts of thecase, documents placed on record, and the entire submissions made by both the appellant as well as jurisdictional officer. We have also perused the ruling pronounced by the Advance Ruling Authority, wherein the AAR inter alia observed that the Appellant cannot be construed as Central Government on the ground that the same had not been created by the Constitution of India as a legislative, executive or judicial authority of the country.
  2. On perusal of the above, one of the moot issues, before us, is whether the Appellant, i.e. Ordnance Factory Bhandara, can be construed as “the Central Government” in light of the various legal provisions and documentary evidences, relied upon by the Appellant.
  3. The Appellant challenged the aforesaid observation made by the Advance Ruling Authority by putting forth the following contentions:
  4. As regards the advance ruling observation in as much as Ordnance Factory Bhandara is not “Government” since it is not created by Constitution of India as a “legislative, executive or judicial authority of the country, it was contended by the Appellant that AAR, Maharashtra did not take cognizance of the fact that the Constitution of India need not “create” the organisations intended for functioning of the country. They further submitted that the Constitution only lays down the framework demarcating fundamental political code, structure, procedures, powers, and duties of government institutions and sets out fundamental rights, directive principles, and the duties of citizens. They further argued that the responsibility & decision of formation of organisations like Ordnance Factory Board & the associated Ordnance Factories under the Board is of the Union Government of India and that the executive power of the Union Government is vested in the President in terms of Article 53 of the Constitution and the same shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President. They further pointed out that AAR, Maharashtra had ruled that Ordnance Factory Bhandara is not “Government” since it is engaged in research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems and is having an industrial status and functions under Ministry of Defence.
  5. The Appellant further argued in this regard that nowhere under law is it mentioned that “Government” cannot undertake activities relating to “research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems”. They further contended that “Having an industrial status” is the result of the nature of activities carried out by Ordnance Factory Bhandara, and “functioning under the Ministry of Defence and being controlled by an apex body (Ordnance Factory Board)” is a result of the organizational structure put in place to govern the functioning of Ordnance Factories. so, these aspects should not be taken into consideration while analyzing whether Ordnance Factory Bhandara is “Government” or not as they are totally irrelevant.

44, They further argued that the only important factor to be analyzed is that whether Ordnance Factory Bhandara falls into the definition of “Central Government” as per the aforementioned clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India.

“As per clause (8) of section 3 of the General Clauses Act, 1897, the ‘Central Government’ shall, in relation to anything done or to be done after the commencement of the Constitution, means the President. As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officer’s subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.”

  1. The Appellant further accentuated that all the powers provided to Ordnance Factory Bhandara’s officers and decisions taken in Ordnance Factory Bhandara are on behalf of the President of India. Even the recruitments in the Indian Ordnance Factories as a Group A gazette officers are appointed through union public service commission on behalf of President of India.
  2. The Appellant further stressed that Ordnance Factory Board Procurement Manual is a manual issued by the Ordnance Factory Board for procurement of stores for production in Ordnance Factories. This has been finalized by MoD in consu:tation with Integrated Detence Finance and has the approval of Hon’ble Raksha Mantri.

Para 7.25 of the “Ordnance Factory Board Procurement Manual” states that-

“All defence contracts are in the name, and on behalf of the President of India.”

They have also furnished a copy of a Supply Order placed to a vendor wherein the Supply Order has been placed on & signed on behalf of the President of India by the concerned officer of Ordnance Factory Bhandara.

  1. The Appellant have also produced an appointment letter of an officer of Ordnance Factory Bhandara to manifest that the recruitments of the officers in the Ordnance Factory Bhandara are done on behalf of the President of India.
  2. Thus, the Appellant contended that all the executive functions of Ordnance Factory Bhandara like recruitment, procurement etc. are done on behalf of the and in the name of the President of India while exercising the executive powers of the Union vested in the President, thereby submitting that Ordnance Factory Bhandara is not merely a Government organization, it is “Central Government” itself since as explained above, it satisfies the conditions of being called “Central Government” as per the aforementioned provision of the section 2(53) of the CGST Act, 2017 read with clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India.
  3. Further, the Appellant for the purpose of justifying their legal status as ‘Government’, has highlighted the constitution of their PAN allotted to them, which is “AAAGG0001Q’ , wherein the 4th letter is ‘“G”, which stands for “Government.”
  4. Further, the certificate, which was issued by the Jt. Secretary, Ministry of Defence, Department of Defence Production dtd. 18/04/2006 for Sales Tax purposes, wherein it was certified that the Indian Defence Forces and Indian Ordnance Factories are integral part of the Ministry of Defence, Government of India, and funds for meeting the expenditure on salaries and wages, stores etc. are drawn from the Defence Services Estimates of the Union Budget, clearly showcase this fact that the Ministry of Defence has certified that Indian Ordnance Factories are integral part of the Government of India, which in other words means that Ordnance Factory Bhandara is “Government” for all practical purposes.
  5. In this regard, we completely agree with the submissions and contention put forth by the Appellant, wherein they have claimed themselves as the Central Government, as it is evident that they are fulfilling all the conditions stipulated for the Central Government, provided under clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India. Since, the Appellant is functioning under the Department of the Defence Production, Ministry of Defence, Government of India, and all its activities including administrative, executive, etc. are carried out for and on behalf of the President of India, the facts which have been established by the various documents like the Appointment letter of the Group A Gazetted Officer of the Ordnance Factory, OFB Procurement Manual. OFB Procurement Manual clearly shows that all defence contracts are in the name and on behalf of the President of India only. Further, the signatures on the supply order placed to the Vendors, the Acceptance of the Tender, etc., clearly exhibits that all these executive works are being carried out in the name, and on behalf of the President of India. Thus, it is adequately evident that the Ordnance Factory Bhandara, the Appellant, is nothing but ‘the Central Government’ in accordance with the provision of section 2(53) of the CGST Act, 2017 read with clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India. We also agree with the Appellant’s contention, wherein they averred that nowhere under law was it mentioned that “Government” cannot undertake activities relating to “research, development, production, testing, marketing and logistics of a comprehensive product range in the areas of air, land and sea systems”; and that “Having an industrial status” was the result of the nature of activities carried out by Ordnance Factory Bhandara, and “functioning under the Ministry of Defence and being controlled by an apex body (Ordnance Factory Board)” is a result of the organizational structure put in place to govern the functioning of Ordnance Factories. Further, the PAN i.e. “AAAGG0001Q” wherein the 4th letter, which signifies the status of the PAN Holder, is “G”, which stands for “Government” is expressly indicating the constitution and legal status of the Appellant as the “Government”.
  6. Hence, in view of the above discussions, we are of the opinion that the observation made by the AAR on account of these aspects is erroneous and arbitrary, and hence the same warrants to be set aside.
  7. Now, that it has been established that the Appellant can be construed as Central Government, we will examine the applicability of GST on the various transactions/activities carried out by the Appellant as described under Question 1 of the Advance Ruling application, earlier filed by the Appellant.
  8. As regards the questions I(a) and I(b) asked by the Appellant, wherein the Appellant had asked as to (a) whether Liquidated damages deducted from the payments to be made to suppliers incaseof delayed delivery of goods or services, and (b) Whether Amount of Security deposit forfeited by the suppliers due to non-fulfillment of certain contract conditions, it is observed that the aforementioned transactions/activities carried out by the Appellant would squarely get covered under the scope of Sr. No. 62 (heading 9991 or 9997) of Notification No. 12/2017-Central Tax(Rate) dated 28th June 2017, which stipulates that “Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating nonperformance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract” shall attract NIL rate of tax. Since the Appellant, which has been established as ‘Central Government’ as described herein above, is supplying the services of tolerating the nonperformance of a contract against the Liquidated Damages and security deposit forfeited by the suppliers, which are covered under the aforementioned Sr. No. 62 of the Exemption Notification No. 12/2017-C.T. (Rate) dated 28.06.2017 attracting Nil rate of GST. Hence, GST will not be applicable to the aforesaid transactions/activities carried out by the Appellant, as have been described under question I(a) and I(b) of the Advance Ruling application.
  9. Since, the Appellant has not appealed against the ruling pronounced in respect of the question 1 (c) of the Advance Ruling Application filed by them, the same is not being considered here for the discussion and ruling thereupon.
  10. Now, we will examine question 1(d) asked by the Appellant as to whether Food and beverages supplied at industrial canteen inside the factory premises will attract GST or not. In this regard, the Appellant has submitted as under:

As per Clause G of Schedule II to the CGST Act, 2017, “supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration” shall be treated as a supply of services. There is an industrial canteen inside the factory premises that serves food and beverages to employees of the factory. Neither is alcoholic liquor served in the industrial canteen nor is the industrial canteen air conditioned. Nominal charges for such food and beverages are recovered from the employees on no profit basis in order to cover the day-to-day expenditure of the canteen. Such industrial canteen is run by the factory itself and no outdoor caterer is involved in providing services related to supply of food and beverages. Thus, such supply of food and beverages by the factory to factory employees inside the industrial canteen falls within the category of ‘services’ as per the aforementioned clause 6 of Schedule Il to the CGST Act, 2017. However, in terms of the aforementioned Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central Tax (Rate), supply of services by the Central Government to non-business entities attract ‘NIL’ rate of tax. Since such supply of food and beverages is being made to factory employees, who are in the nature of non-business entities, the charges recovered by the factory from such employees for such supply attracts ‘NIL’ rate of tax since Ordnance Factory Bhandara is “Central Government” as explained above. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”

  1. Since, it has been established that Appellant can be construed as Central Government and the activities carried out by the Appellant by way of the supply of foods or drinks in the canteen, located inside the factory premises shall be treated as supply of services in terms of clause 6(b) of the Schedule II to the CGST Act, 2017, it may adequately be inferred that the aforementioned activities described under question 1(d) of the Advance Ruling Application, i.e. supply of foods or drinks in the canteen, located inside the Factory premises, will get covered under the scope of activities described at Sr. No. 6 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017,and accordingly Wilf attract Nil rate of GST, as the said services are being provided by the Appellant to their employees, who are certainly non- business entities.
  2. Now, we will examine question I(e) asked by the Appellant as to whether Community hall provided on rental basis to employees of the factory will attract GST or otherwise. In this regard, the Appellant has submitted as under:

There is a community hall within the factory estate that islet to be used by the factory to its employees for their personal purposes like family gatherings, marriages, other social functions etc. Charges in terms of monetary consideration are recovered by the factory from its employees in lieu of such use. As per clause (zz) of the definitions contained in notification no. 12/2017-Central tax (Rate), “Renting in relation to immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property. Thus, the service provided by the factory to its employees for letting them use cultural hall for their personal purposes falls within the definition of “Renting in relation to immovable property”. However, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central tax(Rate), such services provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services(factory employees) are non-business entities. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”

  1. As regards the above question raised by the Appellant, we refer to the observations made in the above para 56 and conclude that the Appellant, being ‘the Central Government’ is providing services of renting of immovable property to its employees, which are non-business entities, hence such services rendered by the Appellant will not be subject to GST in accordance with the provisions of Sr. No. 6 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017.
  2. Now, we will examine question I(f) asked by the Appellant as to whether School bus facility provided to the children of the employees will be subject to GST or not. In this regard, the Appellant’s submissions are as under:

Ordnance Factory Bhandara provides the service of pick and drop of the children of its employees from school located outside the factory via bus owned by the factory. Charges in terms of monetary consideration are recovered by the factory from its employees in lieu of such service provided to them. So, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central tax(Rate), such services provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services (factory employees) are non-business entities. The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. As regards the above question raised by the Appellant, we refer to the reasoning made in the above para 56 and conclude that the Appellant, being ‘the Central Government’ is providing services of transportation to the children of its employees, which are clearly non-business entities. Hence such services rendered by the Appellant will not be subject to GST in accordance with the provisions of Sr. No. 6 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017.
  2. Now, we will examine question 1(g) asked by the Appellant as to whether Conducting exams for various vacancies in the factory will be subjected to GST. In this regard, the Appellant’s submissions are as under:

For conducting examinations to fill up various staff vacancies in Ordnance Factory Bhandara, it collects fees from the candidates who wish to appear in such examinations. So, keeping in view the above discussed Sr. No. 6 of the exemption list on supply of services as per notification no. 12/2017- Central tax (Rate), such services of conducting examinations provided by Ordnance Factory Bhandara attract ‘NIL’ rate of tax since the provider of service (Ordnance Factory Bhandara) is “Central Government” and the recipient of services(candidates) are nonbusiness entities.

The AAR, Maharashtra had ruled that the said exemption is not applicable to Ordnance Factory Bhandara since it is not “Government”.

  1. As regards the above question raised by the Appellant, again we refer to the reasoning made in the above para 56 and conclude that the Appellant, being ‘the Central Government’ is providing services to the candidates, who are undoubtedly the non-business entities, by way of conducting exams for various vacancies in the factory, hence such services, rendered by the Appellant to such non-business entities, will not be subject to GST in accordance with the provisions of Sr. No. 6 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017.
  2. Since no appeal has been preferred against the ruling pronounced in respect of the question I(h) of the advance ruling application filed by the Appellant, the same has not been considered here for any discussions or rulings in connection thereto.
  3. Now, we will examine the question 2 of the Advance Ruling application filed by the Appellant. The question asked by the Appellant was whether Input Tax Credit on expenditure on the goods and services consumed by our organisation in following activities shall be available or not.

(a) Maintenance of garden inside the factory premises.

(b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.

(c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.

(d) Expenditure related to maintenance and upkeep of guest houses maintained by organisation.

(e) Expenditure related to purchase of LPG cylinders used within industrial canteen.

  1. The AAR, Maharashtra ruled that Input Tax Credit in respect of any of the above shall not be available to Ordnance Factory Bhandara except sub-question e), that is, expenditure related to purchase of LPG cylinders used within industrial canteen.
  2. The explanation that AAR, Maharashtra gave for denying such credit was that the goods/services used in such activities are not used or intended to be used by Ordnance Factory Bhandara in furtherance of its business.
  3. Input Tax Credit in relation to sub-question e), that is, expenditure related to purchase of LPG cylinders used within industrial canteen was allowed by AAR, Maharashtra on the pretext that the output supply of food and beverages to employees in industrial canteen is taxable.
  4. The Appellant has challenged the above said ruling of AAR, Maharashtra on the following grounds:
  5. The basic question that is being asked here is that whether the following goods/services received by the factory are covered under the definition of “input” and “input services” as per section 2(59) & 2(60) of the CGST Act, 2017 respectively & whether such goods/services can be considered to be falling within the scope of “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017 so as to entitle Ordnance Factory Bhandara to avail Input Tax of the said goods/services. It is worthwhile to note here that Hon. Finance Minister of India stated at paragraph 5(b) of the Statement of Objects & Reasons while introducing the Central Goods & Services Tax (“CGST”) Bill, 2017 in the Parliament as under: –

“5. The Central Goods and Services Tax Bill, 2017, inter alia, provides for the following, namely: –

(b) to broad base the input tax credit by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business. “

  1. Hence a clear intent to broad base the input tax credit is evident from the above. Also, the term “used or intended to be used in the course or furtherance of business” has been used to expand the scope of inputs & input services to those activities that have some direct or indirect nexus to business of the supplier.
  2. So, it requested to the Hon. Appellate Authority for Advance Ruling to decide upon the admissibility of Input Tax Credit in relation to the following services keeping in view the aforementioned intention of the Hon. Finance Minister of broadening the Input Tax Credit base.
  3. Even in the erstwhilelawsrelating to Excise Duty & Service Tax, the essential requirement of a service to be considered as “Input Service” for availing CENVAT Credit of the same as per Rule 2(l) of the CENVAT Credit Rules, 2004, was that such service should be used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. There is a plethora of decisions by various High Courts &various benches of Tribunal (CESTAT ) in which it was adjudged that CENVAT Credit of Service Tax in relation to the following services was allowable on the pretext that such services were used by the manufacturer, whether directly or indirectly, in or in relation to the business of manufacture of final products.
  4. In thecaseof Coca Cola India Pvt. Ltd. vs. CCE reported in 2009 = 2009 (8) TMI 50 – BOMBAY HIGH COURT, a Division Bench of the Hon. Bombay High Court held that the expression ‘activities in relation to business’ in the inclusive part of the definition of ‘input service’ further widens the scope of input service so as to cover all services used in the business of manufacturing the final products and that any service, used in relation to the business of manufacturing the final products, would be an eligible input service for availing CENVAT Credit. It was also held that the cost of any input service that forms part of value of final products would be eligible for CENVAT credit.
  5. Thus, it can be construed to mean from such decision that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable.
  6. Therefore, applying the same logic, in the GST regime, the said following services can be said to be satisfying the twin necessities for availing Input Tax Credit of GST in respect of expenditure on the said services; that is “input services” and ‘used or intended to be used in the course or furtherance of business” since as per section 2(17) of the CGST Act, 2017, the term “business” includes “manufacture”.
  7. In fact, the scope of availing Input Tax Credit has been further widened under the GST regime to include all inputs and input services used in the course or furtherance of business vis-a-vis erstwhile CENVAT Credit Rules where admissibility of CENVAT Credit was restricted to input services used directly or indirectly, in or in relation to manufacture of final product.
  8. Maintenance of garden inside the factory premises:
  9. Here ‘factory premises’ means plant area where manufacturing activity is carried out and administrative building. The services of maintenance & upkeep of gardens that are located within the factory premises should be considered to be an “input service” as per section 2(60) of the CGST Act, 2017 and should also be considered to be “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017 and Input Tax Credit should be available in respect of expenditure done on such services on the following counts:-
  10. Gardening is essential & mandated by Maharashtra Pollution Control Board to maintain quality of ambient air & prevent air& water pollution and also a condition precedent as laid down by the said Board, without which Ordnance Factory Bhandara cannot resort to its business activity of manufacturing.
  11. Garden creates better atmosphere and environment which increases working efficiency and thus its maintenance is essential in the course of business for better running & furtherance of business.
  12. Cost of such ‘gardening expenses’ forms part of the cost of the final products and thus forms part of the value of taxable supply.
  13. Reliance is placed on the following judicial pronouncements of the Tribunal (CESTAT) & various High Courts, wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to maintenance & upkeep of gardens in the factory:
  14. InM/s. Rane TRW Steering System Ltd. vs The Commissioner of Central Excise and Central Tax (2018) = 2018 (2) TMI 1745 – MADRAS HIGH COURT,the Hon. Madras High Court held that garden maintenance service would fall within the definition of input service, in terms of Rule 2 (l) of the Cenvat Credit Rules, 2004.
  15. InMukand Ltd’scase Vs. Commissioner of Central Excise, Belapur {2016 (42) STR 88 (Tri-Mumbai)} = 2015 (9) TMI 944 – CESTAT MUMBAI, it was held by the Hon. Tribunal that the credit on ‘gardening expenses’ is fully allowable as the same is required for maintaining the good atmosphere in the manufacturing area and also a condition precedent as laid down by the State Pollution Control Board, without which the appellant cannot resort to manufacturing Activity.
  16. InHCL Technologies Ltd., Vs. Commissioner of Central Excise, Noida {2015 (4) STR 369 (Tri-Dei) = 2015 (8) TMI 595 – CESTAT NEW DELHI,it was held by the Hon. Tribunal that Garden Maintenance Services qualify as input services.
  17. InLifelong Meditech Ltd., Vs. Commissioner of Central Excise and Service Tax, Gurgaon II {2016 (44) STR 626 (Tri-Chan)} = 2016 (7) TMI 468 – CESTAT CHANDIGARH,it was held by the Hon. Tribunal that “horticulture services are directly related to the manufacturing activity by the appellant as without maintaining the garden, the appellant cannot run their factory. Therefore, I hold that the appellant is entitled to avail CENVAT Credit for horticulture services.”
  18. InM/s. Orient Bell Ltd., Vs. Commissioner of Central Excise, Noida, reported in 2016 SCC Online CESTAT, 7923 = 2017 (1) TMI 840 – CESTAT ALLAHABAD,it was held by the Hon. Tribunal that so far as garden maintenance is concerned, the same is input service as it is a pollution control requirement and improves the aesthetics and overall atmosphere and thus is an expenditure in or in relation to manufacture.
  19. InCommissioner of Central Excise, Delhi III, Suzuki Motor Cycle India Private Limited {2017 (47) STR 85 (Tri-Chan) = 2016 (9) TMI 576 – CESTAT CHANDIGARH,it was held by the Hon. Tribunal that the assessee is entitled to avail the credit of gardening service.
  20. All the aforementioned arguments andcaselaws were presented before the AAR, Maharashtra. Even the Department agreed to the admissibility of such Input Tax Credit on maintenance of garden inside the factory premises in its legal submission to AAR, Maharashtra.
  21. However, AAR, Maharashtra ruled that “maintenance of garden is not a supply that can be considered as a supply used or intended to be used in the course of furtherance of business of the applicant which is to manufacture Propellants and Explosives. Hence the applicant is not eligible to avail ITC of the tax paid by them on the same. The services availed in relation to plantation and gardening within the plant area will not qualify for Input Tax Credit.
  22. In an appeal filed by the Commissioner of Commercial Taxes and GST, Odisha against an order of the AAR, Odisha, the Hon. AAAR, Odisha held that availing input tax credit for services in relation to plantation and gardening within the plant area, including mining area and the premises of other business establishments is allowed.
  23. Thus, it is our contention against the order of AAR, Maharashtra that availment of Input Tax Credit in relation to maintenance of garden inside the factory premises should be allowed.
  24. On perusal of the above submissions made by the Appellant including the various judicial pronouncements cited by the Appellant, wherein it was categorically held by the courts that Cenvat Credit in respect of the input services used in the maintenance of the gardens in the factory premises is admissible, it is opined that ratio of these judicial pronouncements is clearly applicable in the instant subject matter as the facts and circumstances of the instant subject matter is similar to the facts and circumstances of the above citedMadras High Courtcase of M/s. Rane TRW Steering System Ltd. vs The Commissioner of Central Excise and Central Tax (2018) = 2018 (2) TMI 1745 – MADRAS HIGH COURT, wherein the Appellant had contended on the ground that the maintenance of the garden inside the factory premises is a mandatory condition imposed by the Tamil Nadu Pollution Control Board for the setting up and operation of the factory. In the present case also, it is mandated by the Maharashtra Pollution Control Board to maintain the garden in the factory premises of the Appellant, Further, the definition of the Input services provided under section 2(60) of the CGST Act, 2017 is comparatively wider than the earlier definition of input services, which were provided under Rule 2(l) of the erstwhile Cenvat Credit Rules, 2004, owing to the presence of the phrase “used or intended to be used in the course or furtherance of business” under the present GST Law. Further, the Department, in this case the respondent, has also not opposed to the admissibility of the ITC in respect of the input services used by the Appellant in the maintenance of the gardens inside the factory premises.
  25. Hence, in view of the above discussions, it is reasonably concluded that the Appellant is eligible to avail the ITC in respect of the input services used to maintain the gardens inside the factory premises.
  26. Now, we will discuss the issue of admissibility of ITC, raised by the Appellant in question 2(b) of the advance ruling application, in respect of the various input services like Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.

The Appellant’s submissions in this regard is as under:

As explained above, the term ‘factory estate’ has been used ‘to describe the area that falis within the boundaries of Ordnance Factory Bhandara and are so controlled by Ordnance Factory Bhandara but such area is outside the precincts of the area where factory & administrative building is there. Such area comprises of establishments such as residential quarters of employees of Ordnance Factory Bhandara & allied organisations, market area, places for worship of God, shops that are given on [ease renta! basis for commercial purposes, gardens, parks, playgrounds, swimming pool, factory school for children of employees, hall for recreational activities, footpaths, street lightings, inter-connected roads between all such establishments and factory premises and land that is currently not used for any purpose whatsoever.

The services of maintenance, upkeep, repair, housekeeping, cutting of trees & grass, civil construction, hiring of manpower for attending school bus, security services, garbage collection, sewage treatment, sweeping &cleaning etc. procured in relation to such establishments within the factory estate should be considered to be an “input service” as per section 2(60) of the CGST Act, 2017 and should also be considered to be “used or intended to be used in the course or furtherance of business” as per section 16(1) of the CGST Act, 2017. Thus, input Tax Credit should be available in respect of expenditure done on such services in so far as they are not disallowed under any other provisions of the CGST Act, 2017. Let us analyze each establishment one by one for admissibility of Input Tax Credit:

(i) Residential quarters of employees of Ordnance Factory Bhandara & allied organisations, market area, places for worship of God, gardens, parks, playgrounds, swimming pool, footpaths, street lightings, factory school for children of employees, hall for recreational activities: –

Services like maintenance, upkeep, repair, providing security, garbage collection, sewage treatment, civil construction, sweeping & cleaning etc. are procured in relation to the aforementioned establishments. The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure A”. We wish to submit that all such services are used by the employees of the factory. The Ordnance Factory Board decided to develop such residential facilities within the factory estate since the factory is located at a remote area and employees from different parts of the country are recruited to work over here in Ordnance Factory Bhandara. The residential colony is an ‘industrial township’ and the appellant is responsible to provide all types of municipal services in the colony. If the employees are not provided a proper residential colony with all the aforementioned facilities and establishments, there would be no availability of proper staff and labor required for continuous manufacturing activities. Thus, such services procured in relation to such establishments are necessary for furtherance of business of our organisation since these services help in maintaining the basic living standard of the employees who in turn are responsible for running the day-to-day business of the factory. Cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply. Reliance is placed on the following judicial pronouncements of various High Courts & Tribunals wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to services procured in relation to residential colony for the employees:

In the case of CCE vs ITC Ltd. in the year 2012 = 2011 (11) TMI 516 – ANDHRA PRADESH HIGH COURT, the Hon. Andhra Pradesh High Court held that CENVAT credit of service tax paid on the taxable services used in the residential complex shall be available to the manufacturer. The relevant paragraph of the said judgment is extracted herein below.

“The Commissioner’s Order-in-Appeal dated 27-5-2008 reflects that he accepted that the efficiency of the employees of an organization would be dependent on various factors, one such being the provision of a housing colony. He further conceded that these facilities would contribute to the enhancement of the productivity of the organization. Having stated so, the appellate authority surprisingly took the view that maintenance of the residential colony by the respondent-Company was only an obligatory activity owing to situational exigencies and was not connected either directly or indirectly to the manufacture of its final products. This inherent contradiction in the Order-in-Appeal was noted by the CESTAT, which opined that if accommodation was not provided by the respondent-Company to its employees at this remote location, it would not be feasible for it to carry on its manufacturing activity. The finding of the Commissioner that providing a colony to the employees was not directly or indirectly connected with the manufacturing activity of the respondent-Company was therefore; not borne out on facts. The staff colony, provided by the respondent-Company, being directly and intrinsically linked to its manufacturing activity could not therefore, be excluded from consideration. Consequently, the services which were crucial for maintaining the staff colony, such as lawn mowing, garbage cleaning, maintenance of swimming pool, collection of household garbage, harvest cutting, weeding, etc., necessarily had to be considered as ‘input services’ falling within the ambit of Rule 2(1) of the CENVAT Rules, 2004.”

In the case of MANGALAM CEMENT LTD VERSUS COMMISSIONER OF C. EX. & S.T., JAIPUR-I, the Hon. Delhi = 2015 (10) TMI 2524 – CESTAT NEW DELHI bench of Tribunal held that the residential colony was constructed adjacent to the factory because of the reason that the factory manufacturing cement is located at a place which is away from the city. Unless the residential colony is constructed near the factory, the appellant will not be in a position to get the proper/adequate manpower for running its plant activities and thus set aside the order passed by the Id. Commissioner (Appeals) of denying CENVAT credit of service tax taken by the appellant on maintenance and repair work of their residential colony.

In the case of CCE Meerut vs M/s. Bajaj Hindustan Ltd. = 2015 (9) TMI 1216 – CESTAT NEW DELHI, the dispute was in relation to allowance of CENVAT Credit of Service Tax paid on construction services to the respondent for construction of residential colony/dormitory located in the precinct of the factory. The Hon. New Delhi bench of the Tribunal held that construction of residential colony/dormitory adjacent to the factory premises was the necessity because of the location of the factory in a remote area, where if the accommodation is not provided to staff/workers, the continuous/round the clock manufacturing activity will hamper. Further, the cost towards such construction has also been considered as expenditure in the books of accounts of the respondent. Therefore, such construction activity was held to be in relation to the business of the respondent and therefore CENVAT Credit was allowed in relation to such services.

In the case of Reliance Industries Ltd. vs CCE & ST, Mumbai = 2015 (11) TMI 100 – CESTAT MUMBAI, the dispute was in relation to allowance of CENVAT Credit of Service Tax in respect of services like construction services, repairs and maintenance services, security service, manpower recruitment and supply services, works contract services etc. It was noticed by the lower authorities that these services on which credit was availed of service tax paid were received in their residential township constructed for the employees. It was held by the Mumbai Bench of the Tribunal that the expenses which were incurred by the appellant for the setting up of the township/colony for their employees are expenses which are in relation to the business activity of the appellant which is manufacturing of petroleum products. It was also noted that while arriving at the price of the finished goods manufactured in these factory premises, appellant has considered the expenses incurred towards the residential township/colony as expenses and included the same while arriving at the cost of production of the final products manufactured in the factory premises and accordingly CENVAT Credit was allowed in relation to such services.

96.1 We have carefully considered the above submissions made by the Appellant, which also included the above cited case laws. It is not forthcoming from any of the above cited judgments as to whether the manufacturers involved in the aforementioned cases is charging some amount/rent for providing the accommodation facility to its staffs in the residential colony maintained by them. Thus, the facts and circumstances of the above cited cases are different form the instant case, where the Appellant is charging some rent/consideration from their employees for providing accommodation facility in the residential colony maintained by it, which renders the said activity of the Appellant as supply of residential services, which is an exempt supply in itself in terms of the provisions made at Sr. 12 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017. Further, the education services provided by the factory school to the children of the employees, renting of the recreational halls to the employees for organizing some family functions against certain considerations are exempt supply as discussed while replying to the question 1 of the advance ruling application of the Appellant.

Since, all the aforementioned supplies made by the Appellant are exempt supply, any inputs or input services viz. maintenance, upkeep, repair, providing security, garbage collection, sewage treatment, civil construction, sweeping & cleaning, etc., pertaining to the residential quarters of employees of Ordnance Factory Bhandara & other allied organisations, market area, places for worship of God, gardens, parks, playgrounds, swimming pool, footpaths, street lightings, which are used inside the residential colony will not be available to the Appellant for ITC in accordance with the provision of Section 17(2) of the CGST Act, 2017.

(ii) Shops that are given on rental basis for commercial purposes: –

In general, services related to establishment, repair and maintenance of such shops is procured. Such shops are used for commercial purposes & commercial lease rent is recovered from the tenants of such shops on which GST is collected by Ordnance Factory Bhandara. Thus, the Input Tax Credit related to such services in relation to such shops should be admissible as such expenditure is directly related to the business of renting of immovable property unless otherwise blocked under any other provisions of the CGST Act, 2017,

96.2 On perusal of the above submissions made by the Appellant, it is opined that as per the provision of section 16(1) of the CGST Act, 2017, the Appellant is entitled to avail ITC in respect of expenditures incurred on the input services used in the taxable supply of the renting of immovable property for commercial purposes.

(iii) Inter-connected roads between various establishments and facto premises: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure B”. In general, services related to construction, repair and maintenance of such roads is procured. Roads connect the various establishments within the factory premises; that is factory where manufacturing activity is done and administration building with various other establishments within the factory estate like residential quarters, market area and other establishments mentioned above. Thus, the Input Tax Credit related to expenses mentioned in “Annexure B” in relation to such interconnected roads should be admissible on the following grounds: –

  1. d) The road ranging from the main entrance gate from where the factory estate begins up to the factory premises is used for inward and outward transportation of raw materials & finished goods and is thus used in the course or furtherance of business.
  2. e)  within the factory estate; that is the establishments like residential quarters, hospital, guest houses, market area and all other establishments as mentioned above are also used for the purpose of business of Ordnance Factory Bhandara since as argued above all such establishments are there for the benefit of employees of the factory& thus such roads are used in the course of business of Ordnance Factory Bhandara.
  3. f) The cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply.

96.3 On perusal of the above submissions made by the Appellant, it is observed that the construction and maintenance of the roads in the factory estate is mandatory for the Appellant to carry out their business operation. Without the proper road, the transportation of inputs, capital goods, and the finished products of the Appellant will not be able to take place. Thus, as per section 16(1) of the CGST Act, 2017, the expenditures incurred on the construction and maintenance of the road from the factory’s main gate to the factory premises where the manufacturing activities take place is eligible for ITC, since the same is incurred on the input services, which are used in the course or furtherance of business.

However, the construction and maintenance of the roads within the residential complex of the factory estate are in relation to the supply of the accommodation facility to the employees in the residential colony maintained by the Appellant, which are an exempt supply as discussed above, therefore, ITC in respect of such expenditures on the construction and maintenance of road inside the residential colony will not be available to the Appellant in accordance with the provision of section 17(2) of the CGST Act, 2017.

(iv) Land that is currently not used for any purpose whatsoever: –

The specific transactions in respect of which ruling on entitlement of input tax credit is required is specified in the enclosed “Annexure C”. In general, services related to maintenance of such land are procured. Such land is located within the factory estate and consists of mainly wild grass, trees & other vegetation. It is adjacent to the roads that are used for commutation. Input Tax Credit related to expenses mentioned in “Annexure C” in relation to such land should be admissible on the following grounds:

  1. e) It is necessary to cut wild grass & other vegetation that grows in such area on regular basis in order to maintain the factory estate area neat & clean and ensure that such vegetation does not spill over to and obstruct the roads used for commutation within the factory.
  2. f) Another reason is that such wild grass & other vegetation increases the bacteria count in the environment, factory and finished product that adversely affects the manufacturing process & the quality of the final product & the environment and hence it is necessary to maintain such wild grass & other vegetation.
  3. g) The cost of such services forms part of the cost of the final products and thus forms part of the value of taxable supply.
  4. h) Reliance is placed on the following judicial pronouncement of the Tribunal (CESTAT), wherein it was adjudged that CENVAT Credit of Service Tax was allowable on expenditure related to jungle cutting services to keep environment, factory and finished product bacteria free:

In the case of L’Oréal India Pvt. Ltd. vs. CCE (2011) 22 STR 89 (Tri. – Mum.) = 2010 (11) TMI 143 – CESTAT, MUMBAI, the Hon. Mumbai bench of the Tribunal held that CENVAT credit of service tax paid on jungle cutting services to keep environment, factory and finished product bacteria free are to be allowed as they have nexus with business activity of Appellant.

96.4. After careful consideration of the above submissions and case law cited by the Appellant, it is opined that the Appellant is entitled to avail ITC in respect of expenditure incurred on the maintenance of such unused land in the factory estate, as the same is essential for keeping the factory surroundings bacteria free, and keeping the roads adjacent to such lands commutation worthy, which is important for smooth business operation of the Appellant. Thus, the said maintenance services like cutting of the wild grass and other vegetation are being used in the course or furtherance of business, hence these services may be construed as input services, accordingly are eligible for ITC.

Now, let us examine the issue of admissibility of ITC, raised by the Appellant in question 2(c) of the advance ruling application, in respect of the various inputs like medicines and others mentioned in “Annexure D” , purchased by the factory for the hospital and expenditure on input services like maintenance, upkeep and other activities also mentioned in “Annexure D” relating to such hospital. It has been submitted by the Appellant that a hospital is run by Ordnance Factory Bhandara and is also located within the factory estate but outside the precincts of the area where factory & administrative building is located; and that the medicines and other facilities are provided to employees of the factory without any consideration. The Appellant further submitted that Input Tax Credit on the inputs iike medicines and others mentioned in “Annexure D” purchased by the factory for the hospital and other expenditures incurred on maintenance, upkeep and other activities also mentioned in “Annexure D” relating to such hospital should be admissible on the following grounds: –

(a) Hospital helps in keeping the employees fit and healthy, so that they can contribute for furtherance of business of Ordnance Factory Bhandara.

(b) As a part of welfare measure, it is necessary to provide the employees basic medicinal facilities within the factory estate itself since the factory is located at a remote location.

(c) Cost of such medicines and expenditure on maintenance, upkeep and other activities relating to such hospital forms part of the cost of the final products and thus forms part of the value of taxable supply.

(d) Reference to the judicial pronouncements mentioned in above questions can be drawn in so much so that hospital has been set up for the benefit of the employees and it too forms a part of residential colony of Ordnance Factory Bhandara.

(e) Reference may also be drawn to section 9 of the CGST Amendment Act, 2018, that is In force from 01/02/2019, wherein an amendment in section 17(5) (b) of the principal CGST Act, 2017 has been brought about where input tax credit shall not be available in respect of supply of health services except where the same is obligatory for an employer to provide to its employees under any law for the time being in force.

(f) That as per the amended section 17(5) (b) of the principal CGST Act, 2017, Input Tax Credit in respect of medicines purchased in factory hospital and other inputs and input services used in factory hospital should be allowed since such inputs and input services are used in respect of supply of health services to employees and their families that are mandatory to be provided under Ordnance Factory Medical Regulations.

With respect to the above issue, it was ruled by AAR, Maharashtra that the hospital/dispensary maintained by the applicant to its employees and their dependents is to be categorized as “clinical establishment” as defined at Sr. No. 2(s) of the Notification No. 12/2017-C.T. (Rate) dated 28.6.2017, and supply of health care service by such clinical establishment is exempted under Sr. No. 74 bearing heading 9993 of the Notification No. 12/2017- Central Tax(Rate) dated 28th June, 2017, hence ITC on such exempted supply of services is not available to applicant under sub-section (2) of Section 17 of the CGST Act, 2017 in respect of services and goods procured for maintenance of hospitals and pharmacy outlet as such services, being nil rated, fall under exempt supplies.

  1. We have perused the aforesaid submissions made by the Appellant, wherein they have placed their emphasis on section 9 of the CGST Amendment Act, 2018, which is in effect from 01.02.2019, which provides that input tax credit shall not be available in respect of supply of health services except where the same is obligatory for an employer to provide to its employees under any law for the time being in force. The Appellant here has referred to the Ordinance Factory Medical Regulations in terms of which it is mandatory for the Ordnance Factory Bhandara to provide the medical facility to the employees and their dependents free of cost. Thus, it was submitted by the Appellant that they are falling under the exception clause inserted in section 17(5)(b) of the CGST Act, 2017 vide section 9 of the CGST Amendment Act, 2018 w.e.f. 01.02.2019, which provides that input tax credit shall not be available in respect of supply of health services except where the same is obligatory for an employer to provide to its employees under any law for the time being in force.
  2. Here, we intend to agree with the Appellant’s submissions in light of section 9 of the CGST Amendment Act, 2018, which amends section 17(5)(b) of the CGST Act, 2017 as stated above. Hence, we are of the opinion that Appellant are rightfully entitled to avail the ITC in respect of al! the inputs like medicines, equipment, furniture, etc. consumed in the hospitals and input services like maintenance and upkeep of the hospitals, etc., to provide the health services to its employees and their dependents as per the terms of the Ordnance Factory Medical Regulation, which may be construed as the law for the time being in force as mentioned in the amended in section 17(5)(b) of the CGST Act, 2017. Section 9 of the CGST Amendment Act, 2018, which is in effect from 01.02.2019, has inserted this condition, wherein the ITC in respect of health services will be available to the employer provided such health services are obligatory for the employer to provide to its employees under any law for the time being in force, which, prior to this amendment act, was not available to any registered person under section of the CGST Act, 2017.
  3. As regards the ruling of the AAR, we observe that the impugned ruling is lucidly contrary to the provision of the CGST Amendment Act, 2018, which clearly says that the ITC in respect of the health services are available to a registered person subject to the condition that the employer i.e. the registered person, is under obligation to provide such health services to its employees in terms of the provisions of any law for the time being in force. In the presentcase, it is obligatory for the Appellant to provide the health services to its employees and their dependents as per the Ordnance Factory Medical Regulation. Hence, the ruling pronounced by the AAR in this regard is erroneous, and warrants to be set aside.
  4. Now, let us examine the issue of admissibility of ITC, raised by the Appellant, in question 2(d) of the advance ruling application, wherein they had asked as to whether they were eligible to avail ITC in respect of input services pertaining to maintenance and upkeep of guest houses maintained by them. Here, it was held by AAR, Maharashtra that the Appellant were not entitled to avail the ITC in respect of the input services pertaining to the maintenance and upkeep of the Guest houses owned and controlled by the Appellant as the provisions of the guest house facility to the employees are not in the course or furtherance of business, and also the said services of the guest house facility were being consumed personally by the Appellant and its employees, therefore, ITC in respect of the inputs or input services related to the upkeep and maintenance of the guest houses are not available to the Appellant in terms of the provision of section 17(5)(g) of the CGST Act, 2017. The Appellant has challenged this ruling of AAR, and to support their contention, they have cited variouscaselaws, which are as under:

(a) ISMT LTD. VERSUS COMMR. OF CUS. & C. EX., AURANGABAD [2015 (40) S.T.R. 596 (Tri. – Mumbai)) = 2015 (10) TMI 1540 – CESTAT MUMBAI

(b) L’Oréal India Pvt. Ltd. Vs- Commissioner of C. Ex., Pune-l[2011 (22) S.T.R. 89 (Tri.- Mumbai)) = 2010 (11) TMI 143 – CESTAT, MUMBAI

(c) Commissioner of C. Ex., Visakhapatnam Vs. Hindustan Zinc Ltd. [2009 (16) S.T.R. 704 (Tri. – Bang.)] = 2009 (4) TMI 129 – CESTAT, BANGALORE

  1. We have carefully considered the above cited judgments, which have been relied upon by the Appellant to substantiate their submissions regarding the admissibility of ITC in respect of the inputs and input services pertaining to the maintenance and upkeep of the guest houses. The Hon’ble CESTAT, Mumbai in thecaseof L’Oréal India Pvt. Ltd. Vs. Commissioner of C. Ex. (Supra) inter alia held that the appellants are entitled for input service credit on outdoor catering service/housekeeping service except for the portion of their service for which they have recovered some amount from the persons staying in guest house.
  2. Thus, it is clearly revealed from the above tribunal judgment that ITC in respect of the portion of input/input services pertaining to the guest houses, for which some consideration has been received from the persons availing the guest house facility, are not available. In the presentcase, it has been submitted by the Appellant that they are recovering the room charges from the guests occupying the guest house. Hence, by applying the ratio of the above discussed CESTAT Judgment in the facts and circumstances of the presentcase, we conclude that the ITC in respect of any of the inputs or input services pertaining to the guest house is not available to the Appellant as the Appellant themselves have submitted that they are recovering room rent for availing guest house facilities. Thus, the above discussed CESTAT Mumbai Order, cited by the Appellant in support of their contention has emerged out to be rather adverse for their contention, and has instead supported the ruling pronounced by AAR, wherein the ITC under question has been denied.
  3. Further, as the Appellant is charging rent from the guests availing the guest house facilities, which may be considered as exempt supply in terms of Sr. NC. 6 of the Notification no. 12/2017- Central Tax-(Rate) dated 28.06.2017 as the Appellant, as discussed above, has been held to be the Central Government. Therefore, No ITC is available against the said exempt supply in terms of the provision of section 17(2) of the CGST Act, 2017. Therefore, the ITC in respect of the inputs and input services pertaining to the guest houses will not be available to the Appellant.
  4. Now, let us examine the issue of admissibility of ITC, raised by the Appellant, in question 2(e) of the advance ruling application, wherein they had asked as to whether they were eligible to avail ITC in respect of the expenditure related to purchase of LPG cylinders used within industrial canteen. Here, it was ruled by the AAR, Maharashtra that since their canteen is providing services related to supply of food and beverages tc their employees and also charging consideration for the same, thereby rendering such services leviable to GST regime, therefore, ITC in respect of LPG cylinders being used to provide such taxable services related to supply of food and beverages to their employees are available to the Appellant.
  5. However, the Appellant have contended that allowing the availment of ITC on the aforementioned grounds by AAR, Maharashtra is incorrect in the light of the fact that Ordnance Factory Bhandara is “Central Government” and hence eligible for ‘NIL’ rate of tax on such supply of food and beverages made to the factory employees that are non-business entities in terms of Sr. 6 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017. They, further, submitted that as per section 9 of the CGST Amendment Act, 2018 that is in force from 01/02/2019, an amendment in section 17(5) (b) of the principal CGST Act, 2017 has been brought about where input tax credit shall not be available in respect of supply of food and beverages except where the provision of such goods or services or both is obligatory for an employer to provide to its employees under any law for the time being in force. Now, as per section 46 of the Factories Act, 1948, the State Government may make rules requiring that in any specified factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers. In this connection, it is submitted here that more than 2500 persons have been employed by Ordnance Factory Bhandara and thus the aforementioned provision relating to maintenance of canteen is obligatory for Ordnance Factory Bhandara to provide to its employees under the Factories Act, 1948. So, an industrial canteen has been provided by Ordnance Factory Bhandara for its employees within the factory where the employees have food and beverages by paying a nominal amount of money on no-profit-no-loss basis.
  6. Also, as per section 16(1) of the CGST Act, 2017,“Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Thus, Input Tax Credit in relation to LPG cylinders that are re-filled for use in industrial canteen should be allowed as per amended section 17(5) (b) & 16(1) of the CGST Act, 2017.

  1. Here, we would like to refer to our earlier observation made in respect of the question I(d) of the Advance Ruling application, wherein we held that the Appellant’s activities Of the supply of Food and beverages at the industrial canteen inside the factory premises would attract NIL rate of GST, that is the said supply was held to be exempt supply in terms of Sr. No. 6 of the Notification no. 12/2017- Central Tax-(Rate) dated 28.06.2017. Since the subject supply has been held to be exempt supply by the Appellant, the ITC in respect of the LPG cylinders used in the factory canteen of the Appellant will not be available in terms of section 17(2) of the CGST Act, 2017.
  2. Now, let us examine the question 6 of the advance ruling application, wherein the Appellant has asked as to whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues. As regards this issue, the AAR Maharashtra firstly inter alia ruled that Ordnance Factory Bhandara shall have to pay GST on Liquidated Damages deducted from the payments to its suppliers. AAR further ruled that ultimately Ordnance Factory Bhandara would be paying a lesser amount to their suppliers against supply of goods received, which would result in lesser payment being made by the supplier towards GST.”
  3. The Appellant has challenged the aforesaid AAR ruling by arguing that since they are central government as have been contended by them throughout the submissions made in the subject appeal, they are not liable to pay GST on the liquidated damages deducted from the payment made to the suppliers in terms of the provision of Sr. No. 62 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017. They further submitted that the impugned ruling under question, wherein the AAR has held that ultimately Ordnance Factory Bhandara would be paying a lesser amount to their suppliers against supply of goods received, which would result in lesser payment being made by the supplier towards GST, is factually incorrect attributable to the following reasons:

(i) Lesser payment in respect of L.D cases is made due to deduction of L.D from supplier’s payment. Deduction of L.D is an act of tolerating nonperformance of supplier on account of delay in delivery of goods or services and is as such a manner of compensating the supplier for his dues and not lesser payment against supply of goods/services received.

(ii) It was submitted that Ordnance Factory Bhandara does not make lesser payment of taxable amount and GST amount to the supplier in L.D cases. They have substantiated this claim with the illustration by two sample invoices and the corresponding entries in their books of account. By the said illustration of these sample invoices, and the corresponding transaction vouchers exhibiting the actual taxable value of the goods equal to that recorded in the corresponding invoices and GST thereon, which is also equal to the GST amounts mentioned in the corresponding Tax Invoices, they have strenuously emphasized that they are not paying less taxable amount or GST thereon to their suppliers in the L.D. cases. Further, they emphasized that they are maintaining separate accounts for Liquidation Damages, whose accounting code is different from those used for recording the taxable amount, CGST amount and SGST amount or IGST amount, as the case may be. Thus, they strive to contend that the Deduction of L.D. is separate transactional event from the receipt of the goods and payment made in respect thereof, after deducting L.D. from the dues of the respective suppliers.

  1. As regards the observation of the AAR in as much as the lesser payment being made to the suppliers would result in lesser payment of GST by the concerned suppliers, it was submitted by the Appellant that the taxable value of goods/services does not change due to L.D deduction. They inter alia submitted that the supplier shall have to pay tax on the entire taxable amount and not just only on the amount after deduction of L.D. They have corroborated this contention with the copies of GSTR-2A of the Appellant, wherein the above mentioned two sample invoices are being reflected. They further submitted that no credit notes have been raised by the supplier in respect of these two invoices which means that even the supplier understands that the taxable amount does not decrease due to deduction of L.D; and that the supplier not intend to pay lesser amount to the GST Department by issuing credit notes in respect of deduction of L.D from such invoices.
  2. On perusal of the submissions and documentary evidences put forth by the Appellant, it is amply revealed that deduction of Liquidation Damages from the dues of the suppliers on account of delayed delivery of goods or services has no bearing, whatsoever, on the actual taxable amount and GST leviable thereon mentioned in the tax invoices, as the transaction oi L.D. is separate from the transaction of the receipt of the goods or services. It is manifest from the two separate accounting codes, maintained by the Appellant, one for the receipt of goods and another for deduction of L.D. from the suppliers’ due, that taxable value of the goods or services even in CD. cases are being recorded in their respective accounts having its value equal to those mentioned in the tax invoices raised by the suppliers of the Appellant. The transaction related to L.D. is being recorded in separate accounting code. Maintenance of such accounting codes by the Appellant clearly shows that the Appellant is paying the actual taxable amount and GST thereon to its suppliers, as mentioned in the tax invoices raised by its suppliers. Further, the reflection of the illustrated sample invoices in the GSTR -2A of the Appellant further substantiates the Appellant’s claim that the suppliers are also aware of their liability to pay the actual GST and not the lesser amount of GST are being paid by the suppliers, even in the cases where there is deduction of liquidation damages from the payment made to such suppliers.
  3. Thus, in view of the above, it is observed that the Appellant was rightful in challenging the ruling pronounced by AAR in this regard, and accordingly, they are not required to reverse the ITC on account of the deduction of L.D. from the payment made to the suppliers.
  4. Now let us examine the final issue of the appeal, which had been raised in question 7 of the advance ruling application, wherein the Appellant had asked as to being a part of the Ministry of Defence, Government of India, whether the following notifications are applicable to our organisation and what shall be the impact of such notifications: –

(a) Notification No. 2/2018-Central Tax (Rate), in relation to services by an arbitrator or an advocate to our organisation.

(b) Notification No. 3/2018-Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.

(c) Notification No. 36/2017 – Central Tax (Rate), in relation to payment of tax on reverse charge mechanism on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

The AAR, Maharashtra answered in the negative for all the three aforementioned sub-questions of question no. 7 of the application by contending that the notifications are not applicable to Ordnance Factory Bhandara since it is not “Government”

  1. The Appellant has contended the aforementioned ruling of the AAR on the basis of facts and explanations given for Question No.l that Ordnance Factory Bhandara is indeed “Government” and hence all the three aforementioned notifications in Question No. 7 to the application should be applicable to Ordnance Factory Bhandara.
  2. In this regard, we are of the opinion that since the Appellant has been held to be “the Central Government” as per the discussions and findings carried out herein above, hence all the three aforementioned notifications in Question No. 7 to the application should be applicable to Ordnance Factory Bhandara.
  3. Now, before going into the operative part of the Order, it would be much providential to summarize the above discussions and findings in the tabular form, which is being inserted herein under:
Questions asked by the Appellant Discussions and Findings
1. Being a part of the Ministry of Defence, Government of India, whether our organization Ordnance Factory Bhandara is liable to pay GST on the following supply of services: –

(a) Liquidated damages deducted from the payments to be made to suppliers in case of delayed delivery of goods or services.

(b) Amount of Security deposit forfeited of suppliers due to non-fulfilment of certain contract conditions.

(d) Food and beverages supplied at industrial canteen inside the factory premises.

(e) Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.

(f) School bus facility provided to children of the employees.

(g)Conducting exams for various vacancies.

On perusal of the submissions made by the Appellant, it is observed that they are fulfilling all the conditions stipulated for the Central Government, provided under clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India. Since, the Appellant is functioning under the Department of the Defence Production, Ministry of Defence, Government of India, and all its activities including administrative, executive, etc. are carried out for and on behalf of the President of India, the facts which have been established by the various documents like the Appointment letter of the Group A Gazetted Officer of the Ordnance Factory, OFB Procurement Manual. OFB Procurement Manual clearly shows that all defence contracts are in the name and on behalf of the President of India only. Further, the signatures on the supply order placed to the Vendors, the Acceptance of the Tender, etc., clearly exhibits that all these executive works are being carried out in the name, and on behalf of the President of India. Thus, it is adequately evident that the Ordnance Factory Bhandara, the Appellant, is nothing but ‘the Central Government’ in accordance with the provision of section 2(53) of the CGST Act, 2017 read with clause (8) of section 3 of the General Clauses Act, 1897 read with Article 53 & Article 77 of the Constitution of India. In view of the above, the Appellant is not liable to pay GST on the following services supplied by them:

(a) Liquidated damages deducted from the payments to be made to suppliers in case of delayed delivery of goods or services.

(b) Amount of Security deposit forfeited of suppliers due to non-fulfilment of certain contract conditions.

(d) Food and beverages supplied at industrial canteen inside the factory premises.

(e) Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.

(f) School bus facility provided to children of the employees.

(g) Conducting exams for various vacancies.

Question: 2) Whether Input Tax Credit on expenditure on the goods and services consumed by our organisation in following activities shall be available: –

(a) Maintenance of garden inside the factory premises.

Findings in respect of Q. 2(a):- On perusal of the submissions made by the Appellant including the various judicial pronouncements cited by the Appellant, wherein it was categorically held by the courts that Cenvat Credit in respect of the input services used in the maintenance of the gardens in the factory premises is admissible, it is opined that ratio of these judicial pronouncements is clearly applicable in the instant subject matter as the facts and circumstances of the instant subject matter is similar to the facts and circumstances of the above cited Madras High Court case of M/s. Rane TRW Steering System Ltd. vs The Commissioner of Central Excise and Central Tax (2018) = 2018 (2) TMI 1745 – MADRAS HIGH COURT, wherein the Appellant had contended on the ground that the maintenance of the garden inside the factory premises is a mandatory condition imposed by the Tamil Nadu Pollution Control Board for the setting up and operation of the factory. In the present case also, it is mandated by the Maharashtra Pollution Control Board to maintain the garden in the factory premises of the Appellant. Further, the definition of the Input services provided under section 2(60) of the CGST Act, 2017 is comparatively wider than the earlier definition of input services; which were provided under Rule 20) of the erstwhile Cenvat Credit Rules, 2004, owing to the presence of the phrase “used or intended to be used in the course or furtherance of business” under the present GST Law. Further, the Department, in this case the respondent, has also not opposed to the admissibility of the ITC in respect of the input services used by the Appellant in the maintenance of the gardens inside the factory premises. Appellant is eligible to avail the ITC in respect of the input services used to maintain the gardens inside the factory premises.
(b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate. Findings in respect of Q. 2(b):

On careful consideration the above submissions made by the Appellant, which also included the above cited case laws. It is not forthcoming from any of the above cited judgments as to whether the manufacturers involved in the aforementioned cases is charging some amount/rent for providing the accommodation facility to its staffs in the residential colony maintained by them. Thus, the facts and circumstances of the above cited cases are different form the instant case, where the Appellant is charging some rent/consideration from their employees for providing accommodation facility in the residential colony maintained by it, which renders the said activity of the Appellant as supply of residential services, which is an exempt supply in itself in terms of the provisions made at Sr. 12 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017. Further, the education services provided by the factory school to the children of the employees, renting of the recreational halls to the employees for organizing some family functions against certain considerations (are exempt supply as discussed while replying to the question 1 of the advance ruling application of the Appellant. Since, all the aforementioned supplies made by the Appellant are exempt supply, any inputs or input services viz. maintenance, upkeep, repair, providing security, garbage collection, sewage treatment, civil construction, sweeping & cleaning, etc., pertaining to the residential quarters of employees of Ordnance Factory Bhandara & other allied organisations, market area, places for worship of God, gardens, parks, playgrounds, swimming pool, footpaths, street lightings, which are used inside the residential colony will not be available to the Appellant for ITC in accordance with the provision of Section 17(2) of the CGST Act, 2017.

(c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital. Findings in Q. 2(c)

we intend to agree with the Appellant’s submissions in light of section 9 of the CGST Amendment Act, 2018, which amends section 17(5)(b) of the CGST Act, 2017. Hence, we are of the opinion that Appellant are rightfully entitled to avail the ITC in respect of all the inputs like medicines, equipment, furniture, etc. consumed in the hospitals and input services like maintenance and upkeep of the hospitals, etc., to provide the health services to its employees and their dependents as per the terms of the Ordnance Factory Medical Regulation, which may be construed as the law for the time being in force as mentioned in the amended section 17(5)(b) of the CGST Act, 2017. Section 9 of the CGST Amendment Act, 2018, which is in effect from 01.02.2019, has inserted this condition, wherein the ITC in respect of health services will be available to the employer provided such health services are obligatory for the employer to provide to its employees under any law for the time being in force, which, prior to this amendment act, was not available to any registered person under section of the CGST Act, 2017. In view of this deliberation, the Appellant are rightfully entitled to avail the ITC in respect of all the inputs like medicines, equipment, furniture, etc. consumed in the hospitals and input services like maintenance and upkeep of the hospitals, etc., to provide the health services to its employees and their dependents as per the terms of the Ordnance Factory Medical Regulation.

(d) Expenditure related to maintenance and upkeep of guest houses maintained by organisation. Findings in Q. 2(d): –

As the Appellant is charging rent from the guests availing the guest house facilities, which may be considered as exempt supply in terms of Sr. No. 6 Of the Notification no. 12/2017- Central Tax-(Rate) dated 28.06.2017 as the Appellant, as discussed above, has been held to be the Central Government. Therefore, No ITC is available against the said exempt supply in terms of the provision of section 17(2) of the CGST Act, 2017.

(e) Expenditure related to purchase of LPG cylinders used within industrial canteen. Findings in Q. 2(e): –

Since, the Appellant’s activities of the supply of Food and beverages at the industrial canteen inside the factory premises would attract NIL rate of GST, that is the said supply was held to be exempt supply in terms of Sr. No. 6 of the Notification no. 12/2017- Central Tax-(Rate) dated 28.06.2017. Since the subject supply has been held to be exempt supply by the Appellant, the ITC in respect of the LPG cylinders used in the factory canteen of the Appellant will not be available in terms of section 17(2) of the CGST Act, 2017.

Question: 6) Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues. Findings in Q. 6: –

On perusal of the submissions and documentary evidences put forth by the Appellant, it is amply revealed that deduction of Liquidation Damages from the dues of the suppliers on account of delayed delivery of goods or services has no bearing, whatsoever, on the actual taxable amount and GST leviable thereon mentioned in the tax invoices, as the transaction of L.D. is separate from the transaction of the receipt of the goods or services. It is manifest from the two separate accounting codes, maintained by the Appellant, one for the receipt of goods and another for deduction of L.D. from the suppliers’ due, that taxable value of the goods or services even in L.D. cases are being recorded in their respective accounts having its value equal to those mentioned in the tax invoices raised by the suppliers of the Appellant. The transaction related to L.D. is being recorded in separate accounting code. Maintenance of such accounting codes by the Appellant clearly shows that the Appellant is paying the actual taxable amount and GST thereon to its suppliers, as mentioned in the tax invoices raised by its suppliers. Further, the reflection of the illustrated sample invoices in the GSTR -2A of the Appellant further substantiates the Appellant’s claim that the suppliers are also aware of their liability to pay the actual GST and not the lesser amount of GST are being paid by the suppliers, even in the cases where there is deduction of liquidation damages from tne payment made towards such suppliers. In view of this discussions, it is observed that the Appellant was rightful in challenging the ruling pronounced by AAR in this regard, and accordingly, they are not required to reverse the ITC on account of the deduction of L.D. from the payment made to the suppliers.

Question: 7) Being a part of the Ministry of Defence, Government of India, whether the following notifications are applicable to our organisation and what shall be the impact of such notifications: –

a) Notification No. 2/2018Central Tax (Rate), in relation to services by an arbitrator or an advocate to our organisation.

b) Notification No. 3/2018Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.

c) Notification No. 36/2017 Central Tax (Rate), in relation to payment of tax on reverse charge mechanism on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

Findings in Q. 7: –

Since the Appellant has been held to be “the Central Government” as per the discussions and findings carried out herein above, hence all the three aforementioned notifications in Question No. 7 to the application should be applicable to Ordnance Factory Bhandara.

  1. Hence in view of the above discussions and findings, we set aside the ruling pronounced by the AAR, Maharashtra and pass the following order:

ORDER

For the reasons recorded in the body of the order, the questions against which the Appellant has preferred appeal against the ruling of the AAR, Maharashtra, are being answered as under:

Question: 1) Being a part of the Ministry of Defence, Government of India, whether our organization Ordnance Factory Bhandara is liable to pay GST on the following supply of services: –

  1. a) Liquidated damages deducted from the payments to be made to suppliers incaseof delayed delivery of goods or services.
  2. b) Amount of Security deposit forfeited of suppliers due to non-fulfillment of certain contract conditions.

(d)  Food and beverages supplied at industrial canteen inside the factory premises.

(e) Community hall (Multipurpose Hall) provided on rental basis to employees of our organization.

(f) School bus facility provided to children of the employees.

(g) Conducting exams for various vacancies.

Answer: The Appellant is not liable to pay GST in any of these abovementioned activities/transactions carried out by them.

Question: 2) Whether Input Tax Credit on expenditure on the goods and services consumed by our organisation in following activities shall be available:

  1. a) Maintenance of garden inside the factory premises.
  2. b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.
  3. c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.
  4. d) Expenditure related to maintenance and upkeep of guest houses maintained by organisation.
  5. e) Expenditure related to purchase of LPG cylinders used within industrial canteen.

Answer: ITC in respect of the following input services are available to the Appellant:

(a) Maintenance of garden inside the factory premises;

(c) Medicines purchased by the hospital maintained by our organisation and used for treatment of factory employees and their dependents. Expenditure on maintenance, upkeep and other activities relating to such hospital.

ITC in respect of the following input services are not available to the Appellant:

(b) Maintenance and upkeep activities relating to gardens, parks, playground, factory school for children of employees, hall for ,-recreational activities, residential quarter buildings of employees, roads, footpaths, street lightings and other parts of estate area that are located outside the factory premises but within the factory estate.

(d) Expenditure related to maintenance and upkeep of guest houses maintained by organisation.

(e) Expenditure related to purchase of LPG cylinders used within industrial canteen.

Question: 6) Whether proportionate Input Tax Credit has to be reversed in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues.

Answer: No, the Appellant is not required to reverse any proportionate Input Tax Credit in cases where lesser payment is made to the supplier due to deduction on account of liquidated damages from supplier’s dues.

Question: 7) Being a part of the Ministry of Defence, Government of India, whether the following notifications are applicable to our organisation and what shall be the impact of such notifications: –

  1. d) Notification No. 2/2018-Central Tax (Rate), in relation to services by an arbitrator or an advocate to our organisation.
  2. e) Notification No. 3/2018-Central Tax (Rate), in relation to services supplied by our organisation by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.
  3. f) Notification No. 36/2017 – Central Tax (Rate), in relation to payment of tax on reverse charge mechanism on sale of used vehicles, seized and confiscated goods, old and used goods, waste and scrap to a GST registered person.

Answer: Yes, all the three aforementioned notifications will be applicable to Ordnance Factory Bhandara.

M/S. NAGPUR INTEGRATED TOWNSHIP PVT. LTD.

Nature of supply / transaction – Development of land – Lease of property or supply of works contract for construction of flat – The appellant pleaded that the activity would amount to transfer of immovable property and hence not liable to GST levy at all. – Held that:- Though the appellant in the draft agreement has projected the said transaction as a lease transaction of residential unit in an apartment/building and has also drafted agreement in such a way to project it as a lease transaction, the said transaction cannot be a lease transaction but it is an agreement for construction of residential flats. We say so because the clauses in the agreement though purported to be a lease agreement as clauses which are in complete disharmony with a normal lease transaction.

When a flat/apartment is given on lease it is always a complete unit which is immediately handed over to the Lessee for use. The appellant has argued that the transaction purported to be undertaken by him will come within the purview of renting of residential dwelling for used as residence. However, in the present case, the agreement has taken place during the construction of the project and the lease payments are made slab wise before the completion of the project. This almost never happens in the lease of a flat or a unit.

It is seen that almost 95% of the amount comprising the lease consideration is paid before the possession of the apartment. It is difficult to believe that a Lessee will commit such amount before moving or enjoying the flat. All these leads us to believe that this is nothing but a sale transaction projected as a lease transaction.

Though the object of the RERA Act is to regulate the sale of building, apartment or building, this project is RERA registered. This fact and the interpretation by the Bombay High Court in the case of Lavasa also shows that the said transaction is not a lease.

Decision of AAR upheld wherein it was held that, the activity would be in the nature of “works contract” as defined under Section 2 (119) of the Act and fall under SAC 9954 and attract GST @ 18%.

No.- MAH/AAAR/SS-RJ/11/2019-20, Appeal No. MAH/GST-AAAR-11/2019-20

Dated.- October 24, 2019

Citations:

  1. M/s. Larsen & Toubro Limited & Another Versus State of Karnataka & Another – 2013 (9) TMI 853 – Supreme Court
  2. Lavasa Corporation Limited Versus Jitendra Jagdish Tulsiani, Real Estate Regulatory Authority,] SRA Administrative Building, Mumbai And Manju Narendra Joshi, Girish Vassan Panjwani And Nidhi Panjwani – 2018 (8) TMI 632 – BOMBAY HIGH COURT
  3. In Re: M/s. Nagpur Integrated Township Private Limited – 2019 (7) TMI 39 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

SMT. SUNGITA SHARMA, AND SHRI RAJIVIALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Nagpur Integrated Township Pvt. Ltd. (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-107/2018-19/B-35 dated 02.04.2019 = 2019 (7) TMI 39 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA.

Brief Facts of the Case

  1. M/s. Nagpur Integrated Township Pvt Ltd., the Appellant, herein are registered under GST law, with Registration No. 27AAFCN5825Q1ZS under the jurisdiction of Nagpur. The appellant wish to submit that since the provisions of CGST Act, 2017 and the rules and notifications issued there under are in parametria to corresponding provisions in the Maharashtra SGST Act, 2017 and the rules and notifications issued there under, the provisions of CGST law alone are referred to in this appeal, which would imply reference to corresponding provisions under the SGST law also, unless specified otherwise.
  2. Maharashtra Airport Development Authority (hereinafter referred to as MADC), a company registered under the Companies Act, 1956 and having its registered office at 8th Floor, World Trade Centre, Cuffe Parade, Mumbai 400 005 is a special planning authority under the Maharashtra Regional and Town Planning Act, 1966, for the Multimodal International Hub Airport, Nagpur Project (MIHAN) which includes development of Nagpur Airport as an international hub, development of a Special Economic Zone and other facilities around the Nagpur Airport.
  3. M/s.Chourangi Builders and Developers Pvt. Ltd. (formerly known as M/s Reatox Builders and Developers Pvt. Ltd.) have formed a Special Purpose Vehicle (SPV), along with M/s IJM Realty (Mauritius) Ltd., under the name and style of M/s Nagpur Integrated Township Pvt. Ltd., the appellant herein. MADC and the appellant have entered into a Development Agreement dated 08.12.2017, a copy of which is placed at Page Nos. 35 to 57 of this appeal. By virtue of this agreement, the appellant has been granted the right to design, finance, develop, a township project, comprising of residential apartments, commercial complexes, etc. in the land owned by MADC. As per the agreement, the appellant had been permitted only to grant long term lease of the residential apartments and commercial buildings and the same cannot be sold outright in favour of the buyers. The land in which the construction is undertaken is a leasehold land, which cannot be transferred. In pursuance of thereof, the appellant intend to grant long term lease of the residential apartments being constructed and a sample “Agreement for Lease” proposed to be entered with prospective lessees is placed at Page Nos. 58 to 88 of this appeal. It may be observed that the identified apartment unit in the residential complex is proposed to be given on long term lease for 99 years, expiring on 21.06.2105, against payment of lease consideration by the lessee to the appellant. It may be noted that what is proposed to be given on lease is the identified apartment, as mentioned in Schedule C of the agreement. It may be further noted that the said “Agreements for Lease” would be entered into, as and when prospective lessees approach the appellant, during the state of construction of the complex, which fact is also noted in clause 1.3 of the agreement. The lease consideration is also payable in various installments as mentioned in Schedule D to the agreement, at various stages of construction.
  4. Based on the above facts, the appellant has filed an application for advance ruling before the Maharashtra Authority for Advance Ruling (hereinafter referred to as the AAR), seeking a ruling as to whether the activity of granting long term lease of the residential apartments would amount to “transfer of immovable property” and hence not liable to GST? If not, what is the appropriate classification and applicable GST rate for the said activity? The appellant pleaded that the activity would amount to transfer of immovable property and hence not liable to GST levy at all. In the alternative, it was also claimed by the appellant that the activity is classifiable under Service Accounting Code 997211, as “Rental and leasing services involving own or leased residential property” and as per S.No. 12 of Notification 12/2017 Central Tax (Rate) Dt. 28.06.2017, “Services by way of renting of residential dwelling for use as residence” is exempted from payment of GST. During the hearing, the AAR required the appellant to produce the details of normal sale value of apartments in the area near to the appellant’s project and the lease amounts charged by the appellant, which was also furnished by the appellant. Copy of the application filed by the appellant before the AAR and various written submissions filed before the authority are placed at Page Nos. 89 to 97 of this appeal.
  5. The department was also represented before the AAR and written and oral submissions were made by the department also. The department claimed that the activity of the appellant is in the nature of works contract for construction of the apartment for the prospective lessee.
  6. After due process of law, the AAR has passed the impugnedOrder No. GST-ARA-107/2018-19/B-35 Dated 02.04.2019 = 2019 (7) TMI 39 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA (Page Nos. 18 to 34 of this appeal). The AAR noted the following facts, which are not disputed.

(i) The appellant is granted the development rights on the property by MADC and also has rights to lease out the flats to the customers. In pursuance of the same, the appellant constructs residential apartments and give them on long term lease basis to its customers.

(ii) The customers would be paying 10 % of the lease premium as advance and pay the balance amounts in various installments based on progress on construction and the final 5 % will be paid on obtaining possession.

(iii) The maintenance of the flats would be the responsibility of the customer.

  1. The AAR goes on to observe that generally lease agreements for flats would be entered into in respect of finished apartments and the monthly lease amount would be around 2 to 3 % of the property value, but in thiscase, lump sum lease amount is received during construction stage itself, similar to the case of sale of apartments, where the buyer would make stage wise payments. Then the AAR has proceeded to compare the information as to lease value and sale value of flats in the locality and made certain observations. Further, the AAR has also observed that normally in Maharashtra, the cost of maintenance of the flat is borne by the owners, whereas in the instant case, the same is borne by the lessees.
  2. After making the above observations, the AAR has referred to Schedule II of the CGST Act and comes to a conclusion that in the subjectcase, there is a composite supply of works contract for construction of flat, which is intended to be handed over to the buyer, but the transaction is projected as if it is a lease transaction. The AAR also observes that the entire consideration would be received before issue of Completion Certificate for the project, which does not generally happen in a lease transaction. The AAR also observes that there is not much difference in the price charged for an outright sale of similar apartments in the area and the lease premium payable. Accordingly, the AAR has held that the activity would be in the nature of “works contract” as defined under Section 2 (119) of the Act and fall under SAC 9954 and attract GST @ 18%. The AAR has not at all examined the claim of the appellant that the activity is classifiable under SAC 997211 and entitled for exemption. The AAR has also held that the appellant’s first claim that the activity is not at all liable to levy of GST being a transaction in immovable property is also not sustainable.
  3. Aggrieved by the above decision of the AAR, in so far as holding that the activity is classifiable under Service Accounting Code 9954 and attract 18 % GST and not dealing with the appellant’s claim for classification under SAC 997211 and consequent exemption from payment of GST, the appellant is filing the present appeal before the Hon’ble Appellate Authority for Advance Ruling, Maharashtra, under Section 100 of the CGST Act, 2017 and Section 100 of the Maharashtra SGST Act, 2017, on the following grounds.

GROUNDS OF APPEAL

  1. The Appellant submit that the impugned order passed by the Maharashtra Authority for Advance Ruling (AAR) is not in accordance with correct interpretation of law and/or facts involved in thiscaseand hence liable to set aside for the following reasons.
  2. The short question to be determined in thiscasewhether the subject transactions are leasing of residential dwelling or provision of works contract service by the appellant in favor of their customers.
  3. The relevant facts to decide the above issues are not in dispute and they are:

(i) The appellant has been granted the right to develop and construction residential apartments in the subject land, which is owned by MADC.

(ii) The land is not freehold land but only a lease hold land and there are restrictions on transferring the Land.

(iii) As per the agreement with MADC, the appellant can only allot the residential apartments to their customers on long term lease for 99 years and cannot effect a transfer by way of sale or otherwise.

(iv) The customers can approach the appellant for grant of such long term lease of the residential apartment at any stage, either during the construction stage or after completion of construction.

(v) The lease premium payable by the customer is a lump sum amount, payable in various installments, co-terminus with the stage of construction.

(vi) The customers (lessees) are responsible for proper upkeep and maintenance of the apartment.

(vii) The customers (lessees) use the apartment for their own dwelling or may give it on sub lease to others, subject to the conditions prescribed in this regard.

(viii) The lease is for a long period of 99 years.

(ix) The lease model is chosen by the appellant due to the statutory restrictions on obtaining the land on freehold basis and transferring the same and not with a view to avoid / evade any taxes.

  1. The appellant wish to submit that the AAR has refused to accept the transaction as a lease transaction for the following reasons.

(i) Lease agreement is entered into during the stage of construction of the complex itself and payments are linked to stage of construction.

(ii) The lease premium payable is almost equal to sale price of flats in the locality.

(iii) The lessee have to bear the cost of maintenance of the apartment.

  1. The appellant wish to submit that the above reasons are not at all relevant to disregard the genuine lease transaction entered into by the appellant. As already stated the appellant cannot effect transfer of the apartment by absolute sale, due to the restrictions on transfer of the land, both statutorily as well as in terms of the Development Agreement between the appellant and MADC (the owner of the land). Further, grant of such long-term lease is a normal practice in the industry wherever there are restrictions on absolute transfers. Further, entering into lease agreements during the stage of construction itself is also a common commercial phenomenon. For example, incaseof commercial buildings, once lease agreements are entered into during the construction stage, according to the requirements of the lessee, suitable changes and additional works would be carried out by the builders. As the lease is for a considerably long period of 99 years, the lease premium payable would be comparable with the sale price of similar apartments in the vicinity and this cannot deny the fact that the transaction remains only as a lease and not a sale. The mode of lease consideration, whether it is monthly or lump sum are determined by the parties, based on various parameters. When a house owner gives his flat on lease / rent to a tenant, normally the lease rental is payable on monthly basis and a returnable deposit would also be required to be paid by the tenant. But in long term lease transactions, the consideration is often payable in lump sum. Whether the cost of maintenance is to be borne by the lessor or the lessee is a matter to be decided mutually between the parties and there is no statutory stipulation in this regard. In a long- term lease transaction it is ideally the lessee who is liable to bear it, as the lessor’s interest in the property after granting a long- term lease for 99 years, would be minimal. Thus, all the facts relied upon by the AAR to conclude that the subject transaction is not a lease transaction are totally extraneous facts and have no bearing on the decision as to whether the transaction is a lease or not. The AAR has completely ignored the statutory restrictions on effecting sale, prevalence of various methods of lease transactions in the field but has substituted its own restricted understanding of the term lease to the subject issue. The agreement between the appellant and their prospective customers is purely one of long -term lease and is in accordance with the relevant laws governing leasing of such properties and it cannot be wished away as a sham. Since the lease is for long period of 99 years, the lease premium payable by the lessee would be near to the sale price of such apartments in the vicinity, which is a commercial fact. Hence, all the facts based on which the AAR has come to a conclusion that the subject transaction is not a lease, are not at all relevant to decide whether the transaction is a lease or not and hence the Authority’s conclusion is totally based on extraneous considerations and hence not sustainable in law.
  2. The relevant Service Accounting Code 9972 is reproduced below.
220 Heading 9972 Real estate services
221 Group 99721 Real estate services involving owned or leased property
222 997211 Rental or leasing services involving own or leased residential property
223 997212 Rental or leasing services involving own or leased non-residential property
224 997213 Trade services of buildings
225 997214 Trade services of time-share properties
226 997215 Trade services of vacant and subdivided land
  1. The classification of Services under GST is based on United Nations classification where real estate services are classified under Section 72 (Page Nos. 98 to 100 of this appeal). It may be observed irrespective of the term of lease, leasing and rental services would fall under 9972 only. The AAR has not given any finding in the impugned order, as to why the activity of the appellant, in pursuance of the “Agreement for Lease” being entered into by them with their customers could not get classified under SAC 997211 above.
  2. S.No.12 of Notification 12/2017 is reproduced below.
12 Heading 9963 or Heading 9972 Services by way of renting of residential dwelling for use as residence Nil Nil
  1. The term “renting in relation to immovable property” is also defined in para 2 (zz) of the notification as,

(zz) “renting in relation to immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;

  1. It may be observed from the above that the term renting is given a very wider meaning, which covers, leasing, licensing, etc. without any reference to the period for which such agreement is entered into. The intention of the legislature is not to subject renting or leasing of residential dwelling to levy of GST and by disregarding the real nature of transactions between the appellant and their customers, the AAR has negated such legislative intention.
  2. Further, the appellant also wish to rely on CBIC’s Circular No.44/18/2018 Dt. 02.05.2018 (Page No. 101 of this appeal), wherein it has been clarified that “grant of tenancy right in a residential dwelling for use as residence dwelling against tenancy premium or periodic rent or both is exempt vide S.No. 12 of Notification 12/2017, which would go prove that the mode of payment, whether it is lump sum or periodical is not relevant to claim the said exemption.
  3. Further, the appellant wish to submit that the decision of the AAR that the activity is a works contract, falling under Service Accounting Code 9954 is not sustainable for the following reasons. The relevant classification is reproduced below:
Sr. No. Chapter, Section, Heading or Group Service Code (Tariff) Service Description
(1) (2) (3) (4)
1. Chapter 99 All Services
2. Section 5 Construction Services
3. Heading 9954 Construction services
4. Group 99541 Construction services of buildings
5. 995411 Construction services of single dwelling or multi dwelling or multi-storied residential buildings
6. 995412 Construction services of other residential buildings such as old age homes, homeless shelters, hostels and the like
7. 995413 Construction services of industrial buildings such as buildings used for production activities(used for assembly line activities), workshops, storage buildings and other similar industrial buildings
8. 995414 Construction services of commercial buildings such as office buildings, exhibition and marriage halls, malls, hotels, restaurants, airports, rail or road terminals, parking garages, petrol and service stations, theatres and other similar buildings
9. 995415 Construction services of other non-residential buildings such as educational institutions, hospitals, clinics including veterinary clinics, religious establishments, courts, prisons, museums and other similar buildings
10. 995416 Construction services of other buildings nowhere else classified
11. 995419 Services involving repair, alterations, additions, replacements, renovation, maintenance or re-modelling of the buildings covered above
  1. A careful perusal of the “Agreement for Lease” between the appellant and their lessees would reveal that the agreement is not at all for providing any construction service, as envisaged above. The agreement is purely for long term lease of an identified apartment as mentioned in Schedule C. The specifications of the apartment being constructed are mentioned in Schedule E of the agreement, which would be leased to the lessee, upon completion of construction.
  2. Further, reference is also invited to the following entries under Schedule II of the CGST Act, 2017, which lays down as to whether certain activities would be treated as supply of goods or as supply of services.

SCHEDULE II

[See Section 7]

ACTIVITIES [OR TRANSACTIONS] TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

  1. Supply of services

The following shall be treated as supply of services, namely: –

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation. – For the purposes of this clause –

(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely :-

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

  1. Composite supply

The following composite supplies shall be treated as a supply of services, namely:

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

  1. As per entry 5 (b) above, during the stage of construction of a building, i.e. before issue of Completion Certificate, if any part of the consideration in respect of a building, which is intended for sale to a buyer the said activity would amount to supply of service. It may be noted that sale of an apartment after issue of Completion Certificate would be a transfer of immovable property and hence not liable to GST. But, if any part of the sale price is received during construction stage, the same shall be considered as a supply of service. But, in the instantcase, there is no intention to sell the apartment by the appellant to the lessee at all and the apartment is only leased out.
  2. Further, the term “works contract” is defined in Section 2 (119) of the CGST Act as, “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
  3. It may be observed from the above definition that in order to constitute works contract, there should be a transfer of property in goods, whether as goods or in some other form. In acasewhere an apartment is constructed for a buyer, there is an element of transfer of property in various goods such as cement, steel, wood, etc. during the course of such construction and handing over. In the instant case, the apartment is only leased out to the lessee, along with the proportionate share of undivided share of land and at the end of the lease period, the lessee is required hand over the property back to the lessor in as is where is condition. Thus there is no transfer of property in goods in the transaction between the appellant and the lessees. Hence, the AAR’s conclusion that the subject activity is “works contract” is patently illegal and contrary to the statutory provisions.
  4. Further, the appellant also wish to refer to S.No. 16 (ii) of Notification 11/2017 Central Tax (Rate), as introduced vide Notification 1/2018 Central Tax (Rate) Dt. 25.01.2018, which is reproduced below:
(1) (2) (3) (4) (5)
“16 Heading 9972 (i) Services by the Central Government, State Government, Union territory or local authority to governmental authority or government entity, by way of lease of land. Nil
(ii) Supply of land or undivided share of land by way of lease or sub-lease where such supply is a part of composite supply of construction of flats, etc. specified in the entry in column (3), against serial number 3, at item (i); sub-item (b), sub-item (c), sub-item (d), sub-item (da) and sub-item (db) of item (iv); sub-item (b), sub-item (c), sub-item (d) and sub-item (da) of item (v); and sub-item (c) of item (vi).

Provided that nothing contained in this entry shall apply to an amount charged for such lease and sub-lease in excess of one third of the total amount charged for the said composite supply. Total amount shall have the same meaning for the purpose of this proviso as given in paragraph 2 of this notification.

Nil
(iii) Real estate services other than (i) and (ii) above. 9 -”
  1. It may be observed from the above that if the land / undivided share of land is given by way of long -term lease, and an agreement for construction of a building / apartment is entered into one third of the total value charged is exempted from payment of GST. This is to create a level playing field between outright sale of apartments during construction, where one third of the total value is excluded towards land value and the balance two thirds value is subjected to Service Tax levy. In the instantcase, since the agreement is purely for lease of apartment and not for any construction, this entry is not applicable. Further the above entry would apply only if the lease is for land / undivided share of land, whereas in the presentcase, the lease is that of the apartment itself. Assuming that the subject agreement involves lease as well as construction, as per Sr.No. 16 (ii) of Notification 11/2017 above, one third of the total value is exempted. It may be noted that the said services are classified under 9972 and not under 9954. Once the composite service, which involves leasing as well as construction is thus classified under 9972, as the principal supply being lease, the benefit of Sr.No. 12 of Notification 12/2017, which also covers SAC 9972 can be claimed, as the leasing in this case is of residential unit.
  2. The appellant also wish to submit that if the view of the AAR that the subject lease transaction is nothing but a sale of flat during construction and hence subjected to GST levy accordingly, the applicable GST shall also be equal to the GST applicable on sale of flat during construction. It may be noted that with effect from 01.04.2019, as per S.No.3 of Notification 11/2019, sale of apartments during construction attracts, 1.5 % GST on two thirds value (effective rate being 1 % on total value) incaseof affordable residential apartments or 7.5 %GST on two thirds value (effective rate being 5 % on total value) in case of apartments other than affordable ones. But, as per the ruling of the AAR, the appellant would be liable to charge 18% GST on the whole amount, contrary to 5 % on the whole amount, which is liable in similar cases where the apartments are sold during construction. If the allegation of the AAR that the appellant has camouflaged the activity as a leasing only to claim exemption and if such camouflage is lifted, the appellant should be liable to pay same GST as other builders would be paying in case of sale of apartments during construction. But the AAR’s ruling leads to a disastrous result, whereby the appellant is saddled with 18 % GST liability as against 5 % payable by typical builders.
  3. For all the above reasons, the AAR’s decision, classifying the activity undertaken by the appellant under SAC 9954 attracting 18% GST is not at all sustainable in law. The activity of the appellant is rightly classifiable only under Chapter 997211 and is entitled for exemption from payment of GST as per S.No. 12 of Notification 12/2017 Central Tax (Rate). Accordingly, the appellant wish to make the following prayer before the Hon’ble Maharashtra Appellate Authority for Advance Ruling.

PRAYER

  1. In view of the foregoing, it is respectfully prayed that the impugned advance ruling order passed by the Maharashtra Authority for Advance Ruling be set aside or modified holding that the impugned activities undertaken by the appellant in pursuance of the Agreement for Lease entered with their buyers is classifiable under SAC 9972 and entitled for exemption from payment of GST as per Sr.No. 12 of Notification 12/2017 Central Tax (Rate) Dt. 28.06.2017 and corresponding SGST / IGST Notifications.

Respondent’s Submissions

  1. Maharashtra Airport Development Company Ltd. (MADC) is a special planning authority under the Maharashtra Regional and Town Planning Act 1966, for the Multi Modal International Hub Airport, Nagpur Project (MIHAN) which includes development of Nagpur Airport as an international Hub, development of a Special Economic Zone, and other facilities around the Nagpur Airport. MADC is the rightful owner of the land situated at MIHAN, admeasuring about 31 acres situated within the Registration Division & District Nagpur, Sub Division &Taluka Nagpur (Rural) Revenue Village Khapri (Rly)
  2. M/s Chourangi Builders and Developers Pvt. Ltd., (formerly known as Mis. Reatox Builders & Developers Pvt. Ltd., hereinafter referred to as “Chourangi”), having its registered office at 31341, 1A, Rajiv CHSL, MadhusudanKaleikar Marg, Next to FDA, Bandra Kuria Complex, Bandra (E), Mumbai 400051 formed a Special Purpose Vehicle (SPV), under the name and style of ‘Mis Nagpur Integrated Township Pvt. Ltd.’ (NITPL), with IJM Realty (Mauritius) Ltd., a company incorporated under thelawsof Mauritius.
  3. IJM, on behalf of NITPL has deposited through MADC and Chourangi a Onetime Settlement (OTS) amount to Mis Vijaya Bank towards the Settlement of loan amount, availed by Chourangi in respect of the development of the said Land.
  4. In consideration of NITPL paying the OTS amount and agreed dues in respect of the development of the said Land, MADC had entered in for Development Agreement (DA) with NITPL on 8” December 2017 along with a Power of Attorney (POA) dated 8’ December 2017 and thereby entrusted to NITPL the rights to design, finance and develop a township project, on the said Land comprising apartment units, commercial space and allied infrastructure thereof and to lease the same to the prospective lessees (hereinafter referred to as “Township Project/ First City Project”) and by virtue of the said DA and POA the Developer named herein above is now therefore entitled to complete the said Township Project and to lease, assign and transfer the various residential and nonresidential units proposed to be constructed therein to the prospective lessees. Therefore, the Developer alone has the sole and exclusive right to allot on lease the residential and residential-cum commercial apartment (service apartments) units (hereinafter referred to as “Flats”), commercial space and allied infrastructure thereof in the said buildings to be constructed in the Township Project and to enter into agreement/s with the prospective lessee/s of the Flats in the said buildings and to receive the lease consideration in respect thereof.
  5. The Developer is desirous of developing the entire Township Project in a phased manner and accordingly the Developer is presently developing under Phase-1 A, 2 buildings comprising of 3 84 flats in Symphony 1 & 2 along with a club house on the part of the said land, situated within the Registration Division & District Nagpur, Sub Division & Taluka Nagpur (Rural) Revenue Village Khapri (Rly) bearing Khasra Nos.12, 20 (Part) and 22 (Part) total admeasuring to acres 5.50 cents, The remainder of the development on the balance of the said Land shall be made in future phases as the Developer may deem fit and proper, with necessary approvals from the concerned authorities.
  6. The Prospective Lessee is interested to take the said Property in the said FCP-Phase-1A with the knowledge that the said Property is a Leasehold Property and not a Freehold Property, and pursuance of the same the Prospective Lessee has thoroughly inspected/verified all the documents of title relating to the said FCP-Phase-1A and the Township Project under the existing law applicable to the said FCP-Phase-1A and Township Project, including the relevant orders, and the approval of plans, designs and specifications prepared by the Developer’s Architects and all other documents to his/her own satisfaction, for which the Developer had extended all possible co-operation to verify the rights of the Parties as well as the title of the said Property agreed to be taken on lease by the Prospective Lessee. The Developer has also granted inspection of all relevant building plans, including that of common areas as defined in section 2 (n) of the Real Estate (Regulation and Development) Act 2016.
  7. The Prospective Lessee, by agreeing to the terms and conditions as set out in the application for booking/allotment, has applied to the Developer for the allotment of the said Property.
  8. The developed units will be transferred to prospective customers through an agreement wherein the allotment is given to customer referred to as lessee. The lessee agrees to take on lease from Developer(Applicant) and Applicant agree to lease out to respective buyer the respective flat as mentioned specifically in the agreement. The lessee is not having any option to suggest any changes to the plan as approved. The prospective buyer would make an advance payment followed by instalments as prescribed. The buyer is liable to pay all applicable taxes including GST on the lease Consideration as applicable. The buyer is also liable to pay stamp duty and registration charges as applicable. The lease of property shall be registered in the name of buyer on full payment of consideration as scheduled. The deed is registered with right of inheritance of lease for the remaining period of lease as-is dependent on the situation. The payments from the buyers are described as lease Consideration. Authenticated copies of certificates showing nature of title of MADC and Developer is made available to the prospective buyer. Copy of sanctioned plan on basis of which construction is undertaken is also made available to the buyer.
  9. From the abovementioned facts and paras of sample copy of lease agreement, it is revealed that developer is going to construct the said property for prospective lessee, which will be leased out as per agreement of lease. This entire transaction is verified in the light of provisions of Goods and Service Tax Act 2017 as under:-

As per statutory provisions of GST ACT -2017 Section 7 (1) (a) which is reproduced as under-

Supply includes-

All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business.

As per Schedule II (section 7) i.e. Activities (or transactions) to be treated as supply of goods or supply of services.

Schedule II (5) Supply of services;

(b) Construction of complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Schedule II (6) Composite supply:- The following composite supply shall be treated as supply of services, namely:- a) works contract as defined in clause (119) of section 2

  1. From The above facts it is clear that it is a composite supply i.e. works contract as per Section 2(119) of GST Act -2017.

The meaning and scope of supply under GST can be understood in terms of following six parameters, which can be adopted to characterize a transaction as supply:

  1. Supply of goods or services. Supply of anything other than goods or services does not attract GST.
  2. Supply should be made for a consideration
  3. Supply should be made in the course or furtherance of business
  4. Supply should be made by a taxable person
  5. Supply should be a taxable supply

While these five parameters describe the concept of supply. Any transaction involving supply of goods or services without consideration is not a supply, barring few exceptions, in which a transaction is deemed to be a supply even without consideration. Further import of services for a consideration, whether or not in the course or furtherance of business is treated as supply.

  1. From the facts of thecase& paras of proposed lease agreement, transaction between developer and prospective lessee covers the concept ‘supply’ as it is for supply of construction services for a consideration. Basically, it is a works contract service and as per judgment of Hon’ble Apex Court in case of Larsen & Toubro Vs. State of Karnataka (2014) 1 SCC 708 = 2013 (9) TMI 853 – SUPREME COURT.

The term works contract is broad and includes all obligations and all types of contract. Works contract is a contract for undertaking or bringing into existence some works.

Hence, lease agreement between applicants and prospective lessee is a works contract.

  1. A perusal of the above authorities leads us to the conclusion that “Works” means the carrying out of construction activities involving labor along with the supply of materials. Further, there appears to be a close nexus between “works contract’ and construction activities.
  2. “Works” is largely interpreted as a building or a structure which has emerged as a result of labor;
  3. Works contract is a contract for executing of any works along with the right to sue for breach;
  4. There should be a transfer of property in goods involved in the execution of works contract.
  5. From the final definition of “works contract”, it becomes clear that to qualify as a “works contract”, a contract shall not be a contract for mere supply of goods or supply of services; that is to say, the nature of contract executed shall be a composite supply involving supply of both goods and services which results in the creation or repair/ maintenance/ renovation / improvement etc. of an immovable property as a whole.

The answer to the above lies in the Schedule ll appended to the CGST Act. This schedule categorically specifies whether a particular supply is a supply of goods or services. Two entries under this Schedule are relevant:

  1. Entry 5(b) which stated that –

“The following shall be treated as supply of services, namely:-

(b) ‘construction of a complex, building, civil structure or a part thereof, including a complex or building for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”

Explanation– For the purposes of this clause –

(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of nonrequirement of such certificate from such authority, from any of the following, namely:-

(I) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(II) a chartered engineer registered with the institution of Engineers (India ); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacement or remodeling of any existing civil structure.

  1. Entry 6 Composite supply

The following composite supplies shall be treated as a supply of services, namely:-

(a) Works contract as defined in clause (119) of section 2 under GST, the whole works contract is treated as a composite supply of Services and leviable to GST as Supply of Services.

As entire consideration will be paid by the prospective lessee before issuance of completion certificate or prior to occupation GST will be applicable.

  1. From the facts of thecaseentire construction service is provided to prospective lessees in compliance of agreement of lease hence it is squarely covered in the ambit of GST Law.

Personal Hearing

  1. A personal Hearing in the matter was conducted on 14.10.2019, which was attended by Shri G. Natarajan, Advocate, on behalf of the Appellant, as well as by Shri Manish Puliye, the Jurisdictional Officer in the instant matter, who reiterated their respective written submissions filed before us.

Discussions and Findings

  1. We have gone through the facts of thecase, documents on record and submission made by the appellant as well as the jurisdictional officer. The MADC i.e. Maharashtra Airport Development Authority is a Special Planning Authority under the MRTP Act for the Multi Model International Hub Airport, Nagpur, Mihan which includes development of Nagpur Airport as an International Hub Development of SEZ etc.. It is seen that M/s. Chaurangi Builders and Developers have formed a Special Purpose Vehicle (SPV), along with M/s IJM Realty (Mauritius) Ltd., under the name and style of M/s Nagpur Integrated Township Pvt. Ltd., who is the appellant in the presentcase. Then agreement between MADC and the appellant dated 08.12.2017, the appellant is granted the right to design, finance and develop a township project comprising of residential apartments, commercial complexes, etc. on the land owned by MADC. As per the agreement, according to the appellant, they are permitted to grant long term lease of the residential apartments and commercial buildings and the same cannot be sold outright in favour of the buyers. The land on which construction is undertaken is a leasehold land. The appellant has submitted a draft “Agreement for Lease” which is proposed to be entered with prospective lessees. The have drawn attention to the fact that the identified apartment unit in the residential complex is proposed to be given on long term lease for 99 years, expiring on 2105, against payment of lease consideration by the lessee to the appellant. It is also seen that the agreement of lease entered into during the construction of the complex, and the lease consideration is also payable in various installments at various stages of construction.
  2. The AAR had to give a ruling on as to whether the activity of granting long term lease of the residential apartment would amount to transfer of immovable property or not? It was argued by the appellant that the activity would amount to transfer of immovable property and hence not liable to GST. In the alternative, it was claimed that the activity is classifiable under SAC 997211 as “Rental and lease services involving owned or leased residential property and as per Sr.No.12 of Notification 12/2017, dt.28.06.2017, “Services by way of renting of residential dwelling for used as residence is exempted from payment of GST. The AAR noted the following facts which are not disputed:-
  3. a) The appellant is granted the development rights by MADC and also as rights to lease out the flats to the customers.
  4. b) The customer would be paying 10% premium as lease advances and paying the balance in various installments.
  5. c) The maintenance of the flats would be responsibility of the customers.
  6. The AAR held that this is a composite supply of Works Contract for consideration of flats which is intended to be handed over to the buyer and the transaction is projected as if it is a lease transaction. The AAR based its ruling on the following arguments:-
  7. A) Generally flats taken on lease are fully constructed flats with Occupancy Certificate which is not thecase In the present case, the lease amount are received during construction. The Lessee keeps paying installments on completion of slabs and this type of payment is only made when person has entered into an agreement for purchase of flat in an ongoing project.
  8. B) The AAR called for details of lease amount charged to the customers towards the leasing of the flats in the proposed project. From the details submitted by the appellant, the AAR gave a finding that the lease amount payment over a certain time period is around 50% of the prices for right to move in flats. In respect of certain flats it was found that lease amount payment over a certain time period without having possession of the flats is an excess of 60% of the flat. This lease amount are going to be paid without using the flat and therefore it was concluded that the said transaction are given a colour of a lease transaction.
  9. C) The Lessee have to pay the maintenance charges. Normally in lease transaction it is the flat owner who pay maintenance charges.
  10. In view of the above, the AAR has concluded that the said supply is a taxable supply in the form of construction of complex/building/civil structure or a part thereof including a complexes or buildings for which consideration is received by the appellant in installments and therefore it is a composite supply of Works Contract covered u/s.2(119) of the CGST Act, 2017.
  11. We agree with the findings of the AAR. Though the appellant in the draft agreement has projected the said transaction as a lease transaction of residential unit in an apartment/building and has also drafted agreement in such a way to project it as a lease transaction, the said transaction cannot be a lease transaction but it is an agreement for construction of residential flats. We say so because the clauses in the agreement though purported to be a lease agreement as clauses which are in complete disharmony with a normal lease transaction. The following issues immediately come into mind while reading the agreement placed by the appellant. Under the CGST Act, what is exempted from tax is services by way of renting of residential dwelling for used as residence. Therefore, when a flat/apartment is given on lease it is always a complete unit which is immediately handed over to the Lessee for use. The appellant has argued that the transaction purported to be undertaken by him will come within the purview of renting of residential dwelling for used as residence. However, in the presentcase, the agreement has taken place during the construction of the project and the lease payments are made slab wise before the completion of the project. This almost never happens in the lease of a flat or a unit.
  12. The appellant has got the land on a long term lease from MADC, where in the developments happening out of the agreement have to abide by the basic tenets of the agreement with MADC. Thus the residential flats being booked by the appellant are flats with agreement to construct and cannot be colored by the ‘lease agreement’ word being used throughout the agreement under consideration.
  13. It is also seen from the payment schedule for the prospective lease that the lessee has to give 0.5% of the lease consideration before signing and 9.5% within 30 days of booking. The rest of the amount is to be paid by him on completion of certain milestone in the construction of the project. So for example, on completion of foundation-10% is to be given, after completion of third slab 15% is to be given and so on. As lease never comes under construction project, the above payment schedule is only seen when an agreement is entered into by a prospective buyer with a builder/developer for the construction of a building or complex. Therefore, it is seen that almost 95% of the amount comprising the lease consideration is paid before the possession of the apartment. It is difficult to believe that a Lessee will commit such amount before moving or enjoying the flat. All these leads us to believe that this is nothing but a sale transaction projected as a lease transaction.
  14. As per clause 5.2 of the draft agreement, the prospective Lessee also has to pay advance maintenance charges for the operation and maintenance of the common facilities in the township project.
  15. As per clause 9.1 of the Agreement, it is stated that the developer shall facilitate formation of Society/Association of the prospective lessee of the flat. As per the said clause, all prospective lessee of the flats shall be entitled to join the said Association or Co-operative Society. This clause also goes on to prove that the appellant has built a complex or residential unit and the same is to be given on outright supply and not as a lease. We say so because it is only in thecaseof transfer of ownership where the flat owner is entitled to form an association or a Co-operative Society.
  16. A similarcasewas decided by the Bombay High Court in the case (9717 OF 2018) with civil application no .683 OF 2018) of Lavasa Corporation Limited = 2018 (8) TMI 632 – BOMBAY HIGH COURTThe appeals were preferred, under Section 58 of the Real Estate (Regulation and Development) Act, 2016, (for short, “RERA”), by Lavasa Corporation, which is developing a Township Project to construct ‘Lake Views’ and which is registered under the RERA.. These Appeals are raising the common questions of law as to ‘whether the provisions of the RERA would apply in case of an ‘Agreement to Lease’?’; The Appellants are aggrieved by the three separate orders passed by the Maharashtra Real Estate Appellate Tribunal in three separate Appeals filed by the Respondents, under Section 43(5) of the RERA, against the orders passed by the ‘Adjudicating Authority’, under Section 18 of the said Act. By the impugned orders, the Appellate Tribunal had set aside the orders passed by the ‘Adjudicating Authority’ and held that, the provisions of the RERA are applicable even in case of ‘Agreement of Lease’ in the present case and, therefore, the Adjudicating Member of the Maharashtra Real Estate Regulatory Authority has jurisdiction to entertain the complaints filed by the Respondents. It was held so, despite the fact that, according to the Appellant, relationship between the Appellant and Respondents is of ‘Lessor’ and ‘Lessee’ and there is no sale and/or absolute transfer of right, title and interest in favour of the Respondents with respect to their respective apartments.

In the said case, the ‘Agreements of Lease’ came to be executed between Lavasa Corporation and the buyers of the property and as per the said ‘Agreements’, the Respondents have booked the apartments on the basis of lease for the period of 999 years in the Township Scheme of the Appellant. They had paid most of the consideration amount, which is, approximately, to the extent of 80% of the sale price. They had also paid substantial amount towards the stamp-duty and the registration charges. As per the ‘Agreements of Lease’ executed between the parties, the project was to be completed and the possession of the apartments was to be handed over to the Respondents within a period of 24 months. However after a long delay, the parties approached RERA authorities and the question arose whether, the provisions of the RERA are applicable to the ‘Agreement of Lease’ executed between the parties. The High Court went through the clauses of the agreement and held that though the agreement is shown to be of lease, it is an agreement of sale. It observed the following:-

….”In this context, vis-a-vis, these definitions given in the RERA, it would be essential to go through the ‘Agreements’ executed between the parties. No doubt, it is true, that the ‘Agreements’ are titled as ‘Agreements of Lease’. The word “Rent” is also defined therein to mean the yearly rent amount payable by the customer to Lavasa, once the lease is actually granted in respect of the apartment’. The term ‘Annual Rent’ is defined to be ₹ 1/- and the ‘period of lease’ is stated to be “999 years”. Clause No,4(xi) of the ‘Agreement’ is relevant in that respect. It says that, ‘under its Township Development Scheme, Lavasa proposes to construct ‘Lake Views’ on the ‘Lots’ identified by it and grant on lease, the apartments constructed therein for a period of 999 years on the notionally divided pieces of land termed as “Lots”:

  1. Clause No.5.1 of the ‘Agreement’ further provides that, in consideration of the customer having expressly agreed to pay to Lavasa the lease premium, which is in the range of ₹ 32 to 40 lakhs, as thecasemay be, and which is more than 80% of the total consideration amount Lavasa.doc and the annual lease rent of ₹ 1/- for the said apartment, Lavasa agrees to grant to the customer a lease for a period of 999 years for the said apartment.
  2. Clause No.5.2 of the ‘Agreement’ provides that, the ‘Lease Deed’ was to be executed only after the development and construction of the said apartment has been fully completed and all the lease premium amounts are paid by the customer to Lavasa. The lease term was to commence from the date of execution of the registration of the ‘Lease Deed’ by Lavasa in respect of the said apartment in favour of the customer.
  3. Clause No.6 of the ‘Agreement’ lays down the ‘Schedule of the Payment’, which shows that the payment was to be made as per the progress in the construction and except for some nominal amount, entire consideration was to be paid before possession was to be delivered. This clause is a typical clause, which is normally found in the ‘Agreement of Sale’ under MOFA. Clause No.9.1 states that, the possession of the apartment was to be handed over within a period of 24 months, on the customer depositing the entire lease premium installments.
  4. Further clauses in the ‘Agreement’, like Clause No.10 pertaining to Common Amenities and Facilities’; Clause No.12.1 pertaining to ‘Charges and Contributions towards the Maintenance and Amenities’; Clause No.13 relating to ‘Statutory Payments’ and even other clauses in the ‘Agreement’ are more or less the same like the ones which are necessarily found in the ‘Agreement of Sale’ executed under MOFA. As a matter of fact, though these Agreements are titled as ‘Agreements of Lease’, they are just the replicas of the ‘Agreement of Sale’, which is executed under the MOFA, except for the words ‘lease’ and ‘rent’ used therein.
  5. Thus, if the entire ‘Agreement’ is perused as such, then it becomes apparent on the face of it also, that it cannot be termed or treated as an ‘Agreement of Lease’, but, in its real purport, it is an ‘Agreement of Sale’. The very fact that more than 80% of the entire consideration amount is already paid by the Respondents to the Appellant and the lease premium agreed is only of ₹ 1/- per annum, including the clause relating to the period of lease of 999 years, are self-speaking to prove that, in reality, the transaction entered into by the parties is an ‘Agreement of Sale’ and not an ‘Agreement of Lease’; though it is titled as such. The law is well settled that the nomenclature of the document cannot be a true test of its real intent and the document has to be read as a whole to ascertain the intention of the parties.
  6. Similar clauses can be found in the present agreement. The Payment Schedule found in Schedule D also shows payment made as per the stages in the completion of the construction. (Clause 4.1) Clause 4.2 says that ‘the lessee shall also be liable to bear and pay all stamp duty and registration charges. As per clause 4.6 the developer has also agreed to facilitate the process of obtaining loan from the financing agency. As per Clause 5.2 the lessee also has to pay advance maintenance charges for operation and maintenance of the common facilities. The developer is to give the possession on or before the completion dates as decided. As per clause 6.3, if the developer fails to complete the construction within the period the developer has to pay interest to the lessee. Clause 12.6 says that it is agreed between both that the limited common areas and amenities are for common usage by the prospective lessee together with all the residents/ prospective lessee together. Thus clauses similar to the one in thecaseof Lavasa are found in the present case and the judgement is applicable on all fours.
  7. The project is also registered under RERA. The object of the Act is as follows:-

..An Act to establish the Real Estate Regulatory Authority for regulation and promotion of the real estate sector and to ensure sale of plot, apartment or building, as the case may be, or sale of real estate project, in an efficient and transparent manner and to protect the interest of consumers in the real estate sector and to establish an adjudicating mechanism for speedy dispute redressal and also to establish the Appellate Tribunal to hear appeals from the decisions, directions or orders of the Real Estate Regulatory Authority and the adjudicating officer and for matters connected therewith or incidental thereto.]

Though the object of the Act is to regulate the sale of building, apartment or building, this project is RERA registered. This fact and the interpretation by the Bombay High Court in the case of Lavasa also shows that the said transaction is not a lease.

  1. Thus, in view of the above discussion, we, hereby, pass the following order:

ORDER

We agree with the findings and order of the Advance ruling authority and find no reason to deviate from the conclusions derived by them.

M/S. SUN PHARMACEUTICAL INDUSTRIES LTD.

Classification of goods – rate of GST – production and making of nutritional powder for special dietary use called Prohance-D Chocolate variant – ‘diabetic food’ or not – appellant has stated that Prohance-D is a nutritional powder -special dietary use for people with Diabetics – though the AAR held that the product is a ‘food’, it held that it is not a diabetic food – Challenge to AAR decision.

HELD THAT:- Prohance-D Chocolate contains some extra special ingredients which differentiate from the normal Prohance. All the ingredients in it especially Isomaltulose, Gum Arabic, Inulins, Myo-Innositol, Sucralose, Fructose are sugar replacements or sugar substitute. Gum Arabic is used as a ‘soluble dietary fiber’. The fact that these products are used in the Prohance-D shows that it is specially meant for people suffering from diabetes and is also marketed as meal replacement for diabetics.

As per the definition of ‘Diabetic food’ in the ‘Dictionary of Food and Nutrition’ by David Bander, it covers foods that has specially formulated for people suffering from diabetics. In the present case, the impugned product though generally contributes to the well being of patient is specially formulated for diabetic patients as is evident from the fact that it contains certain sugar replacements which are not found in the normal Prohance. It is therefore specially directed for diabetics. In such a scenario, whether a normal person not suffering from Diabetes would opt for the Prohance-D variant as a meal replacement? The answer is no.

Such a person would opt for Prohance and not for Prohance-D as it can be normally expected that only a diabetic patient would go for the Prohance-D variant. This makes it very clear that that the product is formulated for diabetic patients, is targeted at that particular segment and therefore, can be termed as a ‘diabetic food’.

It is true that the heading 2106 also covers ‘Compound preparation for making nonalcoholic beverages’ under which heading is the product classified by the AAR. Heading 2106 covers both the descriptions and the Explanatory Notes to the HSN do not make it clear as to which product category the explanatory note given above applies. It is only under Customs Tariff Act that the category for ‘diabetic foods’ is carved out under the Heading 2106. But the very fact that the explanatory note explains what a diabetic food gives an indication as to what is intended to be covered by it. The intention is that foods which contains sugar replacement or sugar substitutes are meant to be covered by heading 2106 and such food may be products like sweets and gums also. In the instant case, the impugned product also contains sugar substitutes and therefore it will be covered by the term ‘diabetic food’.

The AAR has also observed that the product is not a diabetic food because it does not contain high amount of dietary fiber and although the fact that it contains Gum Arabic, Gum Arabic is not a great source of dietary fiber. However, the AAR has not given any references in support of the statement that ‘Diabetic Foods’ have to contain dietary fibre. Also, it is felt that such a qualification would not be required to classify a product as diabetic food. As the HSN also considers food containing sugar replacements as diabetic food, the above product would also classify in it.

The Order of the AAR classifying the product Prohance-D (Chocolate) under heading 21069050 is hereby set aside – The product would instead classify as a diabetic food covered under chapter heading 21069091.

No.- MAH/AAAR/SS-RJ/12/2019-20

Dated.- October 25, 2019

Citations:

  1. COMMNR. OF CENTRAL EXCISE, BHOPAL Versus MINWOOL ROCK FIBRES LTD. – 2012 (2) TMI 289 – Supreme Court
  2. COEN BHARAT LTD. Versus COMMISSIONER OF C. EX., VADODARA – 2007 (9) TMI 29 – Supreme Court
  3. UNION OF INDIA Versus PESTICIDES MFG. & FORMULATORS ASSOCIATION OF INDIA – 2002 (10) TMI 95 – Supreme Court
  4. COLLECTOR OF CENTRAL EXCISE, BOMBAY Versus KWH. HELIPLASTICS LTD. – 1998 (1) TMI 71 – Supreme Court
  5. CCE. HYDERABAD Versus BAKELITE HYLAM LTD. – 1997 (3) TMI 598 – Supreme Court
  6. Indian Carbon Ltd. Versus Superintendent of Taxes, Gauhati and Others   – 1971 (8) TMI 184 – Supreme Court
  7. Mineral Sales Corporation Versus Commissioner of Sales Tax – 1980 (2) TMI 240 – ALLAHABAD HIGH COURT
  8. In Re: M/s. Sun Pharmaceutical Industries Ltd. – 2019 (7) TMI 95 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
  9. M/s Shanti Surgical Pvt. Ltd., Shanket Kheria & Director, Subhash Chandra Kheria. GM Versus Commissioner of Central Excise, Kanpur – 2017 (7) TMI 50 – CESTAT ALLAHABAD
  10. COMMISSIONER OF C. EX., MYSORE Versus ANURAG FOODS & APPLIANCES LTD. – 2008 (9) TMI 636 – CESTAT, CHENNAI
  11. RAJDHANI SEEDS CORPORATION Versus COMMR. OF CUS., NAVA SHEVA – 2005 (12) TMI 376 – CESTAT, NEW DELHI

SMT. SUNGITA SHARMA, SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Sun Pharmaceutical Industries Ltd. (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-88/2018-19/B-10 dtd.23.01.2019 = 2019 (7) TMI 95 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA.

Brief Facts of the Case

  1. M/s Sun Pharmaceutical Industries Limited (hereinafter referred to as ‘Appellant’) having its corporate head office at, “SUN HOUSE” Western Express Highway, Goregaon(E), Mumbai-400063 is engaged in the business of manufacturing and trading of pharmaceutical products, nutraceutical and allied products falling under Chapter 28 & 30 of the Customs Tariff Act,1975.
  2. The Appellant was registered under the erstwhile tax regime, and was discharging excise duty, service tax and Value Added Tax (VAT) on manufacture of pharmaceutical and nutraceutical products.
  3. Under the current regime, the Appellant is registered as per the GSTlaws,
  4. The Appellant is, inter alia, engaged in the manufacture and supply of medicaments and other related products. The Appellant is also engaged in business of marketing and supplying of a nutritional powder/food for special dietary use known as ‘Prohance’ and ‘Prohance-D’.

Introduction to “Prohance-D”

  1. Prohance-D is specially designed to serve as a nutritional benefit for people suffering from Diabetes as the name itself suggest that “D” stands for “Diabetes”. Prohance-D is sold in powder form which is required to be mixed with drinking water and used as a partial meal replacement or as a Breakfast replacement or as an Evening snack/healthy bedtime snack or as directed by a Physician/dietician for diabetic person. Prohance-D is a specially formulated nutritional powder for Diabetic person and it is also known in the market as “diabetic product” as it is sugar free, low on GI (Glycemic Index) and contains Isomaltulose – a low glycemic carbohydrate that helps to minimize blood sugar spikes (See Exhibit – A to Annexure 4). In other words, Prohance-D is marketed and also sold by the appellant as “Diabetic food” as specifically meant for Diabetic people only.
  2. The above factual position is also supported by specific declaration mentioned on the label of Prohance-D as “Food for people with Diabetes” and “Nutritional Powder for Diabetcs”. A copy of the label is enclosed as (Exhibit-B to Annexure-4).
  3. Prohance-D provides all required macro nutrients (fat, protein, carbohydrate, fibers) as well micro nutrients (vitamins, minerals and other nutrients) to a Diabetic person and provides energy from high quality protein and fat and is rich in dietary fiber and MUFA (Mono Unsaturated Fatty Acids) that support heart health. The photo of the labels containing the declaration of the product has been enclosed as “Exhibit – B to Annexure 4”.
  4. Further, Prohance-D is manufactured by Independent Third-Party Manufacturer (say ABC Limited) on behalf of the Appellant, under a license issued by the FSSAI. The FSSAI has issued license as a “food for special dietary uses” as recorded in Sr. No. 24 of the license. A copy of the license dated 3rd May, 2018 is enclosed as (Exhibit – C to Annexure 4).
  5. The appellant is dealing with two variants of Prohance-D, namely:-

Prohance-D – Vanilla flavor; and

Prohance-D – Chocolate flavor.

  1. The issue in the presentcase is regarding the determination of correct classification and applicable rate of GST of Prohance D- Chocolate variant only (hereinafter referred to as the product in question’) in terms of Notification No. 1/2017-CT(R) dated 30.06.2017 & the corresponding Notification of relevant State GST Act. However, it is to be noted that there is no dispute in the Ruling dated 23.1.2019 passed by Ld. AAR (between the Appellant and the department) regarding the correctness of the classification of Prohance-D – Vanilla variant under Tariff item No.2106 90 91 and the applicable rate of GST in respect of the same in terms of Sr No. 46A of Schedule II to Notification No. 1/2017-CT(R) dated 30.06.2017 & the corresponding Notification of relevant State GST Act.

Application for Advance Ruling

  1. At this juncture it is pertinent to refer to the rate notification under GST for the possible classification of the product in question. Notification No.1/2017-Central Tax (Rate) dated 30.06.2017 provides for applicable rates of GST on the supply of goods. SI. No. 46A of Schedule – II to Notification No.1/2017- Central Tax (Rate) dated 30.06.2017 reads as under:
Sch. SI. No. Chapter Heading/ Sub-Heading Description of Goods Rate of Tax (CGST)
II 46A 2106 90 91 Diabetic foods 6%
  1. Corresponding notification of relevant State GST Act also provides rate of 6% on the aforesaid item.
  2. Therefore, “Diabetic Food” of Heading No. 2106 90 91 of the Customs Tariff Act, 1975 (hereinafter referred to as ‘CTA’) are covered by SI. No. 46A of Schedule II and attract effective GST @12%.
  3. Further, it shall be noted that SI. No. 12C of Schedule – III to Notification No.1/2017-Central Tax (Rate) dated 30.06.2017 reads as under:-
Sch. SI. No Chapter Heading/ Sub-Heading Description of Goods Rate of Tax (CGST)
II 12C 1806 Chocolates and other food preparation containing cocoa 9%

Therefore, the “Chocolates and other food preparation containing cocoa” of Heading No. 18.06 are covered by SI. No. 12C of Schedule III and attract GST @ 18%.

  1. The product in question, namely, Prohance-D – Chocolate variant/flavor is a food product for diabetic patients in chocolate flavor. The said product thus contains 3% of cocoa for flavoring purposes. The addition of cocoa and other relevant ingredients does not alter the intended use of the product as a partial meal replacement for diabetic patients. However, since the product in question contains cocoa which is added only for flavoring, there existed an ambiguity as to the correct classification of the said product between Heading No. 18.06 and Heading No. 21.06 of the Customs Tariff Act, 1975.
  2. Accordingly, in order to obtain the correct clarification and guidance, the Appellant had filed an application for Advance Ruling in Form No. ARA-1 before the Learned Authority for Advance Ruling, State of Maharashtra (hereinafter referred to as “Ld. AAR”) for obtaining an Advance Ruling on the issue as to what would be the appropriate classification of the Prohance-D – Chocolate variant/flavor. A copy of application filed by the appellant bearing no. Advance Ruling No. 88/2018/GST is enclosed herewith as Annexure-4 collectively.

Advance Ruling dated 23.1.2019 passed by Ld. AAR, Maharashtra

  1. The td. AAR, considered the application filed by the appellant and passedAdvance Ruling No. GST-AAR-88/2018-19/B-10 dated 23.01.2019 = 2019 (7) TMI 95 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA (Annexure-1) and held as follows –
  2. a) Prohance-D is categorized as ‘food’ on the ground that Prohance-D is an eligible substance consisting of nourishing and nutritive components such as carbohydrates, fats, proteins, essential minerals and vitamins and can be ingested and digested and provides nutrition to the human body.
  3. b) Even though the Prohance-D is categorized as ‘food’, the same cannot be treated/considered as ‘diabetic food’ classifiable under Tariff Item No.2106 90 91 of CTA on the ground that Prohance-D is advertised/marketed as providing other health benefits like providing energy, immune health, heart health, vitamins and minerals and maintains cholesterol levels.
  4. c) Relying on the information available on internet, it will not be proper/correct to treat / consider the Prohance-D – Chocolate variant as ‘diabetic food’ as it does not contain high amount of dietary fiber even though it contains gum Arabic and also Prohance-D – Chocolate variant does not contain slow digestion agents.
  5. d) Prohance-D – Chocolate variant is not classifiable as ‘cocoa preparation’ falling under Chapter 18 of the CTA on the ground that the chocolate flavor is used only to attract the end consumer.
  6. e) Prohance-D – Chocolate variant is also not classifiable under Chapter 19 of the CTA.
  7. e) Prohance – D – Chocolate variant is “Food preparation” classifiable under Chapter Heading No.21.06 as it is meant to be consumed by people by dissolving the same in water or milk.
  8. f) Since Prohance – D – Chocolate variant is a combination of various items and could clearly be treated as a ‘compound preparation’ being in powder form and could be consumed by directly mixing with water or milk. Hence, resulting in a non-alcoholic beverage which is obtained after mixing the powder with water or milk is clearly covered under the description ‘Compound preparation for making non-alcoholic beverages’ falling under Tariff Item No.2106 90 50 attracting GST @ 18% as per Serial no 23 to the Schedule III of the Notification No. 1/2017-CT(R).
  9. Aggrieved by the above ruling passed by the Ld. AAR, the appellant is filing this appeal in respect of wrongful classification of the product in question as ‘Compound preparation for making non-alcoholic beverages’ under Tariff Item No.2106 90 50 as opposed to the specific description of ‘Diabetic foods’ covered under Tariff Item No. 2106 90 91, on the following amongst other grounds which are without prejudice to each other.

Grounds of Appeal

PROHANCE-D – CHOCOLATE VARIANT IS A “DIABETIC FOOD” ONLY AND HENCE CLASSIFIABLE UNDER TARIFF HEADING NO. 2106.90.91 OF CTA.

1 Chapter 21 of Custom Tariff Act, 1975 covers “Miscellaneous edible preparation”. Heading No.21.06 under the said Chapter covers “Food preparation not elsewhere specified or included”. In other words, the Chapter Heading No.2106 is residuary heading which covers all the products not specified elsewhere in the tariff. The relevant extract of the said heading is reproduced under for ready reference:

HS Code Description of goods Unit
(1) (2) (3)
2106 Food preparations not elsewhere specified or included
2106 10 00 Protein concentrates and textured protein substances. Kg
2106 90 Other:
Soft drink concentrates:
2106 90 11 —- Sharbat. Kg
2106 90 19 Other Kg
2106 90 20 – Pan masala Kg
2106 90 30 Betel nut product known as “Supari”. Kg
2106 90 40 Sugar-syrups containing added flavouring or colouring matter, not elsewhere specified or included; lactose syrup; glucose syrup and malto dextrine syrup Kg
2106 90 50 Compound preparations for making non-alcoholic beverage. Kg
2106 90 60 Food flavoring material. Kg
2106 90 70 Churna for pan. Kg
2106 90 80 Custard powder. Kg
Other:
2106 90 91 —- Diabetic foods. Kg
2106 90 92  —- Sterilized or pasteurized millstone Kg
2106 90 99 —- Other. Kg
  1. It is clear that Tariff Item No. 21.06 90 91 specifically covers “Diabetic foods”.
  2. At this juncture it is first pertinent to refer to the ingredients of the product in question and the function played by the said ingredients. For ease of reference the ingredients as declared on the packaging of the product are extracted as follows: Maltodextrin – It is a polysaccharide that is used as a food ingredient. It is produced from starch by partial hydrolysis and is usually found as a white hygroscopic spray-dried powder.
  3. Reliance is placed on HSN explanatory notes to Chapter 17.02 which provides the following explanation –

Malto-dextrins (or dextri-maltoses), obtained by the same process as commercial glucose. They contain maltose and polysaccharines in variable proportions. However, they are less hydrolysed and therefore have a lower reducing sugar content than commercial glucose. The heading covers only such products with a reducing sugar content, expressed as dextrose on the dry substance, exceeding 10% (but less than 20%), Those with a reducing sugar content not exceeding 10% fall in heading 35.05. Malto-dextrins are generally in the form of white powders, but they are also marketed in the form of a syrup (see Part (B)). They are used chiefly in the manufacture of baby food and low-calory dietic foods, as extenders for flavouring substances or food colouring agents and in the pharmaceutical industry as carrier.

  1. Sunflower seed oil (High oleic acid) – It is a mono-unsaturated fatty acid rich oil, which help reduce bad cholesterol levels in your blood which can lower your risk of heart disease and stroke. They also provide nutrients to help develop and maintain your body’s cells.
  2. Calcium caseinate – It is one of the several milk protein derived from casein in skim and 1% milk and is primarily used in meal preparation.
  3. Whey protein isolate – It is milk by-product of the cheese-making process, it contains higher percentage of pure protein which can be pure enough to be virtually lactose free, carbohydrate free, fat free, and cholesterol free. They are highly bioavailable, are very quickly absorbed into the body, and have a high concentration of branched-chain amino acids which are highly concentrated in muscle tissue, and are used to fuel working muscles and stimulate protein synthesis
  4. Soy protein isolate – It is a highly refined or purified form of soy protein with a minimum protein content of 90% on a moisture-free basis. It is made from defatted soy flour which has had most of the nonprotein components, fats and carbohydrates removed. It is mainly used to increase protein content, to enhance moisture retention, and as an emulsifier.
  5. Isomaltulose (6.1%) – It is a disaccharide carbohydrate composed of glucose and fructose. Isomaltulose is a slowly digested carbohydrate which provides energy for a longer period and avoiding blood sugar spikes.
  6. Rapeseed oil – low erucic acid – It is Alpha linolenic acid (omega 3 fatty acid) rich oil. It correct imbalances in modern diets that lead to health problems and help lower the risk of chronic diseases.
  7. Fructose – Fructose also known as fruit sugar. is a monosaccharide. Pure. dry fructose is a sweet, white, odorless, crystalline solid, and is water-soluble. It exhibits a sweetness synergy effect when used in combination with other sweeteners. Fructose-sweetened food and beverage products cause less of a rise in blood glucose levels than do those manufactured with either sucrose or glucose.
  8. Reliance is placed on HSN explanatory notes to Chapter 17.02 which provides the following explanation –
  9. Fructose (C6H1206) which is present in large quantities, with glucose, in sweet fruits and in honey. Commercially it is produced from commercial glucose (e.g., corn syrup), from sucrose or by hydrolysis of inulin, a substance found mainly in the tubers of the dahlia and the Jerusalem artichoke. It occurs in the form of a whitish, crystalline powder or as a viscous syrup (sec Part (B)); it is sweeter than ordinary sugar (sucrose) and is especially suitable for use by diabetics. This heading covers both commercial and chemically pure fructose.
  10. Reliance is placed on Kirk-Othmer Encyclopaedia of Chemical Technology Volume 23 at page 556-557, which provides the following –

Sweeteners

…… Although naturally occurring and yielding ca 4 kcal/g (16.7 kJ/g), the same as sugar, fructose does not cause a fluctuation in blood sugar, ie, glucose levels after ingestion, making fructose a better choice for diabetics (2) Fructose is also more potent than sugar (ca 1.5 times) and therefore can be cost-effective for the food industry……..

  1. Fructo-oligosaccharides – They are made up of plant sugars linked in chains, used as a sweetener for food. They also act as food for “good” bacteria in the intestine.
  2. Cocoa powder (3.0%) – It is a powder prepared from the seed embedded in the fruit of the cocoa plant, Theobroma cacao, etc. It is added for flavouring.
  3. Gum Arabic – It is used in the food industry as a stabilizer, emulsifier and thickening agent. Gum Arabic, a complex polysaccharide. is a soluble dietary fibre, primarily indigestible to humans and considered non-toxic and safe for human consumption. It is not degraded in the intestine, but fermented in the colour under the influence of microorganisms.

Minerals

  1. Inulin – It is a soluble fibre, consisting of a group of naturally occurring polysaccharides. Insulins and oligofructose are not digested by human enzymes, making them unavailable for glucose release into the blood stream, ensuring that their consumption does not raise blood glucose levels. It is a preferred sugar substitute for diabetics because it does not cause spikes in blood sugar associated with common sweeteners and can be used to replace sugar, fat, and flour.
  2. Antioxidants (Soya lecithin, L-Ascorbic acid, TBHQ) – Antioxidants are said to help neutralize free radicals in our bodies, and this is thought to boost overall health. They protect against the cell damage that free radicals cause, known as oxidative stress.
  3. Myo-inositol – It is a carbocyclic sugar and a sugar alcohol with half the sweetness of sucrose (table sugar) and helps to promote proper utilization of the hormone insulin.
  4. Choline bitartrate – It is similar to a B vitamin. It is used in many chemical reactions in the body. It is used to prevent liver diseases caused by excessive feeding by vein (by IV).
  5. Vitamins, L-Carnitine – L-carnitine is an amino acid (a building block for proteins) that is naturally produced in the body. L-carnitine supplements are used to increase its levels in people whose natural level is too low because they have a genetic disorder, are taking certain drugs because they are undergoing a medical procedure that uses up the body’s L-carnitine. It is also used as a replacement supplement in strict vegetarians, dieters, and low-weight or premature infants.
  6. Taurine – It is an amino sulfonic acid, but it is often referred to as an amino acid, a chemical that is a required building block of protein.
  7. Artificial sweetener (Sucralose) – It is a zero-caloric artificial sweetener and is made from sugar in a multi-step chemical process in which 3 hydrogen-oxygen groups are replaced with chlorine atoms. Sucralose is commonly used as a sugar substitute in both cooking and baking and is calorie-free. Sucralose is 400-700 times sweeter than sugar and does not have a bitter aftertaste. Sucralose is said to have little or no effects on blood sugar and insulin levels. Sucralose may raise blood sugar and insulin levels in people who do not consume artificial sweeteners regularly. However, it probably has no effect on people who regularly use artificial sweeteners.
  8. Reliance is placed on HSN explanatory notes to Chapter 29.32 which provides the following explanation –

Sucralose (1,6-Dichloro-1,6-dideoxy-b-D-fructofuranosy 1-4-chloro-4-deoxy-a-D-galactopyranoside). Odorless, white to almost white crystalline powder. Artificial sweetener mainly used for medicine and food, especially for the treatment and diet of diabetic patients.

  1. Acidity regulator (Citric acid) – It is an organic acid which is derived from plant tissues.

It is an important metabolic intermediate, used as an acidifying agent.

MEANING OF “FOOD”

  1. The term “food” has been defined in Webster’s international Dictionary as-

“nutritive material absorbed or taken into the body of an organism which serve, for purposes of growth, work or repair and for the maintenance of the vital process.”

  1. Further, the term ‘food’ has also been defined in New International Dictionary as-

“Material consisting of carbohydrates, fats, proteins and supplementary (as minerals, vitamins) that is taken or absorbed into the body of an organism in order to sustain growth, repair and all vital processes and to furnish energy for all activity of the organism.

  1. The Chamber Twentieth Century dictionary defines “food” as-

“What one feeds on: that which, being digested, nourishes the body: whatever sustains or promotes growth.”

  1. The Merriam-Webster online dictionary defines “food” as:

1 a: material consisting essentially of protein, carbohydrate, and fat used in the body of an organism to sustain growth, repair, and vital processes and to furnish energy; also; such food together with supplementary substances as minerals, vitamins, and condiments)

b: inorganic substances absorbed by plants in gaseous form or in water solution

2: nutriment in solid form

  1. It is also a settled legal position that in ordinary and commercial parlance in India, the term ‘food’ is considered as nutritive material absorbed or taken in the body of an organization for the purpose of growth work or repair and for the maintenance of vital processes and not as a refreshment.
  2. In light of the aforesaid legal position and having regard to facts that the ingredients of the product in question (i.e. Whey protein isolate, Maltodextine, Soy protein isolate, etc.) as mentioned in paragraph A.3 above and that the product in question is used for nourishment purposes, the same has to be treated/considered as ‘food’ only.
  3. Thus, it is submitted that Prohance-D – Chocolate variant is a ‘food’ in itself.
  4. The above submission is also supported by the finding of Ld. AAR in its ruling dated 23.1.2019 at 3rd Para of Page 21 which reads as under:

…………..We find that the subject product is an eligible substance consisting of nourishing and nutritive components such as carbohydrates, fats, proteins, essential minerals and vitamins and can be ingested and digested and provides nutrition to the human body. Hence we have no doubt that the subject product can be categorized as food.”

………………(Emphasis supplied)

  1. Once it is clear that Prohance-D – Chocolate variant is ‘food’ in itself, it is to be seen whether the same would be covered within the meaning of the term “Diabetic foods” as mentioned under Tariff Item No.2106 9091 of the CTA.

MEANING OF TERM “DIABETIC FOODS”

  1. The term ‘Diabetic Food’ is not defined under the GST provisions as well as under Harmonized Commodity Description of Coding System (for short referred to as HSN). Further the term ‘Diabetic Food’ is also neither defined under Chapter notes of any Chapters of CTA nor under the allied law namely Customs Act and Rules made thereunder. In order to understand the ordinary meaning of the term ‘Diabetic Food’, reference has to be made to the dictionary meanings.
  2. The Oxford Dictionary of Food & Nutrition by David A. Bender defines “diabetic foods” as under:

“Diabetic foods – Loose term for foods that are specially formulated to be suitable for consumption by people with diabetes mellitus; generally low in carbohydrate (and specially sugar), and frequently containing *sorbitol, xylulose, or sugar derivatives that are slowly or incompletely absorbed.”

  1. It is submitted that the product in question is a specially designed nutritional powder which substitutes “sugar” by using the Maltodextrin, Fructose, Isomaltulose and Fibers (FOS, Insulin and Gum Arabic) to meet the special dietary requirements of Diabetic people. The product in question contains low carbohydrate and sugar derivatives which slow down the absorption and accordingly answer to the definition provided in the Oxford Dictionary of Food & Nutrition. Further, the product in question being a specially formulated food product, containing replacement for sugar which making it suitable for diabetic people is to be considered as ‘Diabetic food’ only.
  2. in view of the above submissions, it is submitted that the product in question shall be considered as a ‘Diabetic Food’ as it satisfies the definition of diabetic food as mentioned above.
  3. At this stage, it is pertinent to refer to The Food Safety and Standards Act, 2006 (FSSAI) wherein the Third-Party manufacturer is granted the license under the category of “foods for special dietary purposes”. The product in question being food for Diabetic people as also declared in the packing label of the product and the same having been certified by the FSSAI. It is pertinent to refer to the relevant provision under FSSAI Act and regulations therein. Further, it is submitted that the Ld. AAR in its ruling dated 23.1.2019 has also relied on the FSSAI Rules to determine the correctness of category declared on the label of the product in question.
  4. Relevant provisions under Food Safety and Standards Act, 2006 for the purpose of present appeal.
  5. Section 22 of the said Food Safety and Standards Act, 2006 is reproduced below for ready reference:

“22. Genetically modified foods, organic foods, functional foods, proprietary foods, etc.

Save as otherwise provided under this Act and regulations made thereunder, no person shall manufacture, distribute, sell or import any novel food, genetically modified articles of food, irradiated food, organic foods, foods for special dietary uses, functional foods, nutraceuticals, health supplements, proprietary foods and such other articles of food which the Central Government may notify in this behalf.

Explanation – For the purposes of this section, –

(1) “foods for special dietary uses or functional foods or nutraceuticals or health supplements” means:

(a) foods which are specially processed or formulated to satisfy particular dietary requirements which exist because of a particular physical or physiological condition or specific diseases and disorders and which are presented as such, wherein the composition of these foodstuffs must differ significantly from the composition of ordinary foods of comparable nature, if such ordinary foods exist, and may contain one or more of the following ingredients, namely: –

(i) plants or botanicals or their parts in the form of powder, concentrate or extract in water, ethyl alcohol or hydro alcoholic extract, single or in combination;

(ii) minerals or vitamins or proteins or metals or their compounds or amino acids (in amounts not exceeding the Recommended Daily Allowance for Indians) or enzymes (within permissible limits);

(iii) substances from animal origin;

(iv) a dietary substance for use by human beings to supplement the diet by increasing the total dietary intake;

(b) (i) a product that is labelled as a “Food for special dietary uses or functional foods or nutraceuticals or health supplements or similar such foods” which is not represented for use as a conventional food and whereby such products may be formulated in the form of powders, granules, tablets, capsules, liquids, jelly and other dosage forms but not parenterals, and are meant for oral administration;

(ii) such product does not include a drug as defined in clause (b) and ayurvedic, sidha and unani drugs as defined in clauses (a) and (h) of section 3 of the Drugs and Cosmetics Act, 1940 (23 of 1940) and rules made thereunder;

(iii) does not claim to cure or mitigate any specific disease, disorder or condition (except for certain health benefit or such promotion claims) as may be permitted by the regulations made under this Act;

(iv) does not include a narcotic drug or a psychotropic substance as defined in the Schedule of the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985) and rules made thereunder and substances listed in Schedules E and El of the Drugs and Cosmetics Rules, 1945;

(2) “genetically engineered or modified food” means food and food ingredients composed of or containing genetically modified or engineered organisms obtained through modern biotechnology, or food and food ingredients produced from but not containing genetically modified or engineered organisms obtained through modern biotechnology;

(3) “organic food” means food products that have been produced in accordance with specified organic production standards;

(4) “proprietary and novel food” means an article of food for which standards have not been specified but is not unsafe:

Provided that such food does not contain any of the foods and ingredients prohibited under this Act and regulations made thereunder.”

  1. Further, the Notification dated 23rd December 2016 (Annexure – 5) issued by the Food Safety and Standards Authority of India (hereinafter referred to as “FSSAI”) Regulation No.8 states that:
  2. Food for special dietary use, other than infants, and those products intended to be taken under medical advice. –

(1) No food business operator shall manufacture, formulate or process an article of food for special dietary use unless-

(i) specially processed or formulated to satisfy particular dietary requirements which may exist or arise because of certain physiological or specific health conditions, namely: –

(a) low weight, obesity, diabetes, high blood pressure;

(b) pregnant and lactating women; and

(c) geriatric population and celiac disease and other health conditions.

(ii) The food business operator shall clearly indicate on the label whether or not the food for special dietary use is to be taken under medical advice;

(iii) A food business operator may manufacture or sell an article of food for special dietary use in single use packaging or in dosage form, namely, granules, capsules, tablets, pills, jelly, semi-solid and other similar forms, sachets of powder, or any other similar forms of liquids and powders designed to be taken in measured unit quantities with a nutritional or physiological effect;

(iv) A food business operator may formulate an article of food for special dietary use in formats meant for oral feeding through a enteral tubes but shall not be used for parenteral use;

(v) An article of food for special dietary use shall not include the normal food which is merely enriched or modified with nutrients and meant for mass consumption, intended for improvement of general health for day to day use and do not claim to be targeted to consumers with specific disease conditions and also not include the article of food intended to replace complete diet covered under food for special medical purpose specified in regulation 9.

(2) (i) The articles of food for special dietary use shall contain any of the ingredients specified in Schedules I or Schedule II or Schedule III or Schedule IV or Schedule VI or Schedule VII or Schedule VIII. (ii) A food business operator may use the ingredients specified in the Schedules referred to in clause (i) of sub regulation (2) in manufacturing food for special dietary use without prejudice to modifications for one or more of these nutrients rendered necessary by the intended use of the product.

….Emphasis Supplied

  1. Schedule VIII of the Notification stated above is extracted below for ready reference:

Schedule – VIII

[See regulations 3,(13), 6.(2)(i), 7.(2)(i), 8.(2)(i), 9.(2)(i) and 11.(1)(i)]

List of prebiotic compounds

Sr. No. Prebiotic Compounds
1. Polydextrose
2. Soybean oligosaccharides
3. Isomalto-oligosaccharides
4. Fructo-oligosaccharides
5. Gluco-oligosaccharides
6. Xylo-oligosaccharides
7. Inulin
8. Isomaltulose
9. Gentio-ologsaccharides
10. Lactulose
11. Lactoferrin
12. Sugar alcohols such as lactitol, sorbitol, maltitol, inositol, isomalt
13. Galacto-oligosaccharides

Note:- The Food Authority may add any new specific prebiotic after proper scientific evaluation and include in this Schedule.

PAWAN AGARWAL,

Chief Executive Officer

[ADVT.-III/4/Exty./352/16(187)]

  1. A combined reading of the above provisions clarifies that FSSAI recognised “food for special dietary uses” (specially processed or formulated to satisfy particular dietary requirements which may exist or arise because of certain physiological or specific health conditions such as diabetes) as a separate category of ‘foods’. FSSAI streamlines the purview of the said foods by providing a list of ingredients that must be contained for any food to qualify as a “food for special dietary uses”.
  2. In view of the above, it is submitted that the product in question is a specially designed nutritional powder to meet the special dietary requirements of Diabetic people. It is pertinent to note that the ingredients like Isomaltulose, FOS – Fructo- oligosaccharides and Inulin are covered under Schedule – VIII of the Notification dated 23.12.2016 as prescribed by FSSAI. Thus, the product in question is treated as a ‘food for special dietary uses” under FSSAI as is registered as the same. This fact is also not in dispute and admitted by the Ld. AAR in its Ruling dated 23.1.2019.
  3. The product in question also has other features also like it being sugar (sucrose) free, having low GI, having high fiber, being rich in MUFA. Thus, in this respect, it can be concluded that the product in question is a ‘diabetic food’ to meet the special dietary requirements of Diabetic people. The Ld. AAR has not disputed the said facts and the conclusion that the product is food which is meant for diabetic persons.
  4. In light of the aforesaid submissions, the fact that the product in question is a food product which answers the description of product designed for a person suffering from diabetes and that the product is a partial meal replacement, is not a matter of dispute. The said facts are also been relied on by the Ld. AAR while finding that the product in question assists diabetics in replacing a meal or part of it. For ease of reference the relevant extract of the ruling is extracted as under:

“In view of the above it can be said that the subject product, Prohance-D is different from the parent product is as much as it contains extra ingredients as mentioned in (i) to (iv) above, ingredients which along with the other regular ingredients may assist diabetic in replacing a meal or part of it.”

  1. On this count alone, it is submitted that the portion of the Ruling dated 23.1.2019 passed by Ld. AAR by which the product is classified as preparation for making beverage is incorrect and is liable to be set aside.

MERELY MENTIONING / DECLARING OTHER HEALTH BENEFITS ON THE LABEL OF PROHANCE-D WILL NOT EXCLUDE/TAKE AWAY THE PRODUCT IN QUESTION FROM BEING A “DIABETIC FOOD”.

  1. Before going into the discussion as to whether the product in question is suitable for diabetic person or not, we will first discuss the meaning and symptoms of diabetes which the root cause of the entire issue.
  2. The term ‘diabetes’ has not been defined under the GSTlaws, Explanatory Notes to HSN and under the CTA and rules made thereunder. Thus, we have to take recourse of dictionary meanings of term ‘diabetes’.
  3. The Oxford Dictionary of Food & Nutrition by David A. Bender described ‘diabetes’ as:

“there are two distinct conditions: diabetes insipidus and diabetes mellitus. The later condition is more common and is generally referred to simply as diabetes or sugar diabetes. Haemochromatosis is known as bronze diabetes.

Diabetes insipidus is a metabolic disorder characterized by extreme thirst, excessive consumption of liquids and excessive urination, due to failure of secretion of the antidiuretic hormone.

Diabetes mellitus is a metabolic disorder involving impaired metabolism of glucose due to either failure of secretion of hormone insulin (insulin dependent diabetes) or impaired responses of tissues to insulin (non-insulin dependent diabetes), If untreated, the blood concentration of glucose rises to abnormally high levels (hyperglycaemia) after a meal and glucose is excreted in the urine (glucosuria). Prolonged hyperglycaemia may damage nerves, blood vessels, and kidneys, and lead to development of cataracts, so effective control of blood glucose level is important.

Type I diabetes mellitus develops in childhood (juvenile onset diabetes) and is due to failure to secrete insulin and hence is called insulin dependent diabetes. Treatment is by injection of insulin (originally purified from beef or pig pancreas, now biosynthetic human insulin), together with restriction of the intake of sugars. Type II diabetes mellitus generally arises in middle age (maturity onset diabetes) and is due to resistance of the tissues to insulin action; secretion of insulin by the pancreas may be normal or higher than normal. It is referred to as non-insulin dependent diabetes and can sometimes be treated by restricting the consumption of sugars and reducing weight, or by the use of oral drugs which stimulate insulin secretion and/ or enhance the insulin responsiveness of tissues (sulphonylureas and biguandies). It is also treated by injection of insulin to supplement secretion from the pancreas and overcome the resistance. Impairment of glucose tolerance similar to that seen in diabetes mellitus sometimes occur in late pregnancy, when it is known as gestational diabetes. Sometimes pregnancy is the stress that precipitates diabetes, but more commonly the condition resolves when the child is born.

Renal diabetes is the excretion of glucose in the urine without undue elevation of the blood glucose concentration. It is due to reduction of the renal threshold which allows the blood glucose to be excreted.”

  1. The WHO Report defines ‘Diabetes’ as under:-

2.1 Definition

The term diabetes mellitus describes a metabolic disorder of multiple aetiology characterized by chronic hyperglycaemia with disturbances of carbohydrate, fat and protein metabolism resulting from defects in insulin secretion, insulin action, or both. The effects of diabetes mellitus include long-term damage, dysfunction and failure of various organs. Diabetes mellitus may present with characteristic symptoms such as thirst, polyuria, blurring of vision, and weight loss. In its most severe forms, ketoacidosis or a non-ketotic hyperosmolar state may develop. and lead to stupor, coma and, in absence of effective treatment, death. Often symptoms are not severe, or may be absent, and consequently hyperglycaemia sufficient to cause pathological and functional changes may be present for a long time before the diagnosis is made. The long-term effects of diabetes mellitus include progressive development of the specific complications of retinopathy with potential blindness, nephropathy that may lead to renal failure, and/or neuropathy with risk of foot ulcers, amputation, Charcot joints, and features of autonomic dysfunction, including sexual dysfunction. People With. diabetes are at increased risk of cardiovascular, peripheral vascular and cerebrovascular disease. Several pathogenetic processes are involved in the development of diabetes. These include processes which destroy the beta cells of the pancreas with consequent insulin deficiency, and others that result in resistance to insulin action. The abnormalities of carbohydrate, fat and protein metabolism are due to deficient action of insulin on target tissues resulting from insensitivity or lack of insulin.

  1. The Ld. AAR has erred in holding that the product in question cannot be treated as a “diabetic food” alone on the ground that the said product can be used to treat and cure/prevent other health benefits such as providing Energy, Immune health, Heart health, Vitamins and Minerals and maintains cholesterol levels, as mentioned on the label.
  2. It is submitted that the above allegation / finding of the Ld. AAR is totally incorrect and perverse. The Ld. AAR has in fact failed to understand the manufacturing process of Prohance – D – Chocolate variant and its chemical composition to arrive at the conclusion that the Prohance – D – Chocolate variant will not be specifically covered under Tariff Item No.2106 9091 of the CTA as ‘Diabetic Foods’.
  3. It is submitted that merely mentioning the other health benefits on the label of the product in question does not exclude it/take it away from the product in question to be considered / treated as a ‘diabetic food’. In reality, the other health benefits mentioned on the label are actually for the patients who are suffering from diabetics only.
  4. The above submission can be explained better by dealing with each and every consequences/effect which can be caused to a diabetic person:

Diabetes and coronary heart disease are closely related. Diabetes contributes to high blood pressure and is linked with high cholesterol which significantly increases the risk of heart attacks and cardiovascular disease. Similar to how diabetes affects the heart, high blood pressure and cholesterol raises the risk of strokes.

  1. High blood glucose levels can cause damage to all parts of the cardiovascular system. For this reason, there is a close link between diabetes and cardiovascular problems.
  2. Excess blood sugar decreases the elasticity of blood vessels and causes them to narrow, impeding blood flow. This can lead to a reduced supply of blood and oxygen, increasing the risk of high blood pressure and damage to large and small blood vessels.
  3. High blood pressure is a risk factor for heart disease. According to the Centers for Disease Control and Prevention (CDC), 74 percent of adults with diabetes have hypertension.
  4. Damage to large blood vessels is known as macrovascular disease, while microvascular disease refers to damage to small blood vessels.

Complications from macrovascular disease include:

  1. heart attack
  2. stroke
  3. peripheral arterial disease

Microvascular disease can lead to problems with the:

  1. Eyes
  2. Kidneys
  3. nervous system
  4. Diabetes may also result in tiredness. The tiredness is the result of having an imbalance between one’s level of blood glucose and the amount or effectiveness of circulating insulin.
  5. People with diabetes are more prone to having unhealthy high cholesterol levels, which contributes to cardiovascular disease (CVD). By taking steps to manage cholesterol, individuals can reduce their chance of cardiovascular disease and premature death.
  6. Diabetes tends to lower “good” cholesterol levels and raise triglyceride and “bad” cholesterol levels, which increases the risk for heart disease and stroke. This common condition is called diabetic dyslipidemia. Diabetic dyslipidemia means your lipid profile is going in the wrong direction. It’s a deadly combination that puts patients at risk for premature coronary heart disease and atherosclerosis.
  7. From the above consequences/effect which can be caused to a diabetic person, it is evident that diabetes can lead to serious health complications including heart disease, blindness, kidney failure, and lower-extremity amputations, high cholesterol, tiredness etc.
  8. At this stage, it is relevant to refer and rely on Rule 106 of the Drugs and Cosmetics Rules, 1945 which reads as under:
  9. Diseases which a drug may not purport to prevent or cure.-(1) No drug may purport or claim to prevent or cure or may convey to the intending user thereof any idea that it may prevent or cure, one or more of the diseases or ailments specified in Schedule J.

(2) No drug may purport or claim to procure or assist to procure, or may convey to the intending user thereof any idea that it may procure or assist to procure, miscarriage in women.

  1. Further, attention is invited to Schedule -J of the Drug and Cosmetics Rules, 1945 (as mentioned in Rule 106) which lists out certain diseases and ailments which a drug may not purport to prevent or cure or make claims to prevent or cure. Out of all the diseases and ailments, it is submitted that Diabetes is one of the diseases or ailments which alone cannot be cured by drug or medicine and hence the same required to be cured or prevented by taking adequate nutritional supplements. The relevant portion of the Schedule J is extracted as under:

SCHEDULE J

[See Rule 106]

DISEASES AND AILMENTS (BY WHATEVER NAME DESCRIBED) WHICH A DRUG MAY NOT PURPORT TO PREVENT OR CURE OR MAKE CLAIMS TO PREVENT OR CURE

1. AIDS
2. Angina Pectoris
3. Appendicitis
4. Arteriosclerosis
5. Baldness
6. Blindness
7. Bronchial Asthma
8. Cancer and Benign Tumour
9. Cataracts
10. Change in colour of the hair and growth of new hair
11. Change of foetal sex by drugs
12. Congenital malformations
13. Deafness
14. Diabetes
15. Diseases and disorders of uterus
16. Epileptic fits and psychiatric disorders
17. Encephalitis
18. Fairness of the skin
19. Form, structure of breast
20. Gangrene
21. Genetic disorders
22. Glaucoma
23. Goitre
24. Hernia
25. High/Low Blood Pressure
26. Hydrocele
27. Insanity
28. Increase in brain capacity and improvement of memory
29. Improvement in height of children/ adults
30. Improvement in size and shape of the sexual organ and in duration of sexual performance
31. Improvement in the strength of the Natural teeth
32. Improvement in vision
33. Jaundice/Hepatitis/Liver disorders
34. Leukaemia
35. Leucoderma
36. Maintenance or improvement of the capacity of the human being for sexual pleasure.
37. Mental retardation, subnormalities and growth
38. Myocardial infarction
39. Obesity
40. Paralysis
41. Parkinsonism
42. Piles and Fistulae
43. Power to rejuvenate
44. Premature ageing
45. Premature greying of hair
46. Rheumatic Heart Diseases
47. Sexual Impotence, Premature Ejaculation and spermatorrtioea
48. Spondylitis
49. Stammering
50. Stones in gall-bladder, kidney, bladder
51. Varicose Vein
  1. In view of the above submissions and Schedule 1, it is clear that diabetic person cannot be treated / cured from drug or medicine alone. The diabetic person has to rely and depend on other nutritional food products or health food supplements to get rid or control the diabetes. Thus, it is prudent that any product which is specifically made for diabetic person should also contain the ingredients to cover other health related benefits apart from controlling the sugar spikes of a diabetic person to meet his / her special dietary requirements.
  2. The finding of the Ld. AAR is totally incorrect and perverse to say that product in question is marketed to treat or prevent the other health related benefits and hence the same cannot be treated as suitable for people suffering from diabetes alone. In other words, the Ld. AAR is totally incorrect to held that presence of essential ingredients in Prohance-D which can also treat the other health related problems will not be considered as “diabetic food” only, when precisely the benefits as mentioned on the label is very much essential and required for treatment and prevention of other connected health symptoms for patients suffering from diabetes. It is submitted that the diabetic person cannot be forced to buy different products for controlling or preventing various consequences/effect of diabetes. In fact, the product in question is ONE STOP SHOP for a diabetic person.
  3. On this count alone, it is submitted that the portion of the Ld. AAR ruling dated 23.1.2019 mentioning of other health benefits on the label of the product will make the product of general use and not exclusive for ‘diabetic people’ is totally incorrect and perverse. Thus, it is submitted that the portion of the Ruling dated 23.1.2019 passed by Ld. AAR which is against the appellant is incorrect and accordingly shall be set aside.

THE LD. AAR HAS ERRED IN HOLDING THAT THE PROHANCE-D (CHOCOLATE FLAVOUR) DOES NOT CONTAIN HIGH DIETARY SUPPLEMENTS AS REQUIRED IN DIABETIC FOODS.

  1. The Ld. AAR in its ruling dated 23.1.2019 has erred in holding that the product in question is not a ‘diabetic food’ by placing heavy reliance on the information obtained from the “internet”.
  2. It is submitted that the finding of the Ld. AAR is totally erroneous. This is for the reason that the guidelines under FSSAI Act and regulations prescribes that a product containing at least 6g fiber per 100g is rich in fiber. Therefore, it is submitted that the product in question containing fiber (FOC/insulin/Acacia gum) content of 8.1 g per 100g powder, is no doubt a rich in fiber content as per the Sr No. 14 to the Schedule I of the Food Safety and Standards (Advertising and Claims) Regulations, 2018.
  3. On this count alone, it is submitted that the portion of the Ruling dated 23.1.2019 passed by the Ld. AAR to the extent of rejecting the classification of the product in question under Tariff Item No. 2106 90 91 as ‘Diabetic foods’ on the ground that Prohance – D Chocolate variant does not contain high fiber content, should be set aside.
  4. It is further submitted that the information and the source of such information which formed the basis to decide the classification of the product in question has not been reproduced nor informed in the ruling. In other words, the appellants were not put to notice of the document or evidence being relied upon against them. On this ground alone, the appellant submit that the portion of the Ruling dated 23.1.2019 passed by the Ld. AAR which is against the appellant should be set aside.
  5. The observation of the Ld. AAR that the product in question should have high fiber content as required in diabetic food, is totally erroneous without any basis and illegal on the face of it. It is submitted that the fact that the product in question has fiber content is not a matter of contention at all in the entire appeal and it is an admitted fact.
  6. It is submitted that the placing heavy reliance on the internet for coming to any conclusion is not tenable in law specially when the issue involved is regarding the classification of the goods under GST regime. The reference to Explanatory notes would be made wherever required in relation to the respective products. It is submitted that the Custom Tariff is generally based on the tariff classification adopted by World Customs Organization in its HSN. Hence, wherever a Chapter of Custom Tariff is fully aligned with the corresponding Chapter of HSN, the HSN explanatory notes explaining the scope of headings of that Chapter would have persuasive value in the determination of scope of headings of correspondence Chapter of Customs Tariff. The aforesaid position has been laid down by the Hon’ble Supreme Court in the following decisions:

(a) Coen Bharat Limited Vs. CCE – 2007 (217) ELT 165 (SC) = 2007 (9) TMI 29 – SUPREME COURT

(b) CCE Vs. Bakelite Hylam Limited – 1997 (91) ELT 13 (SC) = 1997 (3) TMI 598 – SUPREME COURT

  1. Accordingly, the Ld. AAR should have placed reliance on Explanatory notes to HSN in order to understand and ascertain the correct classification of the products in question.
  2. On this count alone, it is submitted that the portion of the Ruling dated 23.1.2019 passed by the Ld. AAR to the extent of rejecting the classification of the product in question under Tariff Item No. 2106 90 91 as ‘Diabetic foods’ being an unreasoned order and shall be set aside.

THE LD. AAR ERRED IN CLASSIFYING THE PRODUCT IN QUESTION AS A “COMPOUND PREPARATION FOR MAKING NON-ALCOHOLIC BEVERAGE”.

  1. The Ld. AAR has erred in holding that the product in question is a “Compound preparation for making non-alcoholic beverages” based on observation that food preparation is meant to be consumed by dissolving the same in water or milk. Based on the observation that the product being a combination of various items could clearly be treated as a ‘compound preparation’ and the product being in powder form could be consumed by direct mix with water or milk.
  2. It is submitted that the above finding is totally incorrect. Having solely been based on the observation that the product being a powder is to be mixed in water or milk and consumed.
  3. The term ‘Compound preparation’ has neither defined under GST provisions nor under the HSN Chapter notes. The Ld. AAR has also failed to provide any detailed reasoning for the classification of the product as a ‘compound preparation’. The sole basis for categorizing the product as a ‘compound preparation’ that Prohance – D is a combination of various items, is totally incorrect.
  4. It is submitted that the Ruling dated 23.1.2019 passed by the Ld. AAR to the extent classifying the product in question as a ‘Compound preparation for making non-alcoholic beverage’ under Tariff Item No. 2106 90 50 instead of ‘Diabetic Foods’ under Tariff Item No. 2106 90 50, being an unreasoned order and the same should be set aside on this ground alone.

PROHANCE-D – CHOCOLATE VARIANT/FLAVOUR AFTER MIXING WITH WATER DOES NOT RESULT INTO A “BEVERAGE”.

  1. At this juncture it is pertinent to refer to the meaning of the term ‘Beverage’. Under the GST provisions, the term ‘beverage’ has not been defined. Thus, the meaning of term ‘beverage’ is to be derived from the dictionary meaning.
  2. The term ‘Beverage’ has been defined in The Random House Dictionary of the English Language as-

“A drink of any kind, other than water such as tea, coffee, beer, milk, etc.”

  1. In Encyclopaedia Britannica (Mycropedia), page 1095, ‘Beverage’ has been described as-

“Liquid prepared for human consumption including types made by an infusion such as tea and coffee, fruit juices and other juices extracted from plants, such carbonated drinks as ginger ale and root beer, and alcoholic beverages, including wine, made by a fermentation process, and distilled liquor, requiring both fermentation and distillation.”

  1. It submitted that for determination whether a product is a ‘beverage’ or ‘food’, the crucial deciding factor should be the “principal purpose” for which it is intended to be used. If the product is used for the purpose of quenching one’s thirst or refreshment purpose, then the same would be classifiable as a ‘beverage’. However, if the product has nutritional value assigned to it and the principle function of the product is to provide nutrition, then it shall rightly be qualified as a ‘food’ product and not as a ‘beverage’.
  2. It is submitted that the mixing of any food product with water or milk cannot be the criteria to conclude that the resultant product will looses its original identity and become beverage or non-alcoholic beverage. This portion of the submission is supported by the umpteen decisions wherein the judicial forums clearly held that if the product is used for the purpose of quenching one’s thirst or refreshment purpose then only the same would be classifiable as a ‘beverage’. Further the aforesaid decisions also held that if the product has nutritional value assigned to it and the principle function of the product is to provide nutrition and nourishment, then it shall rightly be qualified as a ‘food’ product and not as a ‘beverage’.
  3. It is submitted that merely for the reason that a product can be consumed as a drink after dilution with water, cannot be a basis for classification under Chapter 21 as a preparation for beverage. The said product even if is to be consumed after mixing in water/milk in the liquid form would still be a food replacement in liquid form and not a beverage.
  4. It is submitted that the merely because the recommend used of the product is with “water” after making it into a semiliquid form for consumption, the said product does not looses its original identity and become beverage or non-alcoholic beverage. Hence the classification of the product as a compound preparation for non-alcoholic beverage is erroneous.
  5. Further, reference is invited to The Food Safety and Standards (Food Products and Food Additives) Regulations, 2011, wherein under Appendix A to the regulations, a broad list of Non-alcoholic (‘Soft’) beverages have been categorically stated in Para

14.1. The extract of the said Para is extracted as under:

14.0 Beverages, excluding diary products

14.1 Non- Alcoholic (“Soft”) beverages

14.1.1 Waters

14.1.1.1 Natural mineral waters and source waters

14.1.1.2 Table waters and soda waters

14.1.2 Fruit and vegetable juices

14.1.2.1 Fruit juices

14.1.2.2 Vegetable juices

14.1.2,3 Concentrates of fruit juices

14.1.2.4 Concentrates of vegetable juices

14.1.3 Fruit and vegetable nectars

14.1.3.1 Fruit nectar

14.1.3.2 Vegetable nectar

14.1.3.3 Concentrates of fruit nectar

14.1.3.4 Concentrates of vegetable nectar

14.1.4 Water-based flavoured drinks, including “sport”, energy, or “electrolyte” drinks and articulated drinks

14.1.4.1 Carbonated water-based flavoured drinks

14.1.4.2 Non-carbonated water-based flavoured drinks, including punches and ades

14.1.4.3 Concentrates (liquid or solid) for water-based flavoured drinks

14.1.5 Coffee, coffee substitutes, tea, herbal infusions, and other hot cereal and grain beverages, excluding cocoa.

  1. It is submitted that the product in question either in the current state (powder form) or in the form after adding the water to it would not fall under any of the category of ‘non-alcoholic beverages’ listed above.
  2. It is submitted that the product in question cannot be consumed for refreshment purpose or recreational purposes, hence the same shall not be classifiable as a ‘beverage’ at all.
  3. It is further submitted that the license for manufacture of the product in question as granted by FSSAI is under the heading ‘Food for special dietary use’ and not under the heading ‘Non-alcoholic Beverage’. Hence the product in the question is a food preparation and not a beverage or a preparation for making of a potential beverage, as per the regulation of FSSAI. Had the intention of FSSAI to categorize the product as similar to product in question under ‘Non-alcoholic Beverage’, in suchcase, FSSAI should have clearly mentioned the said product under Para No.14.0 of The Food Safety and Standards (Food Products and Food Additives) Regulations, 2011.
  4. It is submitted that the product in question is a nutritional product/food replacement which needs to be consumed in measured quantity. The directions for use on the label of the product too prescribe that it should be consumed as prescribed by the dietician. Hence, the product in question cannot be called a ‘beverage’ which in its common understanding can be consumed in unrestricted quantitates for pleasure. Hence, the classification of the product in question as a compound preparation for non-alcoholic beverage is erroneous.
  5. Thus, it is submitted that the product in question is a ‘food preparation’ rightly classifiable as ‘Diabetic foods’ under Tariff Item No.2106 90 91 of the CTA. Hence, it is submitted that the Ld. AAR has erred in classifying the product in question as ‘Compound preparations for non-alcoholic beverages’, in light of the fact that the said product would not form a ‘beverage’ after mixing with water and would continue to remain as ‘food’ alone in liquid/semi-solid form.
  6. Once it is clear that the product in question is not a ‘beverage’ at all, then the question of categorizing the product in question as “compound preparation for making of non-alcoholic beverage” will not arise at all.

THE PRODUCT IN QUESTION HAVING BEEN HELD TO BE FOOD CANNOT BE SUBSEQUENTLY BE CLASSIFIED AS ‘COMPOUND PREPARATION FOR MAKING A NON-ALCOHOLIC BEVERAGE’

  1. At this juncture it is pertinent to note that the Ld. AAR has indeed observed that the product in question is ‘food’ and has further held that the product is a ‘food preparation’. For ease of reference the relevant finding of the Ld. AAR is extracted as under:

We find that Chapter 2106 of the tariff specially covers ‘Food preparation not elsewhere specified or included’ and in view of the submissions made by the applicant it is clear that “Prohance-D (Chocolate)” is a food preparation which is meant to be consumed by people by dissolving the same in water or milk. It is thus a “food preparation”, squarely covered under Chapter Heading 2106 of the Customs Tariff.

  1. In light of the fact that the Ld. AAR has specifically time and again observed in the ruling that the product in question is a ‘food’ and ‘food preparation’, The finding of the Ld. AAR that the result of the product in question after mixing with water or milk would be a beverage is contradictory. The product in question can either be a ‘food’ or a ‘beverage’ and cannot be both. The Ld. AAR having observed that the goods are food cannot contradictorily classify the product in question as a preparation for beverage, since it would amount to blowing hot and cold.

RELEVANT GUIDELINES ISSUED BY FDA SUPPORTS THE APPELLANT’S SUBMISSION.

  1. It is submitted that the product in question is admittedly being marketed as a “partial meal replacement/supplement for diabetic patients” containing additional ingredients for the special dietary needs of the diabetic patients. The product in question being “food for diabetic” as per the FSSAI standards and is to be consumed in specified dosage. It is submitted that the product in question clearly fulfills all the conditions prescribed by the guidance material for classification as a “dietary supplement product” and not a beverage.
  2. To support the above submission, reference is invited to the“Guidance for industry: Distinguishing Liquid Dietary Supplements from Beverages” issued by theFood and Drug Administration (FDA) to help dietary supplement and beverage manufacturers and distributors determine whether a “product in liquid form” is properly classified as a ‘dietary supplement’ or as a ‘beverage’. The guidance provides certain basis for distinguishing beverages from liquid dietary supplements, relevant extract of the same are as follows:

Labeling and advertising – a product that bears a Supplement Facts panel may still be a beverage if it also bears statements that the product is intended to “refresh” or “rehydrate” because such statements represent the product for use as beverage.

Product name – Product or brand names that use conventional food terms such as “beverage,” “drink,” “water,” or “soda” represent the product as a beverage.

Product packaging – Packaging is used to market a product as well as to contain, hold, and preserve the product. Packaging can convey messages about how the product is to be used.

Serving size and recommended daily intake – Even if a product is not expressly represented as an alternative to a beverage, when the practical result of the labeled serving size and/or total recommended daily intake is that the product is used as a beverage or replaces beverages that serve as ordinary sources of drinking fluid, FDA would generally consider the product to be represented for use as a beverage.

Recommendations and directions for use – Dietary supplements are defined as products that, among other requirements, are intended to supplement the diet. (See section 201 (ff) (1) of the FD&C Act [21 U.S.C. 321(ff) (1)].) In contrast, beverages generally are intended, for example, to quench thirst or otherwise provide a source of fluids (e.g., water, soda), provide nutritive value (e.g., milk, orange juice), or provide taste and aroma (e.g., hot cocoa). Recommendations or directions to use a product as a thirst quencher can be considered recommendations or directions to use that product as a beverage, replacing other beverages such as fruit juice, water, or soda, and thus represent the product as a beverage. In contrast, recommendations or directions to use a liquid product to supplement the diet in a manner consistent with other dietary supplements (e.g., by taking one tablespoon three times a day) could be a factor in determining that the product is not represented as a beverage, even if the packaging is similar to packaging used for beverages.

Marketing practices – Examples of marketing practices that may represent a product in liquid form as a conventional food include labeling, advertising, or other promotional activities that favorably compare the product to a category of beverages (e.g., sodas), market the product as an accompaniment to a meal, or market the product based on typical beverage criteria like taste, refreshment, and thirst-quenching ability; the use of metatags that result in the product’s appearing in the results of an electronic search for sodas, juices, or other beverages; and paying for the product to be displayed in the beverage section of retail stores. However, simply recommending that a liquid product be taken with a meal would not generally be considered to represent the product as a conventional food, as many dietary supplements should be taken with food for best absorption. Moreover, promoting a product as a substitute for a beverage would not always represent the product as a conventional food.

Composition – FDA recognizes that there are areas of overlap between the ingredients of some dietary supplements and conventional foods. However, in light of Congress’s findings in the Dietary Supplement Health and Education Act of 1994 (DSHEA), which focused on the value of dietary supplements in improving nutrition, promoting long-term health and quality of life, and reducing the risk of chronic diet-related diseases, the agency does not believe that Congress intended the overlap in composition between dietary supplements and conventional foods to be total. Moreover, the dietary supplement provisions of the FD&C Act (added by DSHEA) are premised on the concept of dietary supplements as products that are marketed and consumed for nutrition and health benefits, and specifically authorize supplements to be marketed for those purposes (see section 403(r)(6) of the FD&C Act [21 U.S.C. 343(r)(6)1).

Other representations about a product – Other representations about a product include, for example, representations in publicly available documents, such as statements made in filings with government agencies such as the U.S. Securities and Exchange Commission or the U.S. Patent and Trademark Office.

  1. The above guidelines provide that a powdered premix products and liquid concentrates can also be “dietary supplements”. The relevant extract of the guidance is extracted as under:

Powdered premix products that are intended to be added to water or other liquids have long been marketed as dietary supplements. If properly labeled as a dietary supplement, a product of this type is unlikely to be confused with beverage mixes or used as a substitute for a beverage mix. Powdered premixes may bear directions recommending that the premix be added to a liquid as a convenient delivery system, for other reasons of convenience or stability (e.g., if the ingredients are not stable in aqueous solutions), or to mask the taste of certain ingredients. We generally do not view such products as beverages when they are labeled as dietary supplements, provided that they are not otherwise represented as being for beverage use or as alternatives to beverages. Likewise, we generally would not view liquid concentrates that are added to water or other liquids as beverages when they are labeled as dietary supplements, provided that they are not otherwise represented for beverage use or as alternatives to beverages. An example of a product represented for beverage use would be chocolate syrup labeled with the statement “Delicious in milk or over ice cream.” In addition, a product labeled as a powdered lemonade mix would be considered to be a conventional food because lemonade is a beverage.

  1. In view of the above submissions, it is submitted that the product in question is rightly classifiable as ‘Diabetic foods’ being a “dietary supplement” for diabetic patients and not a “beverage”. Thus, it is submitted that once it is clear that the product in question is not a beverage at all, then the question of categorizing the product in question as “compound preparation for making of non-alcoholic beverage” will not arise at all.

IN COMMERCIAL/MARKET PARLANCE TOO THE PRODUCT IN QUESTION IS IDENTIFIABLE AS “DIABETIC FOOD” AND NOT AS A PREMIX FOR A BEVERAGE.

  1. In the alternative, it is submitted that the product in commercial/market parlance is identified as a food for diabetic patients and not as a beverage. Further the same is also highlighted by the packaging label of the product which reads as ‘FOOD FOR SPECIAL DIETARY USE’ and ‘Food for people with Diabetes’.
  2. In common parlance if a customer were to ask the shopkeeper for a premix for a beverage, the shopkeeper would not give the customer the product in question. However, the customer if approaches the shopkeeper to buy food products for a diabetic patient, then only would the shopkeeper provide the customer with the product in question.
  3. Further it is also submitted that the term ‘diabetic food’ shall construe to meandiabetic foods in all its formsas there is no restrictive meaning attached to the term. Further in common parlance any food engineered to suit the needs of a diabetic person is referred to as a diabetic food. Through various judicial pronouncements of the Hon’ble Supreme Court in the past it has been established that “in all its forms” shall have an impliedly wide meaning, placing reliance on the case of Indian Carbon Ltd. vs. Supdt. Of Taxes reported at AIR 1972 SC 154 = 1971 (8) TMI 184 – SUPREME COURT the court read down Section 14 (i) of the Central Sales Tax Act, 1956 and held that coke in all its forms shall include petroleum coke as well. Further in the case of Mineral Sales Corpn. v. C.S.T. reported at [46 STC 208(AII)] = 1980 (2) TMI 240 – ALLAHABAD HIGH COURT the Hon’ble court observed that the phrase “in all forms” has a wider connotation than the phrase “of all kinds” and shall imply all the various forms in which a thing manifests itself.
  4. Accordingly, it is submitted that the product in question is rightly classifiable under Tariff Item No. 2106 9091 as ‘Diabetic foods’ and not under Tariff Item No. 2106 9050 as ‘Compound preparation for non-alcoholic beverage’.

SPECIFIC ENTRY REGARDING SPECIFIC ITEM TO BE PREFERRED TO A GENERAL ENTRY – “PROHANCE -D” IS CLASSIFIABLE UNDER TARIFF ITEM NO. 2106 90 91 OF THE CUSTOMS TARIFF ACT, 1975

  1. In the alternative, the Tariff Item No. 2106 90 50 and 2106 90 91 are competing entries, hence reliance shall have to be placed on the General Rules of Interpretation to determine the appropriate classification of the product.
  2. As stated above, Rule 3 (a) of the General Rules of Interpretation states that a specific heading must be preferred over a general heading.
  3. The same principles was laid down in thecaseof Shanti Surgical Pvt. Ltd. v. Commissioner of C. Ex. Kanpur 2017 (6) G.S.T.L. 164 (Tri. – All.) = 2017 (7) TMI 50 – CESTAT ALLAHABAD which states as under:

“In my opinion the basics of the classification are that initially an attempt should be made to search a specific entry where the goods can be classified as per the nomenclature and the constituent material. In case no specific entry is available the next attempt should be to find the nearest entry where the goods can be classified. in case both the attempts turn to be futile then the attempt should be made to consider the end uses, the inclusion and exclusion clauses provided in the section notes, the chapter notes and the explanatory notes given the HSN. While doing so the interpretation of the said Note will depend upon the context in which the entries have been worded. If an entry is clearly worded and is broad in character, the some would lead to the conclusion. An entry is to be given its ordinary meaning. If any goods fit in within one entry, the same for any purpose would not be held to be included in the other and in particular the residuary.”

  1. The same position was re-iterated in thecaseof Rajdhani Seeds Corporation v. Commr. Of Cus. Nava Sheva 2006 (198) E.L.T. 449 (Tri. – Del.) = 2005 (12) TMI 376 – CESTAT, NEW DELHI in which the six-digit specific entry was preferred over general entry for the classification of “cloves”.
  2. In order to determine the specific entry between Tariff Item No. 21.06 9050 and Tariff Item No. 21.06 9091, it is pertinent to refer to the HSN Explanatory notes.
  3. As discussed above, the relevant extract of the HSN explanatory note to Chapter Heading 21.06 is extracted as under:

“The heading includes, inter alia:

….

(7) Non-alcoholic or alcoholic preparations (not based on odiferous substances) of a kind used in the manufacture of various non-alcoholic or alcoholic beverages. These preparations can be obtained by compound vegetable extracts of heading 13.02 with lactic acid, tartaric acid, citric acid, phosphoric acid, preserving agents, foaming agents, fruit juices, etc. The preparations containing (in whole or in part) the flavoring ingredients which characterized a particular beverage. As a result, the beverage in question can usually be obtained simply by diluting the preparation with water, wine or alcohol, with or without the addition, for example, of sugar or carbon dioxide gas. Some of these products are specially prepared for domestic use; they are also widely used in industry in order to avoid the unnecessary transport of large quantity of water, alcohol, etc. As presented, these preparations are not intended for consumption as beverages and thus can be distinguished from the beverages of Chapter 22.”

  1. In thecaseof Commissioner of C.Ex., Mysore v. Anurag Foods & Appliances Ltd, reported at 2009 (234) E.L.T. 641 (Tri. – Chennai) = 2008 (9) TMI 636 – CESTAT, CHENNAI it was held that Residuary entry is to be preferred only after it is exhaustively shown that the product was not covered in any specific heading.
  2. Tariff Item No. 2106 9091 of the CTA specifically covers “Diabetic Foods”. Thus, “Diabetic Foods” falls under the first interpretation of Chapter Heading 2106 and Tariff Item No. 2106 9091 is deemed to be the “specific entry” for the classification of “Diabetic Foods”.
  3. In light of the same, it is pertinent to peruse that Tariff Item No. 2106 9091 of the CTA is more specific than Tariff Item No. 2106 9050 which is general in nature.
  4. Further the Ld. AAR has also admittedly observed that the product in question contained extra ingredients which along with the other regular ingredients may assist diabetics in replacing a part of the meal.
  5. It has also been established that Tariff Item No.2106 9091 is the “specific entry” for classification of “Diabetic Foods”, it is pertinent to analyze whether “Diabetic Foods in powder form” shall also remain to be classifiable under the said Heading.
  6. It has already been established in thecaseof Indian Carbon Limited v. S. Taxes reported at AIR 1972 SC 154 = 1971 (8) TMI 184 – SUPREME COURT that a “goods in all its forms” are classifiable under the Chapter Heading under which the principal good is classifiable. In the present matter, “Diabetic Foods” is classifiable under Tariff Item No.2106 9091 of the CTA. Applying the principal in the said judgment to the present facts, it can be concluded that “Diabetic Foods” in all forms shall be classifiable under Tariff Item no. 2106 9091 of CTA.
  7. Thus, even if there existed two competing entries for the classification of the product:

(i) Tariff Item No. 2106 9050 of the CTA which is a “general entry” for Compound preparations for making non-alcoholic beverages.

(ii) Tariff Item no. 2106 9091 of the CTA which a “specific entry” for “Diabetic Foods” in all forms.

  1. As per Rule 3(a) of the General Rules of Interpretation, the heading which provides the most specific description and provides for the essential characteristic of the product shall be preferred to headings providing a more general description.
  2. In light of the same, it is humbly submitted that Tariff Item no. 2106 9091 provides the most specific description for the product and thus, is classifiable under the said heading.

SPECIFIC HEADING SHOULD BE PREFERRED AND IF THERE ARE TWO SPECIFIC HEADINGS, TO WHICH A PRODUCT CAN BE REFERRED, THE ONE OCCURRING SUBSEQUENTLY WILL PREVAIL – “PROHANCE – D (CHOCOLATE)” IS CLASSIFIABLE UNDER TARIFF ITEM NO. 2106 9091 OF THE CTA.

  1. In the alternative, if both of the entries under consideration are found to be “specific in nature”, the classification of the product shall be subject to Rule 3 (b) and Rule 3(c) of the General Rules of Interpretation which states as under:

RULE 3

When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:

(a) The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings ore to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.

(a) Mixtures, composite goods consisting of different materials or made up of different components, and foods put up in sets for retail sale, which cannot be classified by reference to 3(2), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.

(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable.

(c) When goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.

  1. Rule 3 (b) of the General Rules of Interpretation is applicable to mixture and composite goods. Thus, the same cannot be used to determine the classification of the product.
  2. Rule 3(c) on the other hand states that when classification cannot be determined by applying Rule 3(a) & 3(b) of the General Rules of Interpretation, then the product under question shall be classifiable under the heading which occurs last in numerical order among those which equally merit consideration.
  3. The same principal was upheld in thecaseof Union of India v. Pesticides MFG. & Formulators Association of India reported at 2002 (146) E.L.T. 19 (S.C.) = 2002 (10) TMI 95 – SUPREME COURT.
  4. Applying the said principal in the present matter, the latter of the competing headings is Tariff Item No.21.06 9091 should be applied in the presentcase.
  5. In view of the same, it is humbly submitted that the product is classifiable under Tariff Item No.2106 9091 of CTA.

WHEN THERE ARE TWO COMPETING ENTRIES, THE HEADING BENEFICIAL TO THE ASSESSEE IS TO BE ADOPTED – “PROHANCE – D (CHOCOLATE)” IS CLASSIFIABLE UNDER TARIFF ITEM NO. 2106 9091 OF CTA

  1. In furtherance to the above stated arguments, cognizance must be placed on the landmark judgment in thecaseof Commissioner of Central Excise vs. Minwool Rock Fibres Ltd. reported at 2012 (278) ELT 581 (S.C.) = 2012 (2) TMI 289 – SUPREME COURT. In the said case, the court held as under:

“We have already noticed the relevant entries to which we are concerned with in this appeal. No doubt there is a specific entry which speaks of Slogwool and Rockwool under Sub-heading No. 6803.00, but there is yet another entry which is consciously introduced by the Legislature under sub-heading No. 6807.10, which speaks of goods in which Rockwool, Slagwool and products thereof are manufactured by use of more than 25% by weight of blast furnace slag. It is not in dispute that the goods in question are those goods in which more than 25% by weight of one or more of red mud, press mud or blast furnace slag is used. If that be the case, then, in a classification dispute, an entry which is beneficial to the assessee requires to be applied and the same has been done by the adjudicating authority, which has been confirmed by the Tribunal.

  1. In the saidcase, both the competing entries dealt with the same product i.e “Slagwool” but with certain different specification. The latter of the two entries was specifically introduced on a later date with a lower rate of duty payable on the same. In analysing the appropriate classification of the slagwool in question, the Tribunal was of the view that in such type of disputes about competing entries, an entry which is beneficial to the assessee requires to be applied.
  2. In the present matter, the two entries under consideration is Tariff Item No. 9050 which covers “Compound preparation for making non-alcoholic beverages” and Tariff Item no. 2106 9091 which covers “Diabetic Food”. The product being a preparation for diabetic patient which is dissolved in water before consumption, can be contended to satisfies both the entries.
  3. It is pertinent to note that although the essential characteristic of the product is “Diabetic Food” and the product being sold in powder form which can be consumed with water for better swallowability cannot be ignored, thus making Tariff Item No. 2106 9050 and Tariff Item no. 2106 9091 competing entries.
  4. In such a scenario, reliance can be placed on the judgment in thecaseof Minwool Rock Fibres Ltd (supra). As per Notification 1/2017 – C.T. (Rate) dated 28.06.2017, as amended from time to time, “Diabetic Food” covered under Tariff Item no. 2106 9091 attracts GST at the rate of 12% and “Compound preparation for making non-alcoholic beverages” covered under Tariff Item No. 2106 9050 attracts GST at the rate of 18%.
Sch. SI. No. Chapter Heading/Sub-Heading Description of Goods Rate of Tax (CGST)
II 46A 2106 90 91 Diabetic foods 6%
III 23 2106 Food preparations not elsewhere specified or included [other than roasted gram, sweetmeats, batters including idli/dosa batter, namkeens, bhujia, mixture, chabena and similar edible preparations in ready for consumption form, khakhra, chutney powder, diabetic foods] 9%
  1. It is further noted that the specific entry with respect to “Diabetic Food” was introduced in CTA in the year of 2005 in Central Excise Tariff Act, 1975 & 2003 in the Customs Tariff Act, 1975 and the preferential lower rate of GST was attributed to the same in November 2017.
  2. Applying the principle laid down in the above stated judgment, when there are two competing entries, and there is a classification dispute, the entry which is beneficial to the assessee is required to be applied, which in thiscaseis Tariff Item no. 2106 9091.
  3. In light of the same, it is humbly submitted that the product is classifiable under Tariff Item no. 2106 9091 of the CTA.

THE HEADING APPROPRIATE TO THE GOODS TO WHICH THEY ARE MOST AKIN IS TO BE ADOPTED – “PROHANCE – D (CHOCOLATE)” IS CLASSIFIABLE UNDER TARIFF ITEM NO. 2106 9091 OF CTA

  1. In the alternative, if the classification is not possible by any of the preceding General rules of interpretation, namely 1, 2 & 3, the classification of the product shall be subject to Rule 4 of the General Rules of Interpretation which states as under:

Rule 4

Goods which cannot be classified in accordance with the above Rules shall be classified under the heading appropriate to the goods to which they are most akin.

  1. The same principles was laid down in thecaseof Collector of Central Excise, Bombay. v. K.W.H. Heliplastics Ltd reported in 1998 (97) E.L.T. 385 (S.C.) = 1998 (1) TMI 71 – SUPREME COURT which states as under:

“7.  Under such circumstances, it would have been more appropriate for the Tribunal to have applied Rules of Interpretation of the Excise Tariff, Rule 4 whereof provides that the goods which cannot be classified in accordance with Rules 1, 2 and 3 of the Rules, they shall be classified under heading appropriate to the goods to which they ore most akin.

  1. Apparently, Rules 1, 2 and 3 are not applicable for resolving the dispute and, as such, what was required to be done by the Tribunal in the presentcasewas, to find out the relationship of goods manufactured by the respondents with the description of goods under disputed headings of the classification list, as contended by the parties. The relationship of goods with particular heading depends upon the description, purpose and use of the goods. Note 11(a) of Chapter 39 of the Act, provides that Heading 39.25 applies also to reservoir, tanks, including septic tank, vats and similar containers. The purpose and use of these goods is to hold liquids or something in liquid form in process of manufacture as in tanning and dyeing etc., and thus can be used and are capable of being used for water storage in connection with raising of construction or mixing construction materials. It is not disputed that the goods manufactured by the respondent are tanks and vats. The description and usage of tanks and vats manufactured by the respondent tallies with the description of goods given in Note 11 (a) of Chapter 39 of the Act. We, therefore, find relationship between the goods manufactured by the respondent with the Heading 39.25. Once it is established that the description of the goods manufactured by the respondent ore akin to description of goods given under Heading 39.25 and sub-heading 3925.10, there is no difficulty in holding that the tanks and vats manufactured by the respondent would fall under Heading 39.25 of the Tariff. We accordingly hold that tanks and vats manufactured by the respondent are classifiable as “builders ware of plastics” and the view taken by the Tribunal that the classification of goods, i.e., tanks and vats would be appropriate under sub-heading 3926.90 of the classification list, and are exempt from excise duty, is erroneous.”
  2. It being an admitted fact that the product in dispute is meant primarily for diabetic persons as a partial meal replacement. Further the Ld AAR also having acknowledged the fact that the product is meant for diabetics as a partial meal replacement. The product in question is most akin to ‘diabetic food’ in terms of the usage.
  3. The product in question being not bought and sold as a premix for a beverage to be consumable by the public at large is in no way synonymous or akin to a compound preparation for making non-alcoholic beverages.
  4. In light of the above submission, applying the principles of Rule 4 of the general rules of interpretation, it is humbly submitted that the product is classifiable under Tariff Item no. 2106 9091 of the CTA.

THE SUB-HEADING CAN BE COMPARED AT THE SAME LEVEL FOR CLASSIFICATION OF GOODS – “PROHANCE – D (CHOCOLATE)” IS CLASSIFIABLE UNDER TARIFF ITEM NO. 2106 9091 OF CTA

  1. In the alternative, the Tariff Item No. 2106 90 50 and Tariff Item No. 2106 90 91 are parts of different sub-headings. The Heading “Compound preparation for making non-alcoholic beverages” figures under three dash “—” at 2106 90 50, whereas “Diabetic Food” figures under four dash “—-” at 2106 9091 as a sub-classification under ‘other’ figure under three dash “—” with both ‘other’ and Compound preparation for making non-alcoholic beverages being sub classified under “Other” figuring under single dash “-” at 2106 90.
  2. Reference in this regard in invited to the Rule 6 of the general rule of interpretation which states that the sub-headings can be compared at the same level. For ease of reference the rule is extracted as under:

Rule 6

For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Sub-heading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.

  1. The Ld. AAR erred in comparing the entry under different sub-headings namely “Compound preparations for making non-alcoholic beverages” figuring under three dash “—” and “Diabetic Food” figuring under four dash “—-”, without concluding whether the product would fall under ‘other’ figuring under three dash “—” or ‘Compound preparation for making non-alcoholic beverage’.
  2. The product in question not answering the description under Tariff Item No. 2106 9050 as “Compound preparation for making non-alcoholic beverages”, should rightly be classified as ‘other’ as ‘Diabetic foods’ under Tariff Item No. 2106 9091.

THE RULING SHALL ONLY BE APPLICABLE TO THE PRODUCT PROHANCE-D (CHOCOLATE FLAVOUR).

  1. Without prejudice to the above submissions, it is submitted that the ruling dated 23.01.2019 is only for the product Prohance-D (Chocolate Flavour). The said submission being supported by the Ld. AAR’s observation in the 2nd para of page 20 of the ruling, which is extracted as under:

They are classifying the vanilla variant of their product as diabetic food and their query is regarding classification only in respect of the chocolate variant of their product where chocolate flavor is used in order to make the said product appealing to the end consumer, without altering the diabetic nature of the same.

  1. It is accordingly submitted that the classification of the vanilla variant of the product in question was never a point of dispute. Hence the ruling dated 23.01.2019 shall be only applicable to the product in question and not the vanilla variant supplied by the appellant.

THE LD. AAR HAS FAILED TO PERUSE THE DECLARATION ON THE LABEL OF PROHANCE-D (CHOCOLATE FLAVOR) THAT IT IS “FOOD FOR PEOPLE WITH DIABETES’’.

  1. It is further submitted that the appellant is already supplying another food product for general dietary supplement namely ‘Prohance’. Hence if ‘Prohance – D’ was meant to be a general dietary supplement, there would have been no need for the appellant to retail an entirely different product. It is reiterated that the ‘Prohance – D’ is manufactured taking into consideration specific needs for diabetes.
  2. Further, the Ld. AAR has failed to peruse that the label of the product in question too highlights the fact that the product is “Food for special dietary use” and “Food for people with diabetes.” Further the said declaration also being supported by the FSSAI license, the Ld. AAR should have on this count alone classified the product in question as a ‘Diabetic food’ classifiable under Tariff item No. 2106 90 91.
  3. In view of the above, the impugned Advance Ruling dated 23.01.2019 is liable to be modified to the extent it proposes to classify the product under Tariff Item No. 2106 90 50 and dismisses the rightful classification under Tariff Item No. 2106 90 91.

PRAYER

  1. In view of the foregoing, it was prayed as under: –

(a) Modify the portion of impugned Advance ruling No. GST-AAR-88/2018-19/3-10 dated 23.01.2019 = 2019 (7) TMI 95 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA which is against the appellant and allow the appeal, with consequential reliefs to the Appellant;

(b) Declare that the product ‘Prohance-D’ as a “Diabetic food” is classifiable under Tariff Item No. 2106 90 91 if the CTA and liable to GST @12%; and

(c) Pass such other order or orders as may be deemed fit and proper in the facts and circumstances of the case.

Personal Hearing

  1. A personal Hearing in the matter was conducted on 14.10.2019, which was attended by Shri R. Nambirajan, on behalf of the Appellant, wherein he reiterated the written submissions, and relied upon various legal provisions in support of the contentions, put forth by the Appellant. The Department was represented by Ms. Manjiri Phansalkar, the Jurisdictional Officer in the instant matter, wherein she maintained the earlier stance taken by the Department before the Advance Ruling Authority.

Discussions and Findings

  1. We have gone through the facts of thecase, documents on record and submission made by both the appellant as well as jurisdictional officer. The appellant is engaged in the production and making of nutritional powder for special dietary use called Prohance-D. The appellant is dealing with two variants of Prohance-D – namely Prohance-D – Vanilla flavor and Prohance-D Chocolate flavor. The issue in the presentcase is regarding the determination of the correct classification and applicable rate of GST on Prohance-D Chocolate variant. The appellant has stated that Prohance-D is a nutritional powder -special dietary use for people with Diabetics. The said product is sold in powder form and is required to be mixed with drinking water and used as partial meal replacement/breakfast replacement/evening snack/healthy bedtime snack or as directed by Physician/Dietician for diabetics. Though the appellant proposes to manufacture two variants of the product, the application is filed with AAR to issue a ruling on the classification of the Chocolate variant.
  2. Notification No.1/2017-Central Tax (Rate) dated 30.06.2017 provides for applicable rate of GST on the supply of goods. Sr. No.46A of Schedule-11 to Notification No.1/2017- Central Tax (Rate) dated 30.06.2017 reads as under: –
Schedule SI. No. Chapter Heading/Sub-Heading Description of goods Rate of tax (CGST)
II 46A 21069091 Diabetic foods 6%

The issue before the AAR was whether the subject product is a ‘diabetic food’ or not and if not, whether it can be considered as product of cocoa or a compound preparation for making nonalcoholic beverages. The AAR agreed with the contention of the appellant that it is a ‘food’ as it is an edible substance consisting of nourishing and nutritive components such as carbohydrates, fats, proteins, essential mineral and vitamins and can be ingested and digested and provides nutrients to the human body. However, though the AAR held that the product is a ‘food’, it held that it is not a diabetic food. Though they agreed with the contention of the appellant that it will not be classifiable under Chapter 18-19 of the Tariff as ‘Cocoa and Cocoa preparation, they instead classified the product under Chapter heading 2106 of the CT under ‘food preparations not elsewhere specified or included’ under the specific heading 21069050 having description ‘Compound preparation for making non-alcoholic beverages’. The AAR denied classification of the product as a ‘diabetic food’ on the grounds that it is advertised as to provide energy, immune health, heart health, vitamins and minerals and has various other health benefits and therefore to treat the same as ‘diabetic foods’ will not be proper. It also held that, as per information available on the inter-net diabetic food, diabetic food’ means something which should contain high amount of dietary fiber and some slow digestion agents and as the impugned product does not have any extra fiber, it has no substance which helps in slowing down of food. Thirdly, it has reasoned that Prohance-D Chocolate variant is only different from the parent product in that it contains some extra ingredients like Isornaltulose, Gum Arabic, Inulins, Myo-Innositol, Sucralose, Fructose.

  1. The appellant has given the composition of the impugned product vis-a-vis the composition of ‘Prohance’ which is a marketed as a normal food supplement and not as a ‘diabetic food’.
PROHANCE INGREDIENTS PROHANCE-D INGREDIENTS
MALTODEXTRIN MALTODEXTRIN
SUNFLOWER SEED OIL (HIGH OLEIC ACID) SUNFLOWER SEED OIL (HIGH OLEIC ACID)
CALCIUM CASEINATE CALCIUM CASEINATE
WHEY PROTEIN ISOLATE WHEY PROTEIN ISOLATE
SOY PROTEIN ISOLATE SOY PROTEIN ISOLATE
RAPESEED OIL (LOW ERUCIC ACID FRUCTO-OLIGOSACCHARIDES RAPESEED OIL (LOW ERUCIC ACID FRUCTO-OLIGOSACCHARIDES
COCOA POWDER 3% COCOA POWDER 3%
MINERALS MINERALS
SUNFLOWER SEED OIL SUNFLOWER SEED OIL
ANTO OXIDANTS (SOYA LECITHIN, L- ASCORBIC ACID, TBHQ) ANTO OXIDANTS (SOYA LECITHIN, L-ASCORBIC ACID, TBHQ)
CHOLINE BITARTRATE CHOLINE BITARTRATE
VITAMINS VITAMINS
TAURINE TAURINE
L-CARNITINE L-CARNITINE
ACIDITY REGULATOR (CITRIC ACID) ACIDITY REGULATOR (CITRIC ACID)
SUGAR ISOMALTULOSE
GUM ARABIC
INULIN
MYO-INOSITOL
SUCRALOSE
Fructose
  1. It is seen from the above table that Prohance-D Chocolate contains some extra special ingredients which differentiate from the normal Prohance. All the ingredients in it especially Isomaltulose, Gum Arabic, Inulins, Myo-Innositol, Sucralose, Fructose are sugar replacements or sugar substitute. Gum Arabic is used as a ‘soluble dietary fiber’. The fact that these products are used in the Prohance-D shows that it is specially meant for people suffering from diabetes and is also marketed as meal replacement for diabetics.
  2. As per the definition of ‘Diabetic food’ in the ‘Dictionary of Food and Nutrition’ by David Bander, it covers foods that has specially formulated for people suffering from diabetics. In the presentcase, the impugned product though generally contributes to the well being of patient is specially formulated for diabetic patients as is evident from the fact that it contains certain sugar replacements which are not found in the normal Prohance. It is therefore specially directed for diabetics. In such a scenario, whether a normal person not suffering from Diabetes would opt for the Prohance-D variant as a meal replacement? The answer is no. Such a person would opt for Prohance and not for Prohance-D as it can be normally expected that only a diabetic patient would go for the Prohance-D variant. This makes it very clear that that the product is formulated for diabetic patients, is targeted at that particular segment and therefore, can be termed as a ‘diabetic food’.
  3. Let us have a look at the explanatory notes given in the HSN. Under the Heading 2106, the following is given: –

“The heading includes

(1) to (8) …

(9) Sweets, gums and the like (for diabetics in particular) containing synthetic sweetening agents (e.g. Sorbitol) instead of sugar.”

This heading 2106 does cover food intended for diabetic patients. It is true that the heading 2106 also covers ‘Compound preparation for making nonalcoholic beverages’ under which heading is the product classified by the AAR. Heading 2106 covers both the descriptions and the Explanatory Notes to the HSN do not make it clear as to which product category the explanatory note given above applies. It is only under Customs Tariff Act that the category for ‘diabetic foods’ is carved out under the Heading 2106. But the very fact that the explanatory note explains what a diabetic food gives an indication as to what is intended to be covered by it. The intention is that foods which contains sugar replacement or sugar substitutes are meant to be covered by heading 2106 and such food may be products like sweets and gums also. In the instant case, the impugned product also contains sugar substitutes and therefore it will be covered by the term ‘diabetic food’.

  1. The AAR has also observed that the product is not a diabetic food because it does not contain high amount of dietary fiber and although the fact that it contains Gum Arabic, Gum Arabic is not a great source of dietary fiber. However, the AAR has not given any references in support of the statement that ‘Diabetic Foods’ have to contain dietary fibre. Also, it is felt that such a qualification would not be required to classify a product as diabetic food. As the HSN also considers food containing sugar replacements as diabetic food, the above product would also classify in it.

In view of the above deliberation, we proceed to pass the following order.

ORDER

(Under Section 101(1) of the CGST Act, 2017 and MGST Act, 2017)

No.GST/AAAR/2018-19/B-

Mumbai, dt.

For reasons discussed in the body of the Order, the Order of the AAR classifying the product Prohance-D (Chocolate) under heading 21069050 is hereby set aside. The product would instead classify as a diabetic food covered under chapter heading 21069091.

M/S. CMS INFO SYSTEMS LIMITED

Supply of goods or not – transport of money by cash-carry vans – goods or not – levy of GST – rate of GST and/or Compensation Cess – Input tax credit.

Whether the money being transported by the Appellant in the cash carry vans can be construed as “goods” or otherwise for the purposes of determining the availability of Input Tax Credit of the GST paid on the purchase and fabrication of the subject transport vehicles?

HELD THAT:- On perusal of Rule 138 (14) of the CGST Rules, 2017, it is clearly evident that only goods are mentioned therein as well as in the annexure thereto. Among those goods, one of the items mentioned in the annexure bearing the heading “Description of Goods” is ‘money’, which clearly indicates that the legislature has considered ‘money’ as ‘goods’, when money is being transported from one place to another. By applying the above interpretation in the present fact and circumstances of the case in hand, it can decisively be inferred that money under question is nothing but goods.

The transportation of the currency for the purpose of cash replenishment in ATMs operated by the Appellant’s clients are being regulated by RBI in the capacity of the Regulatory Authority, the guidelines of which have to be mandatorily complied with by the Appellant for carrying out their activities. Therefore, the compliance of the guidelines issued by the RBI will not detract the subject money from being goods. Further, non- applicability of the RBI guidelines on the goods other than money is quite obvious, as the RBI is the regulatory authority only in the matter related to the money and not for all the goods. Hence, such arguments, put forth by the Respondent is erroneous and absurd, and do not merit to be considered.

Input tax credit – HELD THAT:- Now, when it has been established that money, transported by the Appellant in the cash -carry vans, can be considered as goods, ITC in respect of the cash carry vans used for the transportation of cash will be available to the Appellant in accordance with provisions of section 17 (5) (a)(ii) of the CGST Act, 2017.

No.- MAH/AAAR/SS-RJ/04A/2018-19

Dated.- October 31, 2019

Citations:

  1. Printers (Mysore) Ltd. Versus Assistant Commercial Tax Officer – 1994 (2) TMI 261 – Supreme Court
  2. C.M.S. Info Systems Ltd. Versus The Commissioner, CGST, Mumbai East & Ors. – 2019 (7) TMI 615 – BOMBAY HIGH COURT
  3. In Re : Anyanwu Marteena Uchechi – 2014 (4) TMI 1123 – GOVERNMENT OF INDIA
  4. THOMAS COOK (INDIA) LTD. Versus COLLECTOR OF CUSTOMS, NEW DELHI – 1994 (2) TMI 144 – CEGAT, NEW DELHI
  5. In Re: CMS Info Systems Ltd., – 2018 (8) TMI 977 – APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act. Further, the CGST Act, 2017 and MGST Act, 2017, sometimes, shall also be referred as GST Act.

M/s. CMS Info Systems Limited (herein after referred to as the “Appellant”) had filed application for advance ruling under the provision of Section 97 (1) of the CGST Act, 2017. However, the members of the Advance Ruling Authority differed in their opinion in deciding one of the two issues/questions raised by the applicant before them, and consequently had referred the same to the Appellate Authority for Advance Ruling in terms of section 98(5) of the CGST Act, 2017 for decision on the said question. Accordingly, the said issue, which remain undecided by the Authority for Advance Ruling owing to the difference in their opinions, was eventually decided by the Appellant Authority for Advance Ruling vide Order No. MAH/AAAR/SS-RJ/04A/2018-19 dated 06.08.2018 =2018 (8) TMI 977 – APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA. The Appellate Authority for Advance Ruling vide the aforesaid order had held that the Appellant was not eligible to claim ITC in respect of the Cash Carry Vans, which were used to carry cash as a part of the services provided to their clients as it was observed that the cash or currency, being transported by the Appellant will not be considered as goods as per the definition of the goods provided in section 2(52) of the CGST Act, which inter alia categorically excludes money from the purview of the goods.

Aggrieved by the said AAAR Order dated 06.08.2018 = 2018 (8) TMI 977 – APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA, the Appellant had filed writ petition in the Hon’ble Bombay High Court. Thereafter, Hon’ble High Court, vide its order dated 09.07.2019 = 2019 (7) TMI 615 – BOMBAY HIGH COURT, set aside the impugned AAAR Order dated 06.08.2018 = 2018 (8) TMI 977 – APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA and directed AAAR to hear and decide the case after considering various submissions made by the Appellant.

In view of the aforesaid Hon’ble Bombay High Court Order, we set out to decide the subject-question asked by the Appellant vide the advance ruling application, filed by them before the Advance Ruling Authority, and which was eventually referred to us in terms of section 98(5) of the CGST Act, 2017.

At the outset, we will reproduce the relevant facts of the case below.

BRIEF FACTS OF THE CASE

1. The Appellant is having cash management network pan India. During the course of providing the cash management services, the appellant is engaged in the following activities:

  • Providing ATMs and installing the same at various locations across India.
  • Managing cash circulation through transporting cash from currency chest to bank branches.
  • Cash pick-up and delivery from and to dedicated banks.

2. Such transportation of cash is done through the security vans popularly known as “cash carry vans”. The appellant purchases raw motor vehicles and requisite fabrication, get them converted to cash carry vans. The appellant also pays GST on fabrication. For this purpose, the appellant purchases motor vehicle and pays GST. Credit of GST is not availed by the appellant presently. While purchasing Cash Carry Vans during pre-GST era, the appellant has paid the Central Excise Duty as well as Value added Tax.

3. When these vans cannot be used further, the appellant sells these motor vehicles as scrap. In certain cases, instead of purchasing motor vehicles, the appellant prefers to hire these motor vehicles.

4 The Appellant had approached the Advance Ruling Authority (AAR) for seeking an advance ruling under Section 97 (1) of the CGST Act, in respect of the following questions:

I. Whether supply of such motor vehicles as scrap after its usage can be treated as supply in the course or furtherance of business and whether such transaction would attract GST? If yes, please provide the rate of GST and/or Compensation Cess.

II. If answer to Question I is in affirmative, whether Input Tax Credit is available to CMS Info Systems Limited on purchase of motor vehicles i.e. cash carry vans which are purchased, used for cash management business and supplied post usage as scrap.

ORDER PASSED BY AUTHORITY FOR ADVANCE RULING

5. Regarding the issue raised in the Question I of the application, it is held that supply of motor vehicles i.e. cash carry vans as scrap after its usage will be treated as supply in the course or furtherance of business in terms of the provision of Section 7 of the CGST Act, 2017 and such transaction would attract GST as the disposal of cash carrying van is a transaction in connection with or incidental to or ancillary to business in so much as the sale proceeds of such vans is treated as income and reflected in P&L Account, thereby marking such transaction as taxable supply attracting GST thereon. As regards, the rate of GST leviable on such supply, the applicant has not provided any invoice or has informed tariff heading of these goods. Further, it is also not clear whether after sale these would be usable as vehicles or would be fully scrapped. As the said goods do not appear in the notification no. 2/2017-C.T. (Rate) which exempts the goods from the levy of GST, these taxable supplies would be taxed at rates mentioned in the Notification No. 1/2017-C.T. (Rate), which may be referred by the applicant accordingly.

6. Regarding the issue raised in the Question II of the application, wherein it was asked that if the sale of the cash carry van, as scrap after its usage, held a taxable supply, whether Input Tax Credit is available to CMS Info Systems Limited on purchase of such motor vehicles i.e. cash carry vans which are used for cash management business and supplied, post usage, as scrap, there was difference in opinion on this particular issue between two members of the Advance Ruling Authority. Therefore, the matter was referred to the Appellate Authority for Advance Ruling for giving the appropriate ruling in this regard.

GROUNDS OF APPEAL

7. The Appellant submitted that they were lawfully eligible and entitled for input tax credit of the GST paid on standard motor vehicle and also GST paid on the fabrication of the vehicles to suit the need for cash carrying vehicle.

8. According to Section 17(5)(a) of CGST Act, 2017, input tax credit on motor vehicles and other conveyance is not available; however, the exception has been carved out inter-alia to the motor vehicles and other conveyances used for transportation of goods. In other words, if the motor vehicles and conveyance is used for transportation of goods, input tax credit on motor vehicles is available. The relevant portion of the said section 17 (5) (a) is reproduced below:

“Section 17 Apportionment of credit and blocked credit: –

(1) ………………

(2) ………………

(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely: –

(a) motor vehicles and other conveyance except when they are used-

(i) for making the following taxable supplies, namely: –

(A) further supply of such vehicles or conveyances; or

(B) transportation of passenger; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

………………………..

………………………..

9. As per the meaning assigned to “goods” under clause (52) to Section 2 of the CGST Act, money is excluded from the ambit of the “goods”. Section 2 (52) is reproduced below:

Section 2. Definition – In this Act, unless the context otherwise requires, –

(1) …………….

(2) …………….

…………….

(52) “goods” means every kind of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under contract of supply;”

10. Meaning to “money” has been assigned under clause (75) to Section 2 of the CGST Act, 2017, which is reproduced below:

Section 2. Definition – In this Act, unless the context otherwise requires, –

(1) …………….

(2) …………….

…………….

(75) “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler’s cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Rank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

11. On careful consideration of the meaning assigned to the expression “money”, it would be clear that the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India, only when used as consideration to settle the obligation or exchange with Indian legal tender of another denomination would be considered as “money”.

12. In the instant case, the currency transported by the appellant is for the purpose of carrying out the business of maintaining ATMs by the Appellant and hence, the Appellant are not using the same as a consideration for settling of any obligation. The job assigned to the appellant is for the transportation of currency to the desired destination as per their customer banks and while carrying out the activity of transportation, the said currency is plain goods for the Appellants and cannot be used/ is not used in exchange of other Indian legal tender of another denomination.

13. In other words, although in general understanding, what is being transported by the appellants is currency or cash or money, from the Appellant’s point of view or for the appellant, what is transported is ‘goods’ and not ‘money’ as the said goods being transported would not serve the same purpose of ‘money’ as in the normal circumstances the money in hands of a person would serve i.e. for the payment of purchases/settlement of dues/discharge of debts etc.;

14. It is once again re-iterated that currency/cash is being transported by the Appellants and in support thereof, copy of CA Certificate dated 25.09.2017 and Draft Red Herring prospectus dated 27.09.2017 is enclosed.

15. In view of the above, the cash carry vans are used for transportation of goods as the currency being transported is not covered under the definition of ‘money’ and since the motor vehicle converted into the cash carry vans are used for transportation of goods, input tax credit of tax paid is admissible going by the exclusion from the bar on availability of input tax credit as stipulated under Section 17(5)(a)(ii) of CGST Act.

16. Section 2 of the CGST Act assigning meanings to various terms used under CGST Act begins with the expression “In this act, unless context otherwise requires”. Normally, the term ‘means’ makes the definition exhaustive one but such exhaustive definition has to be departed from if the definition section opens with the word “unless context otherwise requires” if there be something in the context to show that the definition could not be applied.

17. In the present case, the context in which the cash carry vans are used for transportation of currency is that the goods of the customer banks are transported by the Appellant and not the money as defined under Section 2 (75) of the CGST Act as the said currency cannot be used as money as understood in the common parlance. Further, the intention of the legislature in excluding money from the definition of “goods” is not to levy CGST on supply of money as otherwise CGST is leviable on supplies of intra- state supply of goods.

18. Rule 138 (14) which carves out goods the transportation of which would not require the preparation of e-way bill. The said rule specifically mentioning “currency” under the title “description of goods” further substantiates the contention of the Appellant that the currency transported by the cash carry van is “goods”.

19. The provision of the Motor Vehicle Act, 1988 assigned meaning to “goods” under Section 2 (13), “goods carriage” under Section 2 (14) and “transport vehicle” under Section 2 (47) would also substantiate that the currency would be treated as goods. The said provisions are reproduced herein below:

2. Definition– In this act, unless the context otherwise requires, –

…………

……………

(13) ‘goods’ includes live-stock, and anything (other than equipment ordinarily used with the vehicle) carried by a vehicle except living persons, but does not include luggage or personal effects carried in a motor car or in a trailer attached to a motor car or the personal luggage of passengers travelling in the vehicle;

(14) ‘goods carriage’ means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods;

(47) ‘transport vehicle’ means a public service vehicle, a goods carriage, an educational institutions bus or a private service vehicle;

20. Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017 at Sr. No. 117 provides full exemption for Rupee notes when sold to Reserve Bank of India falling under chapter/heading 48/4907 would also substantiate the Appellants’ claim that currency is covered under “goods”.

21. The certificate of registration and also certificate of fitness issued by the Motor Vehicle Department of Govt. of Maharashtra certifying cash carrying vans to be a ‘goods carrier’ and ‘goods vehicle’ also support the Appellant stand.

22. From the certificate of registration, certificate of fitness issued under Motor Vehicle Act and after considering the meaning assigned to the ‘goods’ under Section 2(13), “goods carriage” under Section 2 (14) and “transport vehicle” under Section 2 (47) of the Motor Vehicles Act, it is clear that the cash carry vans are used for transportation of goods. Hence, Revenue authorities cannot take a different view under GST.

23. It is further submitted that the Appellant are carrying out the business as defined in Section 2(17) of the CGST Act and without currency being transported by the Appellant could not have rendered supply of business support service on which GST is paid.

Hence denial of input tax credit of tax paid on motor vehicle converted into cash carry van is incorrect.

24. In support of their arguments, the Appellant have relied upon the following judgments:

(a) (Printer Mysore)- 1994 (2) SCC 434 = 1994 (2) TMI 261 – SUPREME COURT

(b) Thomas Cook -1994 (71) ELT 724(T) = 1994 (2) TMI 144 – CEGAT, NEW DELHI

(c) Anyanwu Marteena- 2015 (329) ELT 750 (GOI) = 2014 (4) TMI 1123 – GOVERNMENT OF INDIA

25. The Applicant refers to the view expressed by both the Hon’ble Members to the effect that there is no issue of admissibility when the vehicle is carrying bullion. In the present case vehicle is capital goods under Section 2 (19) and hence even if it is used in stray cases in transportation of bullion input tax credit is admissible as there is no bar from taking credit and in any case, the Appellant are not making any exempt supplies.

26. With the above submission and those made in their applications and additional submissions, it is humbly prayed for holding that Appellant are eligible and entitled for input tax credit of GST paid by them to vehicle manufacturers for supply of standard vehicles and GST paid on the fabrication. The Appellate Authority for Advance Ruling may also be pleased to hold cash carry vans would be covered under exclusion clause of 17(5)(a)(ii) of CGST.

SUBMISSION MADE BY THE RESPONDENT

27. In response to the above submissions made by the Appellant, the respondent, in this case the ‘Jurisdictional Officer’ has filed their reply, which is being reproduced hereunder:

28. The applicant is engaged in the services of transportation of cash. The cash carrying vans cannot be treated merely as transport vehicles, carrying the goods as claimed by the appellant, as it is a special purpose vehicle which is deployed to collect the currency under the security guards with arms and with 2 supervisors as per the Guidelines of Reserve Bank of India letter dated 06th April, 2018.

29. The appellant transports and manages “the money” which is different from ‘goods’ even in the eyes of the banking industry and RBI. It is because of this reason that the RBI has prescribed special safeguards specifically for “the money”. The fact that these safeguards are prescribed by the RBI are not applicable to goods clearly establishes that RBI considers the money as different from goods. Similarly, in the eyes of the banking industry also the money is not goods. Therefore, in the context of the situation in which the appellant is working, ‘money’ cannot be considered as ‘goods’. Accordingly, only because the definition of ‘goods’ under the CGST Act, 2017, contains the phrase “unless the context otherwise requires” does not mean that, the context of the appellant requires a definition of goods is different from one as prescribed in the CGST Act,2017.

30. The appellant contention that provision of Motor Vehicle Act and the exclusion of money from the scope of e-Way bill should take precedence over the provisions of the CGST Act, 2017, has been made without having any rational or basis. It is emphasized that the CGST Act has provided an unambiguous and clear definition of ‘goods’. Therefore, there is no need for resorting to the provisions of Motor Vehicle Act for looking for the meaning of `goods. Further, the exclusion of the ‘money’ from the scope of the e- way bill has no bearing on the definition of the ‘goods’ provided in the CGST Act. The contention of the appellant in this regard is bereft of any merit, hence not sustainable.

31. Accordingly, they had prayed that the application filed by the Applicant be rejected by the appellate authority.

PERSONAL HEARING

32. A personal Hearing in the matter was conducted on 14.10.2019, where Ms. Padmavati Patil, Advocate, appearing on behalf of the Appellant, reiterated their earlier written submissions filed before us. Vide the said written submissions, she averred that the Appellant were lawfully eligible and entitled for input tax credit of the GST paid on standard motor vehicle and also the GST paid on the fabrication of the vehicles to suit the need for cash carrying vehicle in light of provision under Section 17 (5) (a)(ii) read with Section 2(52) and Section 2(75) of CGST Act.

33. The aforesaid hearing was also attended by Shri Rishi Yadav in the capacity of the Jurisdictional Officer, wherein he reiterated the earlier written submissions, which had been filed before us.

DISCUSSION AND FINDINGS

34. We have carefully gone through the entire case records as well as oral and written submissions made by both the Appellant as well as the Respondent. On perusal of the same, the moot issue, before us, is to determine whether the money being transported by the Appellant in the cash carry vans can be construed as “goods” or otherwise for the purposes of determining the availability of Input Tax Credit of the GST paid on the purchase and fabrication of the subject transport vehicles.

35. Earkier, we had decided the above said issue vide our Order dated 06.08.2018, wherein we had discarded the Appellant’s contention favouring the entitlement of the ITC in respect of the subject cash-carry vans, and had held that since the currency transported by the Appellant in the subject cash carry vans will not be considered as goods as envisaged under section 2(52) of the CGST Act, 2017, accordingly, the ITC of the GST paid on the purchase and fabrication of the said carriage vehicles would not be available to the Appellant. However, pursuance to the Hon’ble Bombay High Court Order dated 09.07.2019 = 2019 (7) TMI 615 – BOMBAY HIGH COURT vide which we were directed to reconsider the case under the light of all the submissions made by the Appellant. The Hon’ble High Court vide the aforesaid order has observed the following flaws in the impugned AAAR Order dated 06.08.2018 = 2018 (8) TMI 977 – APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA:

(i) It was observed by the Hon’ble High Court that the impugned AAAR Order has not dealt with the Appellant’s principal submissions, wherein it was contended that the money transported by the Appellant with the aid of cash carry vans would stand covered by the definition of ‘goods’, provided under section 2(52) of the GST Act so long as the same is not used as a legal tender as have been stipulated under the definition of the money provided under section 2(75) of the GST Act.

(ii) It was also observed by the Hon’ble High Court that the conclusion drawn by the Appellate Authority in as much as ‘money’, prior to the issuance of Press note, subsequent to the 28th GST Council Meetings, was not included within the definition of ‘goods’ provided under the GST law on the basis of the notion that it was only during the 28th GST Council meetings that the GST Council categorically recommended the availment of ITC even in respect of the Motor vehicles, used for transportation of money for or by a banking company or financial institution, is not proper, as the same should have been examined under the existing definition of the `goods’ and ‘money’ provided under the GST Act.

36. In view of the above observations of the Hon’ble High Court, we set out to reconsider the submissions made by the Appellant afresh. The Appellant had, inter alia, submitted that they were mainly engaged in the business of ATM cash replenishment services, cash delivery and pick up services, management consultancy services etc. They further submitted that in GST, they had registered themselves under business support services having SAC 99859, and were discharging their GST liability on the entire value charged for supply of the said support services. They, further, submitted that they had to purchase the motor vehicles and fabricate/design the same as per the guidelines issued by the Reserve Bank of India, which are then used to transport the cash/bullions as a part of the cash replenishment/ management services agreed to be provided to their clients as per the terms of the agreement entered with them. They further submitted that the money being transported by the cash carry vans under question was nothing but ‘goods’ for them as they could not use such money for any purpose whatsoever, as they were simply acting as bailee for their clients. In other words, these moneys are not used as legal tender at any stage of the services rendered by them, and hence those cannot be considered as money in accordance with its definition provided under section 2 (75) of the CGST Act, 2017. Thus, they contended that in the context of their transactions, the currency being transported by them in the cash carry vans is not money, but is rather goods for them.

37. The Appellant have also adverted to the definitions section provided under section 2 of the CGST Act, 2017, which starts with the clause “In this Act, unless the context otherwise requires, -”. By placing reliance on the said clause of the definition section, they emphasized that the meaning assigned to `money’ provided under section 2(75) of the CGST Act, 2017 needs to be understood in the context of the services provided by them. They have also referred to the Rule 138(14) of the CGST Rules, 2017, which provides the list of the goods, which do not require the e-way bills for their movement or transportation by the motor vehicles from one place to the another. In the aforesaid rules, currency has been specified as one of those goods, which do not require e-way bill for their transportation from one place to another.

38. On careful consideration of the aforesaid submissions and facts of the case, placed before us, we are inclined to concur with the Appellant’s contention as to what is being transported by them in the cash-carry vans is not the money but the goods for them, as they cannot use such money for any purpose, whatsoever. This fact is also emanating from the Clause 2.7 of the agreement entered between the Appellant (referred in the Agreement as “COMPANY”) and its client Canbank Computer Services Ltd. (CCSL), which is being reproduced herein under:

“2.7 The COMPANY warrants that cash given to the COMPANY for replenishment of ATMs shall be used strictly in accordance with the instruction of CCSL. The Company shall not use any of such cash.- –

i. for the requirements of any of their other customers and/or; II. for any other Bank’s transactions;

iii. for any other use by the COMPANY.”

39. Now, we would like to examine the above transactional facts pertaining to the Appellant’s activities vis-a-vis the meaning of money as envisaged under section 2(75) of the CGST Act, 2017, which has been reproduced herein under:

(75) “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler’s cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

40. Now when it has been established that the Appellant cannot use the money, which belong to their clients, at any stage of the activities carried out by them, thus ruling out any possibility of the subject money, transported by them, as being used as legal tender at any stage of the performance of the services rendered by them, it can adequately be inferred that the subject money, transported in the cash carry vans by them, ceases to be anything except goods under the facts and circumstances of the Appellant’s case. This notion is also strengthened by the presence of the clause “ In this Act, unless the context otherwise requires, -” in the definitions section provided under section 2 of the CGST Act, 2017, which implies that meanings assigned to the various terms under this section of the act is dependent upon the context of the case at hand. In other words, the meaning of any terms or expressions needs to be comprehended in the context of the cases under consideration. in the context of the present case, it is unavoidably warranted to deviate from the literal meaning provided to the term ‘money’ under section 2 (75) of the GST Act, and it has been rightly observed that what is being transported by the Appellant in their cash-carry van is not money but the goods for the reasons discussed above.

41. Further, this proposition is also supported by the rule 138 (14) and its Annexures prescribed under CGST Rules, 2017, relied upon by the Appellant to establish that the money has been included in the Annexure along side the other goods specified therein, which will not require any E-way Bill for their movement or transportation by motorised conveyances by from one place to the another. It is to be mentioned that Rule 138 (14) of the CGST Rules, 2017 specifies those goods, which do not require E-way Bills for their transportation. On perusal of the said rules, it is clearly evident that only goods are mentioned therein as well as in the annexure thereto. Among those goods, one of the items mentioned in the annexure bearing the heading “Description of Goods” is ‘money’, which clearly indicates that the legislature has considered ‘money’ as ‘goods’, when money is being transported from one place to another. By applying the above interpretation in the present fact and circumstances of the case in hand, it can decisively be inferred that money under question is nothing but goods.

42. Further, the Revenue’s contention, wherein they argued that since the Appellant is using special purpose vehicle to transport the money under the security and supervision of the armed persons/guards as per the guidelines issued by RBI; that the said RBI guidelines are not applicable to the other goods, thereby drawing the inference that even RBI as well the entire Banking Industry treat the said money different from the other goods, and hence ‘money’ cannot be considered as ‘goods’, is devoid of any merit and is not sustainable, as just because money is being transported by the customised vehicles, and is given special treatment in terms of its security and its handling by RBI and Banking industry; and that the said guidelines are not applicable to other goods, do not lead to the conclusion that money cannot be considered as ‘goods’, as it is nowhere mentioned in the GST Act that transportation or treatment of all the goods are to be effected in the uniform manner or the mode of transportation or handling of any goods keeping in mind its value and importance cannot be different from the other goods. Here, the transportation of the currency for the purpose of cash replenishment in ATMs operated by the Appellant’s clients are being regulated by RBI in the capacity of the Regulatory Authority, the guidelines of which have to be mandatorily complied with by the Appellant for carrying out their activities. Therefore, the compliance of the guidelines issued by the RBI will not detract the subject money from being goods. Further, non- applicability of the RBI guidelines on the goods other than money is quite obvious, as the RBI is the regulatory authority only in the matter related to the money and not for all the goods. Hence, such arguments, put forth by the Respondent is erroneous and absurd, and do not merit to be considered.

43. Now, when it has been established that money, transported by the Appellant in the cash -carry vans, can be considered as goods, ITC in respect of the cash carry vans used for the transportation of cash will be available to the Appellant in accordance with provisions of section 17 (5) (a)(ii) of the CGST Act, 2017, which has been reproduced herein under:

“Section 17 Apportionment of credit and blocked credit: –

(1)…………..

(2) …………..

(5) Notwithstanding anything contained in sub-section (1) of Section16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely: –

(a) motor vehicles and other conveyance except when they are used-

(i) for making the following taxable supplies, namely: –

(A) further supply of such vehicles or conveyances; or

(B) transportation of passenger; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

Now, in view of the above deliberation, we pass the following order:

Order

We, hereby, hold that Input Tax Credit against the GST paid on the purchase and fabrication of the motor vehicles, used for carrying cash and bullions, is available to the Appellant.

RAJEEV KUMAR GARG (M/S. AMAR FOOD PRODUCTS)

Classification of supply – supply of goods or supply of services – supply of food items at GMUs (General Minor Units) at Railway Platforms which include only counter sale of packed food items, drinks and cooked item – input tax credit – benefit of Serial No. 7(ia) of Notification No. 11/2017-C.T. (Rate), dated 28-6-2017 – Input Tax Credit (ITC) of GST paid on license fees to Indian Railway or IRCTC – consequences for wrong availing of ITC – challenge to AAR decision.

HELD THAT:- After addition of Entry No. 7(ia) in the Notification No. 11/2017, the issue, regarding classification of the supply of goods, by the Indian Railways, Indian Railways Catering and Tourism Corporation Ltd., or their licensees, whether in trains or at platforms, has attained finality that the same would be classified as “Supply of Service” – it is not the duty of the Authority either to enlarge the scope of legislation or the intention of the legislature, when the language of the provision is plain. The Authority cannot add words to a statute or read words into it which are not there. Hence, it is the bounden duty and obligation to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated. Thus we are in unison with the Advance Ruling Authority that the activity provided by the appellant correctly falls under Entry No. 7(ia) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 (as amended).

The contention of the appellant that they involved in the “Supply of goods” is not tenable in the light of letter dated 15-4-2019 and “License Agreement” entered into between Divisional Railway Manager (Commercial), NCR, Agra and the appellant, which clearly spells the nature of work provided by the appellant as “Supply of Catering Service”. Accordingly, the N/N. 11/2017-Central Tax (Rate), dated 28-6-2017(as amended) is squarely applicable on them.

The appellant has quoted case laws prior to GST era, whereas with the introduction of GST, the ambiguity in taxation has been removed to a greater extent. We observe that after introduction of Sl. No. 7(ia) in the Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 ‘(as amended) the Law is very much clear that the GST rate on supply of goods, being food or any other article for human consumption or any drink, by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd. or their licensees, whether in trains or at platforms, will be 5% without ITC.

The order passed by the Authority for Advance Ruling is just and proper and no interference is required in the said ruling – appeal disposed off.

No.- Order No. 09/AAAR/01/11/2019

Dated.- November 1, 2019

Citations:

  1. Northern India Caterers (India) Ltd. Versus LT. Governor of Delhi – 1978 (12) TMI 157 – Supreme Court
  2. The State of Punjab Versus Associated Hotels of India Ltd.   – 1972 (1) TMI 80 – Supreme Court
  3. Sangu Chakra Hotels Private Limited Versus The State of Tamil Nadu (and other cases) – 1985 (1) TMI 278 – MADRAS HIGH COURT
  4. Govind Ram and Ors. Versus The State of Rajasthan and Ors. – 1982 (1) TMI 209 – RAJASTHAN HIGH COURT
  5. IN RE : RAJEEV KUMAR GARG (M/s. Amar Food Products) – 2020 (1) TMI 1092 – AUTHORITY FOR ADVANCE RULING – UTTAR PRADESH
  6. IN RE: KUNDAN MISHTHAN BHANDAR – 2019 (5) TMI 312 – APPELLATE AUTHORITY FOR ADVANCE RULINGS, UTTARAKHAND

Shri Karnail Singh, Member (CGST) and Smt. Amrita Soni, Member (SGST)

ORDER

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act and Uttar Pradesh Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act and UPGST Act”) by M/s. Amar Food Products, 14/310, Madan Mohan gate, Agra (hereinafter referred to as the “Appellant”) against the Advance Ruling Order No. 32, dated 30-6-2019 by the Authority for Advance Ruling, Uttar Pradesh [2020 (32) G.S.T.L. 549 (A.A.R. – CST – U.P.].

At the outset, we would like to make it clear that the provisions of both the CGST Act and the UPGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the UPGST Act.

Brief facts of the case

1.  M/s. Amar Food Products, 14/310, Madan Mohan gate, Agra (hereinafter called the appellant) is a registered assessee under GST having GSTN : 09AGVPG1061E1ZF.

2.  The appellant is engaged in running of General Minor Units (GMU)  at Railway Platforms at which sale of packed food items, drink and cooked items is done.

3.  The Appellant submitted application for Advance Ruling dated 3-4-2019, seeking ruling on the following questions :

(i)  Whether supply of food items at GMUs (General Minor Units) at Railway Platforms which include only counter sale of packed food items, drinks and cooked item shall be treated as “Sale of Goods” or “Sale of Services”?

(ii)  If it is sale of services, whether the whole revenue shall be taxed @ 5% without ITC under Serial No. 7(ia) of Notification No. 11/2017-C.T. (Rate), dated 28-6-2017 or assessee can opt to pay tax @ 18% with ITC under Serial No. 7(ix) of that notification.

(iii)  If the assessee pays the taxes @ 5% under Serial No. 7(ia), whether assessee can claim the Input Tax Credit (ITC) of GST paid on license  fees to Indian Railway or IRCTC.

(iv)  If answer to question (iii) is negative. What will be the consequences for wrong availing of ITC?

4.  Appellant was granted hearing on 22-5-2019. Shri Gaurav Goyal, CA and Shri Amit Agarwal, Advocate, Authorized Representatives, appeared for hearing.

5.  After going through the submissions of appellant, the Jurisdictional office, Authority for Advance Ruling ruled as under :-

(i)  Supply of Food items at GMUs (General Minor Units) at railway platforms which includes only counter sale of packed food items, drinks and cooked item shall be treated as ‘Supply of Services’.

(ii)  Whole revenue shall be taxed @ 5% without ITC under Serial No. 7(ia) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017.

(iii)  Appellant cannot claim the Input Tax Credit of GST paid on license fees to Indian railway or IRCTC.

(iv)  Question raised is out of purview of the mandate of Advance Ruling u/s 95(a).

6.  Being aggrieved with the Order No. 32, dated 30-6-2019, M/s. Amar Food Products, filed appeal application before us.

Grounds of appeal submitted by the appellant :

7.  The appellant submitted the grounds of appeal as Annexure- “B”  The grounds for appeal were as under :-

(a)  The Learned Authority of advance ruling has erred in law and facts by holding that supply of food items at GMUs (General Minor Units) at railway platforms which includes only counter sale of packed food items, drinks and cooked item shall be treated as “Supply of Service”.

(b)  The appellant craves leave to add, alter, amend or vary the grounds  of appeal before or at the time of hearing.

8.  Appellant was granted personal hearing on 23-10-2019,

Personal Hearing

9.  Mr. Abhinav Mehrotra, Advocate and Mr. Gaurav Goel, Chartered Accountant appeared in personal hearing on behalf of the appellant.

9.1 During the course of personal hearing, they reiterated their written submission made vide letter dated 1-8-2019 and requested to submit some more documents within 2 days. The appellant, vide their email dated 28th October, 2019, submitted the copy of letter

dated 15-4-2019 issued by the Sr. Divisional Commercial Manager, NCR, Agra, copies of some allotment letters and additional written submission dated 28th October, 2019. In the additional submission dated 28th October, 2019, the appellant submitted that their supply should be considered as “Supply of Goods” and not a Composite Supply/ supply of service, because of following reasons :

(a)  At the GMUs, no service, like provision for waiters, service of food on tables, supply of free drinking water, sitting arrangements, air-conditioning, linen, crockery and cutlery, etc. is available. The supply is made at MRP without any escalation in the price.

(b)  Transaction under consideration involves transfer of property in movable goods. There are no restrictions as regard to the place of consumption, however there is no provision for any sitting arrangement, etc. as the point of sale is the counter o such GMU.

(c)  Only supply involved in the above transaction is that of supply of goods i.e. food items, no service element is involved in the instant transaction. Even if it is assumed that there is some portion of provision of service involved, the same is incidental to the principal supply.

(d)  The predominant element involved is that of sale of food items, in the present case, the consumer intends to buy and the applicant intends to sell. Thus, it is clear that there is only one activity which has taken place predominantly i.e. buying and selling of packed food items. The applicant does not intend to provide any sort of service to their consumers.

(e)  In the instant case, the supply has not been made by way of any service. The appellant’s only intent is to sell the packed food items, etc. Here again the appellant submits that it is the pre-dominant intention of the supplier and the recipient of supply which must be the decisive factor in order to determine the nature of the supply.

(f)  In the instant case, the outlets of the applicant do not serve the food items to their customers on the table. Rather the same has to be collected by the customer themselves from the counter. Further, the appellant does not provide any sitting facility to the customers as well.

(g)  Accordingly, the activity of supply of food items in the outlet is purely a contract for supply of goods and the GST must be levied accordingly.

1(i) The appellant is the licensees of Indian Railway not of the IRCTC Ltd. All the tenders allotted to him are from Indian Railway.

(j)  Supply at major units at Railway platform includes service components also. Therefore, it is composite services, while, supply at GMUs does not include services. Therefore, it is not composite services, it is sale of goods.

(k)  As per Para No. 18 of press release dated 22-12-2018, the nature of establishment will not decide whether supply is goods or service. It will rather depend on the constituents of each individual supply and whether same satisfies the conditions/ingredients of a composite supply or mixed supply.

(l) The appellant is not allowed to serve foods at Railway coaches in terms of Para No. 9(D) of North Central Railway letter dated 15-4-2019. The appellant is allowed to sell the food across the counter only. Therefore, there is no service component for supply at GMUs.

(m)  Scope of Notification No. 11/2017(R) is to provide the rate of tax on services only. It Cannot classify any supply either as goods or services.

(n)  Accordingly, the appellant has requested that the supply at GMUs shall be considered as sale of goods not as sale of services.

9.2 The appellant has paid reliance on the following case laws in support of their claim :

(a) Kundan Misthan Bhandar (2019) 105 taxmann.com 364 (AAAR-Uttarakhand) = 2019 (24) G.S.T.L. 94 (App. A.A.R. – GST);

(b)  Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi {AIR 1980 SC 674};

(c)  State of Himanchal Pradesh v. Associated Hotels of India {1972 2 SCR 937};

(d)  Govind Ram and Ors. v. State of Rajasthan {AIR 1982 Raj 265);

(e)  Sangu Chakra Hotels Private Limited v. State of Tamil Nadu {1985 60 STC 125).

Discussion and findings

10. We have gone through the submissions made by the appellant and examined the detailed explanation submitted by them. We observed that the appeal is mainly based upon the following points viz.

(A) The Authority of Advance Ruling has erred in law and facts by holding that supply of foods items at GMUs (General Minor Units) at railway platforms which includes only counter sale of packed food items, drinks and cooked item shall be treated as “Supply of Service”.

(B) The supply made by appellant at GMUs should be considered as “Supply of Goods” not as “Supply of Service” and shall be taxed as per the Notification No. 01/2017-C.T. (Rate) with the benefit of ITC.

(C) The scope of Notification No. 11/2017-C.T. (Rate) is to decide the rate of Service, it cannot classify any supply as “Service”. Any supply shall be considered as service in accordance with Section 2(52), (102) of CGST Act read with Schedule II of CGST Act, 2017 and not by Notification No. 11/2017-C.T. (Rate).

(D) The appellant also placed reliance upon the ruling issued by the Appellate Authority for Advance Ruling-Uttarakhand, in case of M/s. Kundan Misthan Bhandar.

11. The appellant vide his application has prayed for :

(i)  To set aside/modify the impugned advance ruling passed by the Authority for Advance Ruling;

(ii)  To grant a personal hearing;

(iii)  To pass such further or other order or orders as may be deemed fit and proper in the facts and circumstances of the case.

12. The first issue to be decided is whether supply of food items at GMUs (General Minor Units) at railway platforms which include counter sale of packed food items, drinks and cooked item shall be treated as “Sale of Goods” or “Sale of Services”.

12.1 We observe that the appellant has been awarded License to set up General Minor Units (GMUs) at various railway platforms. The appellant, in his submission, has contended that the activity being provided by them should be consider as “Supply of Food” and not as “Supply of Service”. However, we notice that as per the “Article 1 – Scope of the arrangement” of “License Agreement” dated 29th April, 2016 (submitted by the appellant before the Advance Ruling Authority), entered between Divisional Railway Manager (Commercial), NCR, Agra and the appellant :-

“1.1-the parties agree that the scope of services shall be principally to operate, manage and supply catering service on the GMU from the commencement date of operation which is agreed by the parties to be… (Commencement date).”

We find that the “Scope of Service” itself clearly spells the nature of activity as “operate, manage and supply catering service on the GMW’. We observe that the agreement entered into between the appellant and the Divisional Railway Manager (Commercial), NCR, Agra, itself consider the activity to be undertaken by the appellant as “supply of catering service”. Thus the contention of the appellant that they are involved only in counter sale of food is not tenable.

12.2 We also notice that as per the License Agreement dated 29-4-2016 the appellant has to seek prior approval of Railways for sale of items and can only supply those products which are approved by the Railways. Further, the Railways have the right to inspect/ audit of appellant’s unit/ records. The appellant is bound to follow the License Agreement in letter and spirit and the License Agreement clearly spells that the agreement is for “Supply of Catering Service”

12.3 The appellant has laid emphasis that they are involved only in across the counter sale and not permitted to supply the food items inside the railway coaches in terms of Para 9(D) of Sr. DCM, NCR, Agra letter dated 15-42019. However, we observe that said letter is issued to the appellant specifying the terms & conditions for “Platform Vending”. Further, the Terms & Conditions for “Platform Vending” have been defined in Para 5 of the said letter dated 15-4-2019, which is as under :

From the above, we observe that the contention of the appellant that they are involved only in counter sale is not correct. From Para 5 of the letter dated 15-4-2019 it is evident that the vendors of the appellant are allowed to take their goods upto the customers, at railway platforms, away from their stalls, in prescribed sized baskets/flasks. Thus we observe that the activity being undertaken by the appellant at GMU is entirely different from across the counter supply and the service provided by them is rightly classified under “Catering Service”.

12.4 We further observe that Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017, which specify the rate of central tax, on the intra-State supply of service” was amended vide Notification No. 13/2018-Central Tax (Rate), dated 26th July, 2018 and an entry at Sl. No. 7(ia) was added, which is as under :

“Supply, of goods, being food or any other article for human consumption or any drink, by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd., or their licensees, whether in trains or at platforms.”

We noticed that after addition of Entry No. 7(ia) in the Notification No. 11/2017, the issue, regarding classification of the supply of goods, by the Indian Railways, Indian Railways Catering and Tourism Corporation Ltd., or their licensees, whether in trains or at platforms, has attained finality that the same would be classified as “Supply of Service”.

We observe that it is not the duty of the Authority either to enlarge the scope of legislation or the intention of the legislature, when the language of the provision is plain. The Authority cannot add words to a statute or read words into it which are not there. Hence, it is the bounden duty and obligation to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated. Thus we are in unison with the Advance Ruling Authority that the activity provided by the appellant correctly falls under Entry No. 7(ia) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 (as amended).

12.5 From the aforesaid discussion we observe that the contention of the appellant that they involved in the “Supply of goods” is not tenable in the light of letter dated 15-4-2019 and “License Agreement” entered into between Divisional Railway Manager (Commercial), NCR, Agra and the appellant, which clearly spells the nature of work provided by the appellant as “Supply of Catering Service”. Accordingly we observe that the Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017(as amended) is squarely applicable on them.

12.6 We notice that appellant is emphasizing that at the GMUs, no service, like provision for waiters, service of food on tables, supply of free drinking water, sitting arrangements, air-conditioning, linen, crockery and cutlery, etc. is being provided by them so their transaction should be classified as “Sale of Goods”. However, we observe that the appellant has entered into a “License Agreement” with Indian Railways wherein the clause on “Scope of Service” itself clearly mention the nature of activity to be provided by the appellant as “to operate, manage and supply catering service on the GMU”. Accordingly, we observe that in the light of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 (as amended) the activity being undertaken by the appellant is rightly classified under Sl. No. 7(ia) of the said Notification i.e. “supply of goods, being food or any other article for human consumption or any drink, by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd. or their licensees, whether in trains or at platforms”.

13.  As regard to the availment and utilization of ITC, we observed that the Authority of Advance Ruling has rightly ruled that the whole revenue shall be taxed @ 5% without ITC under Serial No. 7(ia) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 and the appellant cannot claim the Input Tax Credit of GST paid on license fees to Indian Railway or IRCTC.

14.  As regard to the ruling issued by the Appellate Authority for Advance Ruling-Uttarakhand, in the case of M/s. Kundan Misthan Bhandar, on which reliance is paid by the appellant, we observe that in that case, the Party was running a sweet shop and a restaurant in two distinctly marked separate place on their own, whereas, in the instant case the appellant is running a GMU, under the supervision and contractual agreement with Indian Railways for Catering Service. Accordingly, we observe that the facts and circumstances of M/s. Kundan Misthan Bhandar case is entirely different from that of the appellant’s case and the ratio of the said case cannot be applied here.

15.  In addition to above, the appellant has also placed reliance on some other case laws, which are as under :

15.1 In the case of M/s. Northern India Caterers v. Lt. Governor of Delhi {AIR 1980 SC 674}, on going through the contents of the case we observe that in that case the party was an eating house/ restaurant whereas in the instant case the appellant is a licensee of Indian Railways to operate a GMU under the License Agreement to provide Catering Services. In view of this, we observe that the ratio of the said judgment cannot be applied in the instant case.

15.2 As regard to the Judgment in the case of State of Himachal Pradesh v. Associated Hotels of India {1972 2 SCR 937}; we notice that that the Hon’ble Court has observed that :

(a)  Even if there is a right to carry away, if in essence, the transaction is a transaction of service and not a transaction of sale, it would not be eligible to tax.

(b)  The question whether the dominant object was the sale of food or rendering of service would depend upon the facts and circumstances of each case which has to be decided by the assessing authority in the light of the evidence before it.

We observe that the Hon’ble Court has itself made it clear that the classification of any transaction entirely depends upon the facts and circumstances of that particular case and any correlation cannot be drawn between two cases having different facts and circumstances.

15.3 As far as case of M/s. Govind Ram and Ors. v. State of Rajasthan {AIR 1982 Raj 265} is concerned, we observe that in the cited case the sale of food stuffs are being made across the counter, whereas in the appellant’s case the vendors even carrying the foodstuffs up to the customers in the specific sized baskets/flasks specified by the Indian Railways.

15.4 With reference to the case of M/s. Sangu Chakra Hotels Private Limited v. State of Tamil Nadu {1985 60 STC 125}, the party was running a restaurant and also providing take away facility to its customers whereas, in the instant case the appellant is running a GMU under License Agreement. We observe that the facts and circumstances of this case i.e. nature of service provided, place of provision of service, control and supervision etc. are entirely different from that of the appellant’s case. Hence, no parallels can be drawn between them.

15.5 Accordingly, to conclude in a nut shell, we observe that the appellant has quoted case laws prior to GST era, whereas with the introduction of GST, the ambiguity in taxation has been removed to a greater extent. We observe that after introduction of Sl. No. 7(ia) in the Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 ‘(as amended) the Law is very much clear that the GST rate on supply of goods, being food or any other article for human consumption or any drink, by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd. or their licensees, whether in trains or at platforms, will be 5% without ITC.

16.  Thus in light of the above, we pass the order as :

RULING

17.  In view of the foregoing discussion and findings we hereby find that the Advance Ruling Order No. 32, dated 3rd June, 2019, passed by the Authority for Advance Ruling is just and proper and no interference is required in the said ruling.

18.  The appeal of the appellant i.e. M/s. Amar Food Products, 14/310, Madan Mohan gate, Agra is disposed accordingly.

———

1 Number as per official text

M/S. H.P. SALES INDIA PVT. LTD.

Rectification of mistake – error in the impugned AAAR order – supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products by the Appellant to its customers – mixed supply or composite supply – HELD THAT:- The Appellant themselves have admitted that there is not any specific element under this bundle of supplies, which is more significant than others, ruling out the possibility of presence of any principal supply. The above submissions and the evidence produced by the Appellant themselves in the form of the Chartered Engineer’s certificate also lead us to conclude further that there are no components in this bundle of supplies, which are ancillary in nature, as all the components are indispensable in nature, and not additional or subordinate in nature. None of the components are subordinate to any one element of the supplies. That is, none are providing additional support to any specific consumable items. All these consumables are being consumed together to achieve the desired output. In absence of any one of these consumables, the entire printing function will be stalled, which clearly shows the importance of each of the components of the bundled supplies. At the same time, it also shows that none of supplies are ancillary in nature.

It is established beyond doubt that the bundled supplies by the Appellant to its customers has no principal supply, which is one of the primary conditions for any supply to be treated as the composite supply as envisaged under section 2(30) of the CGST Act, 2017.

Circular No. 32/06/2018-GST, March 1, 2018 states that value is only the guiding factor, and not the sole factor for determining the principal supply in the bundle of supply. Therefore, the Appellant’s contention based on the consumption pattern of the printing consumables, wherein consumption of Electrolnk is 41% in terms of the volume, thereby asserting the Electrolnk as the Principal supply only on the basis of its highest consumption among all the printing consumables, without establishing the fact that the same (Electrolnk) is imparting the essential nature of the supply is feeble and slight, and clearly not tenable.

We reach the same conclusion as reached earlier in the appellate order, that the supply of the Electrolnk along with other consumables by the Appellant is not a composite supply. Instead the said supply can be construed as mixed supply, as it satisfies all the conditions stipulated for the ‘mixed supply’ under the provision of section 2 (74) of the CGST Act – As is evident from the facts of the case, the supplies, made by the Appellant, squarely satisfy all the conditions prescribed for the mixed supply. Accordingly, it was rightly held by the AAR that the supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products is ‘mixed supply’ and not the composite supply as being made out by the Appellant.

There are no reason to amend our original order dated 17.02.2019, wherein it was held that the supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products by the Appellant to its customers is ‘mixed supply’ and not the ‘composite supply’, as being claimed by the Appellant.

No.- MAH/AAAR/SS-RJ/21A/2019-20

Dated.- November 4, 2019

Citations:

  1. DEVA METAL POWDERS PVT. LTD. Versus COMMISSIONER, TRADE TAX, UP. – 2007 (12) TMI 221 – Supreme Court
  2. C.M.S. Info Systems Ltd. Versus The Commissioner, CGST, Mumbai East & Ors. – 2019 (7) TMI 615 – BOMBAY HIGH COURT
  3. ROSTAM PARVARESH Versus UNION OF INDIA – 2010 (8) TMI 418 – BOMBAY HIGH COURT
  4. In Re : HP India Sales Private Limited – 2018 (10) TMI 1515 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA
  5. In Re : Five Star Shipping – 2018 (7) TMI 1182 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA
  6. In Re : M/s Giriraj Renewables Private Ltd. – 2018 (6) TMI 1127 – AUTHORITY ON ADVANCE RULINGS, KARNATAKA
  7. In Re: M/s. HP India Sales Private Limited – 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA
  8. In Re: M/s. Giriraj Renewables Private Ltd. – 2018 (9) TMI 1341 – APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA
  9. In Re: Giriraj Renewables Private Limited – 2018 (9) TMI 1183 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA
  10. In Re: M/s. Fermi Solar Farms Private Limited – 2018 (9) TMI 1339 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(under Section 102 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

  1. At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.
  2. In the presentcase, appeal had been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by H.P. Sales India Pvt. Ltd., (herein after referred to as the “Appellant” or Applicant interchangeably) against the Advance Ruling No. GST-ARA-38/2017-18/B-45 dated 08.06.2018 = 2018 (10) TMI 1515 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA, which was disposed of by the AAAR Order No. MAH/AAAR/SS-RJ/21/2018-19 dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA. However, pursuant to the said AAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA, the Appellant, M/s. H.P. Sales Pvt. Ltd., has brought to our notice that the impugned AAAR Order dated 17.02.2019 had not considered the additional submissions dated 11.02.2019 in entirety, filed by them before the AAAR, which was also referred and duly relied upon by them in favour of their case during the course of the personal hearing conducted on 12.02.2019. They, further, pleaded that non consideration of the abovementioned additional submissions dated 11.02.2019, which would have significant bearing on the impugned AAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA, is an error, which is error, apparent on the face of the record, and hence the same need to be amended as per the provision of section 102 of the CGST Act, 2017, which is reproduced herein under:

Section 102 of CGST Act 2017: Rectification of Advance Ruling

The Authority or the Appellate Authority may amend any order passed by it under section 98 or section 101 or section 101, so as to rectify any error apparent on the face of the record, if such error is noticed by the Authority or the Appellate Authority or the National Appellate Authority on its own accord, or is brought to its notice by the concerned officer, the jurisdictional officer, the applicant or the appellant within a period of six months from the date of the order:

Provided that no rectification which has the effect of enhancing the tax liability or reducing the amount of admissible input tax credit shall be made unless the applicant, appellant, the Authority or the Appellate Authority has been given an opportunity of being heard.

  1. Further, the Appellant, in support of their submissions made in the application for rectification of error, have also cited various judicial pronouncements, some of which are being mentioned herein below:

(i) Supreme Court Judgment in the case of Deva Metal Powders Pvt. Ltd. Vs. Commissioner, Trade Tax, UP [2008 (221) ELT 16 (SC)] = 2007 (12) TMI 221 – SUPREME COURT;

(ii) Bombay High Court Judgment in the case of C.M.S. Info Systems Ltd. Vs. the Commissioner, CGST, Mumbai East & Ors.[2019-VIL-326-BOM] = 2019 (7) TMI 615 – BOMBAY HIGH COURT

(iii) Bombay High Court Judgment in the case of Rostam Parvaresh Vs, Union Of India [2010 (259) E.L.T. 42 (Bom)] = 2010 (8) TMI 418 – BOMBAY HIGH COURT.

All the above judgments have invariably held that that Ignoring, non- recording, or non-consideration of the submissions, made by the parties would amount to error apparent on the face of the record, and the same needs to be rectified by the adjudicating authority.

  1. Thus, in view of the above submissions, the abovementioned legal provision of section 102 of the CGST Act, 2017, and various judicial pronouncements, cited by the Appellant in favour of their submissions, we are convinced that the impugned AAAR Order dated 17.02,2019 warrants rectification as the additional submissions dated 11.02.2019 filed by the Appellant has truly not been considered in the impugnedAAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA.
  2. Accordingly, the Appellant was granted personal hearing in the matter, which was held on 14.08.2019.

Personal Hearing

  1. Personal Hearing in the instant matter, conducted on 14.08.2019, was attended by Shri K. Sivarajan, C.A., on behalf the Appellant. He reiterated the additional submissions filed on 11.02.2019 and contended that the impugnedAAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRAwarrants rectification as per the provision of section 102 of the CGST Act, 2017, as the said AAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA did not consider the aforesaid additional submissions filed before the Maharashtra AAAR on 11.02.2019.Shri P.R. Nilewad, the jurisdictional officer also attended the above said hearing, wherein he reiterated the earlier submissions filed before us.
  2. The additional submissions filed by the Appellant on 11.02.2019, which forms the basis for the present application filed under section 102 of the CGST Act, 2017 are as under:
  3. Appellants are inter-alia engaged in supplying HP Indigo printers and the consumables to re-sellers, who in turn supply them to end customers. The following points are worth noting in this regard:
  4. The Indigo press machine is sold upfront to the reseller/ end customer as per mutually agreed terms;
  5. Electro Ink and the consumables required for printing are then supplied to resellers, who supply them to end customers; and

III. Spare parts are sold to resellers, who consume such spare parts in the course of providing maintenance services to end customers.

  1. It may be noted that the above transactions (i.e. I,II and III) are entirely independent of each other and are distinct supplies vis-a-vis each other from a Goods and Services Tax (GST) perspective. The subject matter under the present appeal is the composite supply of Electro Ink along with other consumables (as per II above) by the Appellant to the reseller and from the reseller to the end customer.

Further, the two main points of contention are:

  1. Whether the supplies are in the ordinary course of business and
  2. Whether the supplies are naturally bundled.
  3. The facts of supply of Electro Ink and consumables are provided in detail in the appeal memorandum filed by the Appellant. In addition to the facts submitted in the appeal document and the Impugned Order, for the sake to provide further clarity we wish to bring the following supplemental facts:

The Electrolnk and the consumables are supplied under the following methods:

  • Tier (“Click”) Model; and
  • A la carte model

The Tier (“Click”) model, includes supplies made and invoices raised based on the clicks performed (i.e. actual print) by the final customer. “Supplies” here refers to the Electrolnk and consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products. Further, “Click” here in simple terms represent the chargeable unit for each printing function performed by the final customer. The functionality of the indigo press machine is such that all these supplies are necessarily required to be consumed together at a single time in order to produce the print. The desired quality and final output as per customer needs can be achieved only when all these supplies are collectively present in the indigo machine and used in the course of printing activity.

Under the A-Ia carte model, Electrolnk and consumables are supplied individually to the re-seller at a price and which are further supplied by the re-seller to the final customer.

  1. We wish to bring to your Lordship’s attention that an end customer could use the “click” and “A-la-carte” model together and in conjunction with other. In these cases, the end customer would contract with the re-seller for supply of Electroink and consumables in a bundle and additional inks in an a-la-carte model. A standard HP Indigo Digital Printing press comes with 4 ink stations installed by default with an option provided to the customer to add 3 more ink stations. The bundle inter-aha comprises 4 types of ink, i.e. Cyan, Magenta, Yellow and Black which are 4 standard process inks which may be mixed in different proportions to achieve most colours required for prints. Additionally, 3 inks i.e. orange, violet, and green, again supplied as part of the click can be placed and used in conjunction to obtain prints with different effects as required. In some scenarios the customers may wish to use these additional inks on an a la carte basis from the reseller. The reseller has similar contractual arrangements with the Appellant.
  2. As apparent from above, both models are necessary to serve different customer needs. While the click model is necessarily taken by the customer to effect print in his regular course of business, supplies under A-la carte depends on specific print requirements, for which separate request is made by customer.
  3. Additionally, the inks supplied by the Appellant under A-la carte model are “specialized inks” to give enhanced printing experience. These inks differ from those supplied ordinarily under the click model. Further, in order to effect print using inks procured under A-la carte, the customer necessarily shall be required to also use other consumables supplied under click model, including ink. Therefore the A-la carte is not an alternate for click, rather an optional scheme.
  4. The Appellant wishes to reiterate that the appeal filed before your Hon’ble Lordships for classification of Electroink supplied along with consumables under GST is only in relation to the Click model and not with respect to supplies made to customers on A-la carte model.
  5. The Consumables supplied under the Click model are naturally bundled and not compulsorily bundled, therefore qualify as a composite supply. With respect to the above ground, we have provided our detailed submission in para 14 of our Grounds of Appeal. Further to these submissions, we additionally wish to submit as under:

Findings in the impugned order

The Learned AAR has in its Order confirmed that the Electroink and consumables are bundled. However, the Learned AAR has concluded that the bundle is not naturally bundled. The relevant portion of the Impugned Order is reproduced below:

‘The word ‘Naturally, is not defined under the Act, we therefore refer to dictionary to under the meaning. The dictionary meaning is as below,

As per Merriam Webster

1: by nature: by natural character or ability

  • naturally timid

2: according to the usual course of things: as might be expected 3a: without artificial aid

4: with truth to nature: realistically

Without special intervention; in a natural manner. As per English Oxford dictionary

In a normal manner; without exaggeration or effort.

‘act naturally’

a naturally bright pupil’

The dictionary meaning of the word ‘Naturally’ with reference to supply implies that it should be in the natural manner or is happening or existing as a part of nature and not made or done by the people, In the present case and as per the terms of the HP’s agreement with reseller/ customer which provides that:

“Reseller may elect to purchase Supplies for the different Indigo Press Product Lines under different programs, provided that Reseller shall purchase all of Supplies required by it for each Indigo Press Product Line under the some Supplies purchase program.” This clause of the purchase agreement assume significance of the factual background that there exists a notable difference between the conventional offset and HP Indigo Digital offset Printing Technology. The terms of the contract as mentioned above clearly indicate that the recipient of the supply has no option but to accept it as a bundled supply. Thus, the transaction of supply of Electrolnk with consumables cannot be considered as bundled supply but a compulsory supply. Thus, the transaction before us cannot be said to be naturally bundled supply”

The Impugned Order while determining the characteristics of a “Composite Supply” has at page 13 observed:

“The terms of the contract as mentioned above clearly indicate that the recipient of the supply has no option to select individual supply but to accept it as bundled supply”.

[Emphasis supplied]

However, subsequently, on page 14 the Impugned Order has concluded that

“Each of such supplies can be supplied separately as they are not dependent on each other”

[Emphasis supplied]

  1. Our submissions

The Appellant wishes to place its humble objections to the findings in the Impugned Order:

  1. Supply being naturally bundled

The word “naturally bundled” is not defined under GST law. Bundled supplies of Electrolnk along with all consumables are supplied as a bundle “according to the usual course of things”

The Impugned Order has held that the bundled supply of Electrolnk and consumables are not “naturally” bundled as the end customers are contractually required to procure all goods from the Appellant. The Impugned Order has further held that while the arrangement qualifies as being supplied in a bundle, the arrangement does not qualify as being “naturally” bundled as the same does not fall under the dictionary meaning of the phrase “naturally”.

Through the following submissions, the Appellant place evidence that the supply of Electroink along with the consumables qualify as being “naturally” bundled and are covered under the dictionary definition of “naturally”.

  1. We wish to place the dictionary meaning of the word “naturally” as defined in the Merriam Webster’s dictionary that is quoted in the Impugned Order:

“As per Merriam Webster

1: by nature: by natural character or ability

  • naturally timid

2: according to the usual course of things: as might be expected

3 a: without artificial aid

4: with truth to nature: realistically

Without special intervention; in a natural manner.”

[Emphasis supplied]

  1. We wish to submit that the bundle of Electro Ink and consumables supplied under the Click program are so bundled naturally as they are supplied “according to the usual course of things” or “as expected by the trade and industry.

To this extent, the Appellant submits as follows:

  • Functionally. all the supplies including Electrolnk and consumables are supplied naturally as a bundle lo achieve the print which is the intention of the end customer.
  • To this extent, we submit a certificate from the Chartered Engineer to support our claim;
  • We further wish to submit brochures, pamphlets and trade literature to substantiate that the industry in general works on the Click model;
  • We have enclosed a self-declaration on the usage of standard inks;
  • Further, we wish to submit that the working of the HP Indigo printing press substantiates that the Elertrolnk and the consumables are used in conjunction with each other to deliver the print:
  • The Agreement between the Appellant and the reseller also substantiates that the supply of Electrolnk and the consumables is done only when they are used upon effecting the “print” command of the end customer.
  1. The above substantiate that the consumables are functionally supplied as a natural bundle to the reseller and consequently to the end customer.
  2. Interdependency of the consumables

The Impugned Order noted that “Each of the supplies can be supplied separately as they are not dependent on each other and the identification of the principal supply therefore cannot be drawn from and among the supplies”

  1. The Appellant humbly submits that the consumables supplied under the Tier Model are fundamental for the printing process to get effectively completed. Shortage or non-availability of any consumables may either result in the print not being achieved or may adversely impact the quality of the printout.
  2. Further, drawing reference to Clause 3 on Page 5 of the HP – reseller agreement, “supplies shall remain the property of HP until utilized in the Press(es)”. Additionally, the parties to contract have agreed that the billing in this regard shall be made on a “per click” basis. Therefore, it is clearly evident that both the activity of transfer of property in goods supplied and invoicing for the same is made collectively for the entire bundle at a single point of time (based on consumption).
  3. One of the condition as provided in the Goods and Service Tax Flyer (“Flyer”) on Composite supply and Mixed Supply issued by the Central Board of Indirect Taxes (CBIC) specifies that to constitute a composite supply, “the different elements shall be required to be integral to one overall supply – if one or more is removed, the nature of the supply would be affected”. The supply of indigo press consumables are integral to each other that where anyone is removed, the entire functionality of the print output shall get affected.
  4. The Chartered Engineer certificate enclosed with the appeal further confirms the above.

Intention of the Customer

  1. We wish to submit that the end customers also require the Electrolnk and consumables to be supplied in a bundle. The intention is to not to buy individual products separately but to have all the Electro Ink and consumables at one place for use in the printing machines.
  2. To corroborate the same we have enclosed a declaration from the customer.

Presence of other competitors along with similar models

  1. The Click model adopted by the Appellant is generally accepted industry practice and matched the business requirements of the customers in this trade. The provisions of the contract to raise invoices based on the consumptions and the clicks performed are not unique and specific to the Appellant. To corroborate the same, the declarations as by end customers enclosed with the appeal also confirm the availability of similar models by other competitors. We have also enclosed write up on the click model based on websites that specialize in printing solutions to industry. It is important to note in this regard that under the erstwhile indirect tax regime as well, these supplies have been provided as a bundle at a single rate. The same was and has been the intention of the suppliers and customers in this regard. Availability of option to non-purchase under supplies separately does not change the nature of the supply from a naturally bundled supply. The contrary statements in the Impugned Order as highlighted above clearly indicate that the same is liable to be set aside.
  2. As provided above, the Impugned Order has erred in concluding that a composite supply should not be done by people but should be part of nature or made in a natural manner. The Impugned order has relied on the dictionary meaning of term “naturally bundled” to conclude on this principle, without appreciating the applicability of the meaning in the context of the GST law and the facts.
  3. Not accepting but assuming where an interpretation of the term “naturally” means ‘it should not be done by people’ is adopted, many of the composite supplies, including those clarified by the Revenue authorities by way of circulars and FAQ’s, may not qualify as naturally bundled as they evolve out of business practices. Table providing for list of such supplies clarified by CBIC as a composite supply is enclosed with this submission.
  4. The Impugned order has clearly mis-construed the terms of agreement entered between Appellant and reseller by understanding that the reseller is mandated to purchase all the supplies required for the indigo press. The agreement firstly provides an option to the reseller to opt for either the Tier or A-la carte model. Further, post selection of the desired model, various elements are bundled and supplied together in order to facilitate the desired output. Where such supplies under the Tier model were not naturally bundled and supplied mandatorily, reseller would automatically opt for the A-la carte program, which is not thecase.
  5. The fact that customers opt for Tier model proves that all such supplies are integral to obtain the final output and not “compulsorily bundled”.
  6. The click model is given to customers intending to have all the arrangements at one place and to pay at the time of consumption. Click model allows businesses to create a lower cost entry point for customers in addition to helping them manage cash flow by aligning revenue and expenses. Click model helps customers change their “capital expenditure “to “operating expenditure”.
  7. Further, as per the Flyer issued by the Central Board of Indirect Taxes and Customs (“CBIC”), one of the feature of a composite supply is that the components of a “composite supply” should not be available separately. The Click model contractually and practically ensures that this criterion is met.
  8. Further, the Hon’ble Maharashtra AAR, in the application filed byM/s Five Star Shipping = 2018 (7) TMI 1182 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRAobserved as following in the Para 6:

“If each service as per the applicant’s own submission, can be provided in isolation then one of the indicators of a composite supply as per the flyer on composite supply and mixed supply that the different elements are not available separately would not be fulfilled. Going by the above, it is clear that the services as set out in Exhibit A cannot be treated as a composite supply”

  1. Accordingly. one of the factors which was considered by Maharashtra AAR to conclude that the services were not composite supply was the fact that the individual products were available separately. This is not applicable to the Appellant’scaseas the different elements of the click model are not available separately.

There is an obvious contradiction in the approach of the Impugned Order.

Compulsory supply

  1. There is no concept of ‘compulsory supply’ or ‘compulsorily bundled’ in the GST law. Supplies may be naturally bundled or artificially bundled. Without prejudice to our earlier submissions, the department circulars also illustrate cases of composite supply where services are treated as naturally bundled, though these may be compulsory in somecase. To illustrate:
  • Boarding school and education service;
  • Room rent in hospital
  • Food supplied to inpatient
  • Printing contracts
  • Re-treading of tyres
  • Airline ticket with food (this is mostly bundled in corporate fares)
  • Hotel packages
  1. Further, the concept of natural bundling is not static and evolves as the businesses come up with new models of packaging their products and services. Hotel rooms with breakfast complimentary was a concept which was not always prevalent. Airline tickets combined with food is also one suchcase. So, the concept of natural bundling has to be looked at as per industry practice, customer preferences, technological and other changes etc.

We wish to illustrate the same through an example as highlighted in the Flyer issued by the Central Board of Indirect Taxes & Customs (‘CBIC”), on “Goods and Services Tax Composite Supply and Mixed Supply”.

Illustration

A hotel provides a 1-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

Now, in general trade practice most hotels provide additional services to its guests in addition to such accommodation bundled with breakfast services, For instance, a hotel provides for accommodation services and breakfast as a bundled supply, however in addition to the same, it also offers to the customers to select/receive additional services for an additional fee like laundry services, airport pick up and drop. etc. Offering such additional services at an additional fee shall not change the nature of supply of accommodation services bundled with breakfast services. The Appellant humbly submit that similarly, the option provided to end customers to avail optional additional supplies under the a la carte model shall not change the nature of supply of the bundle of Electro Ink and consumables supplied under the click model.

Similarly, in some of the Advance Rulings or Appellate Advance Rulings, supplies have been treated as composite and naturally bundled, even though they may be compulsory in certain cases.

  1. Supplies under Click program being consumed at different points of time does not alter the fact that the supply is a bundled supply.

With respect to the above ground, we have provided our detailed submission in para 26 of our Grounds of Appeal. Further to these submissions, we additionally wish to submit as under:

Finding in the impugned Order

  1. The Impugned Order has observed that the supply of Electro Ink and other consumables in a bundle to customers have different shelf life and accordingly cannot be treated as supplied in conjunction to each other. The relevant portions of the Impugned Order at page 14 are extracted below:

“The Applicant submits all such supplies are required to be consumed together in order to produce desired output. He therefore submits that the goods are supplied in conjunction to each other in the ordinary course of business.

However, we find that this submission and argument is contrary to their own admission that every product supplied herein has a separate lifespan independent of each other.”

[Emphasis supplied]

  1. The Appellant submits that that the consumption pattern of the consumables may vary vis-a-vis each other. However, this fact does not in anyway conclude that the consumables are not supplied in conjunction with each other as there is no pre-requirement or condition that the goods should have the same consumption pattern to be treated as supplied in conjunction to each other.
  2. To illustrate, the Appellant’s submit that the supply of mosquito coils with the “stand” is a composite supply. However, the burner may have a different shelf life in the sense that a single “stand” may be used multiple times for use of burning multiple coils. This does not make the supply of “coil stand” and “coils” as a mixed supply.
  3. Similarly, for the Appellant, the supply of Electrolnk and consumables may have different consumption pattern, but that does not change the nature of the supply from being “naturally bundled”.
  4. The fact of transfer of property, supply on conjunction with each other, continuous supply and billing based on consumption and statement of accounts have been accepted and not disputed. While so, the aspect relating to different lifespan should not be a criterion to determine whether the supplies are naturally bundled.
  5. Supplies are made in ordinary course of business

With respect to the above ground, we have provided our detailed submission in para II of our Grounds of Appeal. Further to these submissions, we additionally wish to submit as under:

Findings in the Impugned Order

Para 5-4 at page 14

“He therefore submits that the goods are supplied in conjunction to each other in the ordinary course of business. However, we find that this submission and argument is contrary to their own admission that every product supplied herein has a separate lifespan independent of each other.”

Our submissions

  1. Electroink and consumables supplied under the Click model are supplied to almost all customers in India except a Government Company that specifically requires the supplies exclusively under the A-la-carte model. Accordingly, the model of supplying in a bundle is not a one-off transaction, but is in the usual course of business of the Appellant. The Click model is also internationally accepted as a means of making supplies to customers.
  2. Further, the Click model is a standard method of delivery and consumption in the “Offset printing industry”. This is further substantiated from the fact that multiple suppliers supplying similar printing presses to other customers use the click model. This is substantiated by trade literature and competitors’ brochure enclosed with the appeal.

Accordingly, the supplies are made in ordinary course of business.

  1. Electrolnk is the principal supply of the Bundle

With respect to the above ground, we have provided our detailed submission in para III of our Grounds of Appeal. Further to these submissions, we additionally wish to submit as under:

Findings in the impugned Order Page 14 para 5-4

“Thus, the consumption of supplies has its own pattern. Each of such supplies can be supplied separately as they are not dependent on each other and the identification of the principal supply therefore cannot be drawn from and among the supplies which gives one of the essential character of bundle supplies to the suppliers in the present case

Our submissions

  1. Further, we wish to submit that for usability, the printing ink or the “Electrolnk” is the most critical element from the customer’s perspective to achieve the print, as printing essentially requires the placement of ink on paper, and the balance consumables aid in achieving this function.
  2. The table provides the pattern of consumption of supplies made under the Click program for effecting a single print from the indigo press machine.
S. No. Nature of the Product Consumption (In percentage)
1 Printing Ink (EletroINK) 41
2 Blanket 16
3 PIP- Photo Imaging Plate 13
4 OMP-Other machine Products 10
5 BID- Binary Ink Developer 10
6 OIL 7
7 Blanket Web 2
8 Other Consumables 1
  1. The above pattern of the consumption of the consumable establishes the fact that the Electrolnk is the principal supply among all the supplies made. As is evident, the Electrolnk is the most predominant supply in the bundle. The ink flows through the entire process to effectively generate a print and produce the desired output. It is the most essential and highest consumed product (in terms of volume) in a printing cycle, evident from the fact that 41% of the consumption in terms of value is of ink. The ink determines the quality and resolution of the image being printed, in the manner required by the customer.
  2. Additionally, the Chartered Engineer Certificate confirms that the Electrolnk is the fundamental supply amongst the consumables for the purpose of effectively completing the printing process.
  3. The principles applicable for Composite supply are satisfied by the Appellant.

Findings in impugned Order

Para 5.4 page 13

“In this regard useful reference can be made to GST Flyers issued by CBEC in which certain tests ore laid down which are listed below to ascertain supply of goods or services or both in the ordinary course of business.

1) The perception of the consumer or the service receiver;

2) Majority of service providers in a particular area of business provide similar bundle of services;

3) The nature of the various services in a bundle of services;

4) There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use;

5) The elements are normally advertised as a package;

6) The different elements are not available separately;

7) The different elements ore integral to one over all supply if one or more is removed, the nature of supply would be affected;

As the impugned transaction fails to satisfy the tests mentioned above, the supply of Electrolnk along with consumables cannot be considered as a composite supply as defined under section 2 (30) of the GST Act.”

Our submissions

  1. The approach adopted by the Learned Advance Ruling authority on basing its conclusion merely on the alleged non-satisfaction of a single illustrative factor without giving regard to the terms of contract, business arrangement and satisfaction of other necessary requirements. While the tests to be applied as per the flyer have been laid out in the impugned order, the satisfaction of these tests has not been specifically discussed, except for one of the tests i.e. elements not being available separately. The Appellant has explained the satisfaction of these tests explicitly in its submissions made before the Learned Authority, which has not been judiciously considered.

illustration provided in the definition of composite supply under Section 2(30) of the CGST Act (similar provision in the Maharashtra State GST Act):

  • Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
  • Accordingly, the concept of composite supply, shall need to be analysed only where there is a bundled supply of two or more goods or services.
  1. Highlighting the abovementioned illustration as provided in the law, a taxable person may be capable of supplying goods only whereas the packing and transportation services are arranged for by the recipient. However, where such services are provided as a bundle along with the supply of goods, the supply shall be a composite supply, principal supply being the supply of goods. The fact that such goods or services may be capable of being supplied independently cannot be considered as a factor for determining the nature of bundled supply.
  2. In the Appellant’scase, the items covered under the click program are not capable of being sold independently as all the items like Ink, Blanket, photo imaging plate etc. are essential for printing purpose and has no separate use for customer.

Additional indicators for a composite supply

  1. Drawing reference to the clarification issued by the Central Board of Indirect Taxes and Customs (“CBIC”) on the concept of Composite supply via a flyer, whether a supply qualifies as a composite supply would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:
  2. The perception of the customer

As explained above, the perception of the customer is to receive (consume) all such goods together in order to obtain the desired output. The same can further understood by the fact that the customer agrees to pay the consideration on click basis. i.e. the point in time when the supply of all the consumable actually occurs. Where these consumables were not naturally bundled, the consumer would haw selected different payment terms for each of the product at the respective point of their consumption. These goods are provided as a package to all the customers of the indigo press machine under the Tier program. evidencing the fact that such consumables are used together (to affect a print) and therefore the payment is also made for the clicks made and not the consumables held in the device.

  1. Majority of service providers in a particular area of business provide similar bundle of services.

Further to the submission made earlier, the HP indigo consumables are provided as a bundled and charged on click basis globally. Also, other industrial printers’ competitors also supply consumables as a bundle and charge on click basis.

  1. The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service.

The HP Electrolnk is the principal supply as for the customers and suppliers, the Electrolnk is the main component of the supply, as is evident from the consumption. The ancillary supplies only help in transferring the ink from the cartridge to the paper.

  1. There is a single price or the customer pays the same amount, no matter how much package they actually receive or use:

The invoicing is done on a “per click basis” for all the supplies. Every customer is charged a single price for all the goods, irrespective of the fact that in achieving the final output of a print, there is different proportion of Electrolnk and other ancillaries consumed. Therefore, where a single price is charged in relation to bundled supply of goods or services, the said supply cannot be deemed as a “mixed supply” under GST. The definition of composite supply neither restricts nor lays down any condition on the manner of pricing to be adopted for such classification. Accordingly, bundled supplies having a single price can be classified as a composite supply, where other conditions are satisfied in this regard.

In this regard, the Applicant wishes to highlight the illustration provided in the flier issued by the CBIC wherein, activity of supply of hotel accommodation service along with supply of breakfast for a single price is considered as a composite supply.

  1. The elements are normally advertised as a package:

All customers enrolled under the tier program are supplied consumables as a bundle. Further, HP’s agreement with Redington as indicated earlier provides that such goods shall be used only for commercial printing purpose ensure that these goods are not sold, and cannot be used individually.

  1. The different elements are not available separately:

HP’s agreement with Redington as indicated earlier provides that such goods shall be used only for commercial printing purpose ensure that these goods are not sold, and cannot be used individually, as the same are not available separately under the click program.

  1. The different elements are integral to one overall supply. If one or more is removed, the nature of the supply would be affected :

The desired print output can only be achieved where all these goods are used as a bundle. They are integral to ensure the final output by the customer is in the manner required.

Therefore, considering the above facts and explanations, the HP indigo consumables supplied under the tier program satisfies all the conditions of a composite supply.

  1. The principles enunciated in the Impugned Order are contradictory to other Advance Ruling Orders passed by the Maharashtra AAR. We wish to bring to your attention that in the following rulings, the authorities have held that the transaction is a Composite Supply.

“46. This brings us to the issue of whether the contract for the setting up of the solar power generation plant is a ‘composite supply’. The term ‘composite supply’ is given under Clause 30 of Section 2 of the CGST Act.

“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: Illustration:- Where goods ore packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

It is important to see the definition of principal supply, and goods along with the same.

“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;

A reading of the definition of composite supply shows that there should be –

  1. Two or more taxable supplies,
  2. of goods or services or both;
  3. or in combination thereof;
  4. Which are naturally bundled and supplied in conjunction with each other
  5. In the ordinary course of business
  6. One of which is a principal supply.
  7. The Contracts are two – one for the supply of goods and the other for the supply of services. The contract or the agreement fulfils the conditions of the ‘composite supply’. There is supply of goods and services. They are naturally bundled in the sense that both the goods and services may require lo fulfil the intention of the buyer in giving the contract. The supply of goods and services are provided as a package and the different elements are integral to flow of supply i.e., if one or more is removed, the nature of the supply would be affected. Thus, we hold that though there are two agreements made one for the supply of goods and the other for the supply of services, what can be easily gathered from the tenor of both the agreements is that the buyer has given a contract for setting up SPGS to the appellant and therefore it is a single indivisible contract which involves element of two supplies- one for the supply of goods and other for the supply of services. By making two separate agreements – one for the supply of goods and the other for the ‘supply for services’, what is purported to be done is an artificial division of contracts which though done, cannot take away the true and inherent nature of the contract. It is a single supply of a ‘Solar Power Generating System, consisting of two or more taxable supplies.

This is clearly a case of composite supply of goods and installation thereof. The entire transaction of providing the goods and the services are naturally bundled – it is natural and also a practice to expect that a contractor who will supply the goods may also supply the services along with it,”

“38. As per the Appellant, since the Scope of work includes the provision of goods and services, the entire contract is one turnkey EPC contract and hence would qualify as a ‘composite supply’ within the definition of the term as given under Section 2(30) of the CGST Act. it is also their contention that the principal supply in in such case is the provision of goods and hence the entire contract should be taxable @ 5%.

The term ‘composite supply’ is given under clause (30) of Section 2 of the CGST Act. “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.

Illustration:- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

It is important to see the definition of ‘principal supply’ and goods along with the same. “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;

A reading of the definition of ‘composite supply’ shows that there should be-

  1. Two or more taxable supplies;
  2. Of goods or services or both;
  3. Or in combination thereof;
  4. Which are naturally bundled and supplied in conjunction with each other;
  5. In the ordinary course of business;
  6. One of which is a principal supply.
  7. The contract fulfils the condition of composite supply. There is a supply of goods and services. They are naturally bundled in the sense that the goods and services may be required to fulfil the intention of the buyer in giving the contract. The supply of goods and services are provided as a package and the different elements are integral to flow of supply i.e. one or more is removed, the nature of the supply would be affected. Thus, from a reading of the entire contract as well as from the definition of composite supply what can be easily gathered is that the buyer has given a contract for setting up Solar Power Generating Supply to the appellant, and therefore it is single composite supply of goods and services and installation thereof
  8. in order to understand the scope of a ‘composite supply’ and also to know what may be the criteria to judge a supply as a ‘composite supply, the CB1C has published an e-flier on the subject. As per the e-flier, ‘Composite supply’ entails the concept of ‘naturally bundled supply, and whether services are bundled in the ordinary course of business would depend upon the normal or frequent practice followed in the area of business. it also says that in order to qualify for a composite supply one of the characteristics would be that ‘none of the individual constituents are able to provide the essential character of the service’. What is the normal frequent practice in the trade can be ascertained from the following indicators:-
  • The participation of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.
  • Majority of service provider in a particular area of business provide similar bundle of services.
  • The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service.
  • The other instructive indicators can be the following: –
  1. There is a single price or the customers pays the same amount;
  2. No matter how much of the package the actually received;
  3. The elements are normally advertised as a package;
  4. The different elements are not available separately;
  5. From the application of the above indicators, we hold that the contractor providing the design, procurement, supply, development, testing and commissioning of the Plant which includes the supply of both goods and services is a composite supply as per the definition in the Act. There are two taxable supplies- one of goods and the other of services and they both are naturally bundled and it is natural and also a practice to expect that the contractor who will supply the goods, will also supply the services alongwith it. In the business of contracts for the Solar Power Generating System, it is a practice to provide a Plant as a whole along with the supply of services. We differ with the order of the Advance Ruling Authority in this respect.

“22. In the instant case there is no dispute that the contract in question involves a supply of both goods and services. However, in order for the supply to be termed as a ‘composite supply, what is required is that the supply of the goods and the services should at least be bundled, more specifically be ‘naturally bundled, and supplied in conjugation with each other. The term ‘naturally bundled’ has not been defined in the GST Act. We note that the concept of composite supply under the GST law is similar to the concept of naturally bundled services that prevailed under the service tax regime, and the same was understood to refer to those transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction.

  1. We have gone through the draft contract in question in detail. We find that the scope of the contract is that the contractor shall supply all the equipment as per the terms of the contract in accordance with the Execution Schedule. The., terms “Equipment” has been defined in Para 1.1.39 to mean and include all the equipment and major equipment along with its associated accessories. conductors, electrical cables, instruments, apparatus and other items/equipment required to be supplied by the contractor for completing and integrating the SPP, as per the Technical Specification, excluding Free Issue Equipment (Emphasis supplied). In terms of Para 1.1.45 “Free Issue Equipment” means Photovoltaic Modules to be supplied by the owner to the contractor, as a free issue equipment at the Plant site for the installation and commissioning of the SPP. The obligations of the owner in terms of Para 4 of the contract include providing for insurance required for Free Issue Equipment, third party/public liability insurance and insurance required for its representative, engineers and labours until completion of its obligations under this contract. In terms of Para 9 of the contract, the owner agrees to provide Free Issue Material as agreed between the parties. The said material would be over and above the Plant being supplied by the contractor under this contract. The owner shall be responsible for transportation of Free Issue Equipment from the point of origin till the Plant site and in this regard, the owner shall remain solely liable, including in respect of any damage during transit. Further, in terms of Para 15.3, the contractor shall, on arrival of the Free Issue Equipment at the Plant site, shall be entitled to inspect the Free Issue Equipment at the Plant Site and notify the owner in writing, detailing the defects of such inspection. The Owner shall correct/rectify the defects detailed in the contractor’s notice by causing to repair or replacing the defective Free Issue Equipment. Whereas it is apparent from the terms of the draft contract as indicated above, that, in the instantcase, the appellant has vivisected the contract in the initial stage itself into two parts i.e., first a supply of the PV module which constitutes about 60-70% of the value of the contract and then the second part for the supply of the remaining parts and components and services.
  2. The first part of the supply is done by purchasing from a foreign supplier the Pv module and transferring the title of the said PV module on High Sea Sales basis to the owner of the project. The Project owner clears the PV module through the Customs and makes available the same to the contractor (Appellant) without consideration at the project site. The appellant have argued that the above modus is merely undertaken for commercial reasons since it is the project owner who is eligible for customs duty exemptions and therefore, the PV module although has been identified and arranged for purchase by the appellant, the same has been actually procured and imported by the other contracting party. We find that the reason for this modus, though compelling is not the relevant to the issue at hand. What is relevant is that the appellant having resorted to such a structuring, has the effect of making the supplies effected in this instance to have been effected in at least three clear and distinct stages.
  • One is the transfer of ownership of the PV module from the appellant (the original purchaser) to the Project Owner on High Sea Sale basis.
  • Second is the free issue of the PV module by the owner to the contractor at the Plant site.
  • The third part is the supply of the remaining part of the goods and services by the appellant.
  1. The effect of the first transaction under the contract is to transfer the chattel as chattel to the other contracting party and thus effectively separate it from the subsequent supplies. This transaction is outside the scope of GST as it takes place on High Sea Sales basis. However, we note that it is a ‘supply’ as understood in ordinary parlance, wherein the meaning of the expression supply is clearly understood to “make (something needed or wanted) available to someone; provide”.
  2. The second transaction which happens thereafter, is the free supply of the PV module by the Project owner to the appellant for setting up the Solar Power plant. This supply without consideration is not within the fold of the definition of “supply’ as stated in Section 7 of the CGST Act. Other than the exceptions spelt out in Schedule I, any supply without a consideration is not a ‘supply’ and hence does not attract GST. What crystallizes from the above is that, the supply of the PV module which is the major component of the contract is not coupled at all with the supply of the other parts of the Solar Power Plant and the services for setting up the Solar Power Plant. In fact, the supply of the PV module in the situation is separated both in time and intent and is distinct and never coupled with supply of other items/services within the impugned contract (and which, it is the responsibility of the owner to procure and make available to the contractor). The transaction of supply of PV module in itself is abstracted from the rest of the elements of the EPC contract. It is clearly a separate instance of sale/delivery from the rest of the agreement of work or service and the sale of other items, and just because the contractor may have arranged the procurement of it for the owner, does not take away from the distinct and separate nature of the supply. The distinction is observed by the contracting parties too in having separately received the consideration for this element of supply from the rest of the supplies made under the contract. Transfer of property of goods for a price is the linchpin of the definition of sale. Clearly, the thing to be delivered (PV modules in thiscase) has an individual existence before the delivery as the sole property of the party who is to deliver it and for that reason, this then is a sale. If ‘A’ may transfer property for a price in a thing in which ‘8’ had no previous property then the contract is a contract for sale. On the other hand, where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. The intention in the two different transactions is different on the matter of PV module sold on high seas, it is sale; and thereafter other transactions in goods and services are to follow.
  3. Therefore, in view of the above, we find that the supply of PV module is a distinct transaction by itself and cannot be said to be naturally bundled with the supply of the remaining parts required for setting up the Solar Power Plant. The contract itself makes it abundantly clear that the term “equipment” does not cover “free issue equipment”, Therefore, the contract itself recognises the supply by the owner as a distinct transaction which is separate from the supply of the other equipment and components by the contractor. To this extent the AAR was right in the impugned order in holding that the concept of natural bundling does not apply to the instant envisaged supply of the PV module in terms of the draft contract in question.
  4. Once the contract in question is that of a multistage supply as already discussed, having been already vivisected into the supply of the PV module by the owner as free issue to the appellant, what remains to be executed by the appellant is undertaking the supply of the remaining equipment and components and parts of the Solar Power Plant and supplying the services of design, erection, installation and commissioning of the Solar Power Plant. We are of the opinion that the supply of this remaining portion of the contract in question (involving the supply of the balance components and parts as well as the service portion) can still be termed as a ‘composite supply’ in terms of Section 2(30) of the CGST Act, 2017, since the supply of these components and parts as well as the services of erection, installation and commissioning appear to be naturally bundled. Having said this, the tax liability on the latter portion of the contract in question which is to be supplied by the appellant and which we are agreeable to be termed as a composite supply will be determined on the basis of the dominant nature of the supply. in other words, if the dominant nature of the remaining portion of the contract in question which is executed by the appellant is principally a supply of services of design, erection, installation and commissioning, then the tax rate will be the rate as applicable to the services if they form the principal supply of the remaining portion of the contract. It has never been contended before us that for the balance part of the supply under the contract in question, the goods element of what we agree to call a ‘composite supply’ are the predominant or principal component in the transaction. We modify the ruling of the Advance Authority in the impugned order to the above extent. It is emphasised that the discussions and findings as detailed above are limited to the facts involved in the contract in question.
  5. As regards the question whether the benefit of concessional rate of 5% GST on the supply of solar power generating systems and its parts will apply to the sub-contractors, we are of the view that the supplies made by the sub-contractor to the appellant are independent supplies. If the supply by the subcontractor to the appellant is of goods which can be termed as ‘parts of the Solar Power Generating System, then the rate applicable will be 5% in terms of Sr. No. 234 of Notification No. 1/2017- Integrated Tax (Rate), dated 28-6-2017. However. if the supply by the sub-contractor to the appellant is a composite supply, then the rate applicable to the dominant nature of the supply will prevail. We are in agreement with the finding of the AAR on this and uphold the same.
  6. In view of our findings and discussions as above, theRuling dated 21-3-2018 of the Karnataka Authority for Advance Ruling = 2018 (6) TMI 1127 – AUTHORITY ON ADVANCE RULINGS, KARNATAKAis modified as under:

(a) The supply of the PV module which is the major component of the Solar Power Plant is not naturally bundled with the supply of the remaining components and parts of the Solar Power Plant and the supply of the services of erection, installation and commissioning of the Solar Power Plant.

(b) The supply of PV module is a distinct transaction from the supplies in contract in question as it is the owner whose responsibility it is to procure and supply the PV module. This PV module is to be supplied as free issue material over and above the plant being supplied by the contractor. The owner is responsible for transportation of the PV module from the point of origin till plant site and he bears the other risks and rewards of ownership. The PV module which is procured by the Project owner on High Sea Sale basis and imported by availing Customs duty exemptions and later supplied to the appellant as a free issue for use in the setting up of the Solar Power Plant.

(c) The supply of the remaining portion of the contract in question by the appellant which involves the supply of the balance components and parts of the Solar Power Plant and the supply of services of erection, installation and commissioning of the Solar Power Plant is viewed as a ‘composite supply’ as the supply of goods and services are naturally bundled.

(d) The tax liability on this portion of the contract in question (other than PV module) which is termed as a ‘composite supply’ will be determined in terms of Section 8 of the CGST Act, 2017 wherein the rate applicable to the dominant nature of the supply will prevail.

  1. The appeal is disposed of in the above manner.”
  2. In both the above rulings, it is held that the elements of the contract are supplied together and therefore qualify as a “Composite Supply”. Similarly, even for the Appellants, as all the elements are inter-dependent, they should qualify as a Composite Supply. Accordingly based on the above submission and the submission already made at the time of filing of appeal, the impugned supply should qualify as composite supply with the principal supply being Electro Ink.

Discussion and Findings

  1. Having agreed upon to the Appellant’s contention with regard to the non-consideration of the additional submissions dated 11.02.2019 in the impugnedAAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA, leading to the apparent error on the face of the record, and warranting the invocation of section 102 of the CGST Act, 2017 for the rectification of the error in the impugned AAAR order, we perused the additional submission dated 11.02.2019 made by the Appellant, vide which they had supplemented their contention made in the grounds of appeal, by way of further clarification in respect of the transactions carried out by them in terms of the agreement entered with their customers, and exhibition of various evidences in the form of the certificates, declaration, documents, records relied upon them to vindicate their claim.
  2. Before setting out to discuss the merits of contention made in the additional submissions under consideration, we would like to recapitulate the findings of the impugned AAAR order.
  3. In the impugned AAAR order, it was held that the supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products by the Appellant to its customers is ‘mixed supply’ and not the ‘composite supply’, as being claimed by the Appellant. One of the reasons for the aforesaid ruling, made by the AAAR, was that out of the various supplies, which comprise of Electrolnk along with the other consumables like blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products, there was no such supply which could be construed as principal supply in terms of its definition provided in section 2 (90) of the CGST Act, 2017, thus violating one of the primary conditions stipulated for the composite supply under section 2(30) of the CGST Act, 2017. Further, since the above mentioned supply of the Electrolnk along with the printing consumables by the Appellant was not held to be composite supply for the reasons recorded above, the said bundle of supply by the Appellant against the single price charged from the customers, which has been held by the Advance Ruling Authority as ‘mixed supply’ in the impugnedAAR order dated 08.06.2018 = 2018 (10) TMI 1515 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA, was also upheld by the Appellate Authority for Advance Ruling.
  4. At the outset, we would like to examine this very aspect of the principal supply among the bundle of supplies, made by the Appellant to its customers, in light of the contentions and evidences tendered vide the additional submissions dated 11.02.2019. Also, it has to be kept in mind that the scope of ‘rectification’ is only limited to the error apparent on the face of record. Therefore, we will examine only those submissions which were not considered by us while passing theAAAR order dated 17.02.2019 = 2019 (8) TMI 30 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA.
  5. Firstly, we will refer to the para no. 43 to 46, wherein the Appellant has submitted that the Electroink is the principal component of the supply and the remaining printers’ consumables just aid in placement of the ink on the paper to effect the desired print outs. The Appellant have, further, emphasized that the Electrolnk is the most consumed items in terms of volume, which is 41% of all the items consumed, among all the elements of supply by the Appellant. To assert this submission, they have incorporated one table exhibiting the consumption pattern of the various components of the supplies, wherein it was displayed that the consumption of the Electrolnk is 41 % of the total consumed items in terms of the volume. This consumption pattern of printing consumables was also certified by the Chartered Engineers vide the certificate issued by him, wherein he testified as under:

“………all the consumables shall be required to be required to be supplied as bundle to the customer to enable the customer to achieve the print. functionally, the print shall not be available to the customer unless all the goods are used in the prescribed manner to take the print out.

To conclude, all indigo press consumables are necessarily required to be consumed together at the same time for effecting the desired output.

The entire printing process is centric to the use and consumption of H.P. Indigo’s Electrolnk, to yield the desired print results. Accordingly, based on the consumption pattern of the various elements provided for our consideration and our analysis of the printing process, functionally, the Electrolnk is the predominant element in the process of obtaining print impression from H.P. Indigo Printers.”

Thus, on perusal of the above submissions and the certificate issued by the Chartered Engineer, it is clearly revealed that all the printing consumables comprising Electrolnk, blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products are equally important and are indispensable for the printing function of the Indigo Presses, which is also vindicated by the Chartered Engineer’s certificate, wherein he has testified as under:

“all the consumables shall be required to be required to be supplied as bundle to the customer to enable the customer to achieve the print. functionally, the print shall not be available to the customer unless all the goods are used in the prescribed manner to take the print out.

To conclude, all Indigo press consumables are necessarily required to be consumed together at the same time for effecting the desired output.

Thus, the Appellant themselves have admitted that there is not any specific element under this bundle of supplies, which is more significant than others, ruling out the possibility of presence of any principal supply. The above submissions and the evidence produced by the Appellant themselves in the form of the Chartered Engineer’s certificate also lead us to conclude further that there are no components in this bundle of supplies, which are ancillary in nature, as all the components are indispensable in nature, and not additional or subordinate in nature. None of the components are subordinate to any one element of the supplies. That is, none are providing additional support to any specific consumable items. All these consumables are being consumed together to achieve the desired output. In absence of any one of these consumables, the entire printing function will be stalled, which clearly shows the importance of each of the components of the bundled supplies. At the same time, it also shows that none of supplies are ancillary in nature.

  1. From the above discussions, it is established beyond doubt that the bundled supplies by the Appellant to its customers has no principal supply, which is one of the primary conditions for any supply to be treated as the composite supply as envisaged under section 2(30) of the CGST Act, 2017.
  2. The Illustration provided under clause (30) of section 2 of the CGST Act, 2017, was also heavily relied upon by the Appellant in the additional submissions filed by them, and it is observed that in the proposed illustration, the supply of goods is the principal supply, and the supply of packing materials, supply of the transportation services, insurance services are ancillary in nature, as all these supplies are directly related to the goods, which are being transported. That is, all these supplies have no meaning or existence in absence of the goods. Because, it is the goods only, which are being packed, insured, and then transported to a particular destination. This submission was discussed in para no 57 of the appellate order. It is discussed therein that the example is not applicable to the presentcaseas in the present facts and circumstances of the case, as these supplies are completely independent in nature, and is not related in any manner to the Electrolnk, which is being claimed by the Appellant as the principal supply. All these printing consumables i.e. blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products can be very much supplied independently by the Appellant to its customers.
  3. To support their claim, the Appellant have cited the various illustrations incorporated in CBIC flyers and Circulars issued in respect of the composite supply, which inter alia include one illustration cited in the Circular No. 32/06/2018-GST, March 1, 2018, wherein it was clarified by the CBIC that which part of the composite supply is principal supply, must be determined keeping in view the nature of supply involved. Value may be one of the guiding factors in determination but not the sole factor. It was further mentioned that the primary question that should be asked is what is the essential nature of the composite supply and which element of the supply imparts that essential nature to the composite supply.
  4. Thus, it is abundantly clear from the aforementioned circular that value is only the guiding factor, and not the sole factor for determining the principal supply in the bundle of supply. Therefore, the Appellant’s contention based on the consumption pattern of the printing consumables, wherein consumption of Electrolnk is 41% in terms of the volume, thereby asserting the Electrolnk as the Principal supply only on the basis of its highest consumption among all the printing consumables, without establishing the fact that the same (Electrolnk) is imparting the essential nature of the supply is feeble and slight, and clearly not tenable.
  5. Now, we refer to the other illustrations, cited by the Appellant in support of their claim. Some of these are mentioned herein below:

Reference has been drawn to Q-6 page 26 of 3rd Edition FAQ’s dated 15.12.2018, wherein it was illustrated as under:

When a consumer buys a television set and he, also gets a warranty and a maintenance contract with the TV, this supply is a composite supply. In this example, supply of TV is the principal supply, warranty and maintenance service are ancillary. From the above illustration, it may be inferred that supply of the T.V. is the principal supply because it provides the central and essential nature of the supply, and all other supplies, whether supply of warranty or maintenance contract are ancillary in nature, as the same is directly dependent on the T.V. To elaborate further, if there is no supply of T.V., there would not be any supply of either warranty or maintenance contract. That means, they do not exist standalone. There has to be a supply of T.V. for the relevance and significance of the supply of warranty or maintenance contract. However, in the present case, this is definitely not so, as all the supplies i.e. Electrolnk, and other consumables comprising blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products are equally important and indispensable, as the absence of any one of these will adversely impact the functionality of the H.P. Indigo printers.

(ii) Reference has been drawn to Circular Ko 32/06/2018 -GST dated 12.02.2018, wherein it was illustrated as under:

Health care services provided by the clinical establishments will include food supplied to the patients. Therefore, food supplied to the in-patients as advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable. However, other supplies of food by a hospital to patients (not admitted) or their attendants or visitors are taxable.

In the above illustration, it is clearly revealed that the Health care services is the principal component of the composite supply, and the food supplied to the patients are ancillary in nature, as the same is additional to the main supply, which in this case is the supply of health care, which is imparting the true essence or the character of the composite supply, called supply of health case facility. The supply of the food to the patient are in the nature of ancillary owing to the reason that supply of the health care can still continue even without the supply of the food. However, there is no meaning of supply of food to the patient in the hospital without the patient being provided the health care facilities. Once again, this is not the case in the present facts of the appeal, as all the components of the printers are equally important and none is more important than others, thereby lending support to our observation that there is no principal supply in the supplies under question.

  1. Similarly, all other illustrations mentioned in the FAQ’s, GST Fliers, and CBIC circulars, cited by the Appellant does not support the Appellant’s contentions. Rather, the same is validating our observation to the extent that there is no principal supply in the bundle of supplies under question.
  2. In view of the above, it is concluded that though some of the submissions remained to be considered, after adequate consideration of the same, we reach the same conclusion as reached earlier in the appellate order, that the supply of the Electrolnk along with other consumables by the Appellant is not a composite supply. Instead the said supply can be construed as mixed supply, as it satisfies all the conditions stipulated for the ‘mixed supply’ under the provision of section 2 (74) of the CGST Act. Section 2(74) is being reproduced herein under:

(74) “Mixed Supply” means two or more individual supplies of goods or services or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;

  1. As is evident from the facts of thecase, the supplies, made by the Appellant, squarely satisfy all the conditions prescribed for the mixed supply. Accordingly, it was rightly held by the AAR that the supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products is ‘mixed supply’ and not the composite supply as being made out by the Appellant.
  2. Now, in view of the above analysis of the submissions and evidences put forth by the Appellant vide the additional submissions dated 11.02.2019, it is conspicuous that additional submissions dated 11.02.2019, made by the Appellant, do not have any significant bearing on the outcome of thecase. The other submissions made by the Appellant are inconsequential in the presentcase, as even the vindication of all those submissions would not have any bearing on the outcome of the instant appeal. Therefore, we have restricted our discussions to the aspect of examining the principal supply among the bundle of supplies under question.

Thus, in view of the above discussion, we, hereby, pass the following order:

ORDER

We do not find any reason to amend our original order dated 17.02.2019, wherein it was held that the supply of the Electrolnk along with the other consumables comprising of blanket, photo imaging plate, binary ink developer, HP imaging oil, blanket web and other machinery products by the Appellant to its customers is ‘mixed supply’ and not the ‘composite supply’, as being claimed by the Appellant.

M/S. ROTARY CLUB OF MUMBAI QUEENS NECKLACE

Levy of GST – Supply of services or not – amount collected as membership subscription and admission fees from members – Input tax credit of the tax paid on the Banquet and Catering services for holding members meetings and various events.

HELD THAT:- In the absence of any mechanism to treat the appellant and its members as separate persons the said service does not tantamount to supply u/s 7 of the CGST Act, 2017, GST is not leviable on membership fees collected by the appellant from its members.

Whether the amount collected as membership subscription and admission fees from members is liable to GST? – HELD THAT:- It appears that the Club & Association does not provide only Social Services as an NGO, but also have other functions relating to Personal Functions which clearly amounts to furtherance of business. In lieu of consideration received as membership fees, admission fees and subscriptions are taxable as supply of services under GST. So, prima facie there appears a levy of GST.

If receipts are liable to GST, can the club claim input tax credit of the tax paid on banquet and catering services for holding members meetings and various events? – HELD THAT:- The Appellant is not providing any specific facility or benefits to its members against the membership subscription charged by it, as the entire subscription amount is spent towards meetings and administrative expenditures only. Thus, we conclude that the Appellant is not doing any business as envisaged under section 2(17) of the CGST Act, 2017.

Once it has been established that the Appellant is not doing any business in terms of section 2(17) of the CGST Act, 2017, it can be deduced that activities carried out by the Appellant would not come under the scope of supply as envisaged under section 7(1) of the CGST Act, 2017 – Since, it has been held herein above that impugned activities of the Appellant will not be construed as supply, question regarding the availment of ITC on the input services like catering services, banquet services, etc. does not arise.

The amount collected as membership subscription and admission fees from members is not liable to GST as supply of services.

No.- MAH/AAAR/SS-RJ/15/2019-20

Dated.- November 6, 2019

Citations:

  1. Commissioner of Income-Tax Versus Bankipur Club Limited – 1997 (5) TMI 392 – Supreme Court
  2. SPORTS CLUB OF GUJARAT LTD Versus UNION OF INDIA & 3 – 2013 (7) TMI 510 – GUJARAT HIGH COURT
  3. Ranchi Club Ltd. Versus Chief Commissioner of Central Excise & Service Tax – 2012 (6) TMI 636 – Jharkhand High Court
  4. THE ENGLISH AND SCOTTISH JOINT CO-OPERATIVE WHOLESALE SOCIETY LTD. Versus COMMISSIONER OF AGRICULTURAL INCOME-TAX, ASSAM – 1948 (4) TMI 2 – PRIVY COUNCIL
  5. In Re: M/s. Rotary Club of Mumbai Queens Necklace – 2019 (7) TMI 616 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

SMT. SUNGITA SHARMA, AND SHRI RAJIV JALOTA, MEMBER

PROCEEDINGS

(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.

The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and MGST Act”] by Rotary Club of Mumbai Queens Necklace (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-118/2018-19/B-46 dated 30.04.2019 = 2019 (7) TMI 616 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA.

Brief Facts of the Case

1. This Appeal is being filed by Rotary Club of Mumbai Queens Necklace (‘the Appellant’ or ‘the club’) against ruling no. GST-ARA-118/2018-19/B-46 dated 30.04.2019 = 2019 (7) TMI 616 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA pronounced by Maharashtra Authority for Advance Ruling.

2. The appellant, having Good and Service Tax (‘GST’) Registration No. 27AAABRO64311Z is an un-incorporated association of individuals. The club is affiliated to Rotary International, a worldwide organization with [520+] districts, [35000+] clubs and [1.2million plus] members. The object of Rotary is to encourage and foster the ideal of service.

3. For the sake of brevity, the structure of Rotary is explained as under:

(i) Clubs – Rotarians are members of Rotary clubs, which belong to the global association Rotary International (RI). Each club elects its own officers and enjoys full autonomy within the framework of Rotary’s constitution and bylaws.

(ii) Districts – Clubs are grouped into RI districts, each led by a district governor. The district administration, includes District Secretary, District Treasurer, assistant governors and various committees. The District, guides and supports the clubs.

(iii) Rotary International Board (RI) – RI Board of Directors, which includes the RI president and president-elect, meets quarterly to establish policies. The RI president, who is elected annually, develops a theme and emphases for the year.

(iv) The Secretariat: Rotary International is headquartered in the Chicago suburb of Evanston, Illinois, USA, with seven inter-national offices in Argentina, Australia, Brazil, India, Japan, Korea, and Switzerland. The office for RI in India, serves clubs and districts in that region.

4. The normal functioning of the Rotary as a whole is summarized as under:

(i) Rotary clubs bring together dedicated individuals to exchange ideas, build relationships, and take action.

(ii) Rotary International supports Rotary clubs worldwide by coordinating global programs, campaigns, and initiatives.

(iii) The Rotary Foundation uses generous donations to fund projects by Rotarians and other partners in communities around the world. As a nonprofit, all of the Foundation’s funding comes from voluntary contributions made by Rotarians and friends who share our vision of a better world.

Together, Rotary clubs, Rotary International, and The Rotary Foundation work to make lasting improvements in our communities and around the world.

5. Appellant work with Rotary Foundation to:

• Promote Peace

• Fight Diseases

• Provide Clean Water, Sanitation and hygiene

• Save Mothers and children

• Support Education

6. The purpose of club is to promote integrity, and advance world understanding, goodwill, and peace through fellowship of leaders.

7. The members come together to form a rotary club. It is not a service club. There is an annual budget of expenses and that money is pooled by the members in equal share. It is non-profit institution. It has neither rendered commercial service to its members nor does it render services to outsiders for a fee.

8. For the said purpose, appellant receive contribution from its members for incurring expenditure on its meetings and communication. The receipts majorly comprise of:

(i) Fees from members which in essence is contribution towards yearly expenses. The contribution from new members is collected on pro rata basis rounded to quarter/ half year.

(ii) One time admission Fees from New Members (other than who are or were Rotarians).

9. The expenses are in the form of:

(i) Meeting Expenses

(ii) Fees and contributions to District or Secretariat of Rotary

(iii) Other Administration expenses like printing, stationery, audit fees etc.

10. The amounts collected by way of fees are only pooled together and it is not expected to generate any surplus. Club is not formed to give any facilities or services to its members. The members gather under the umbrella of the club to perform socially relevant activities.

11. Club in normal parlance is understood to provide goods or services to its members such as recreation, sports etc.

However, appellant does not provide any facilities or benefits in terms of goods or services to its members.

12. The activities relating to receiving donation etc. is carried out through a charitable trust which is registered under Bombay Public Trust Act, 1950.

13. To ensure the smooth and proper working of the club, membership subscription fees and admission fees are collected from members. The amounts collected are then utilized for administration purposes of the club.

14. In order to avoid unnecessary and unwanted litigation, the appellant was erstwhile registered under service tax vide registration number AAABRO643JSD002 and also under Good and Service Tax (‘GST’) having registration number as 27AAABRO64311ZJ and is currently charging GST on the membership subscription and admission fees collected by it.

15. The Club organizes events for the purpose of enabling members to meet and interact with each other. For such events the Club incurs various expenditure like banquet charges, catering services, etc.

Club also incurs expenditure on banquet and catering services for its weekly/monthly meeting.

GST amount paid to vendors on such expenses is substantial.

16. The membership / subscription fees are collected from members only to cover meeting expenses, banquet expenses, catering expenses, printing and stationery expenses, etc. Collections pooled from members is not intended to accumulate any surplus fund / profit. Appellant, being a non-profit entity, aims only at furtherance of object of Rotary. Membership / Subscription fees is only to cover up the expenses of appellant.

17. In view of the above, the appellant filed an application before the advance ruling authority (Maharashtra) seeking a ruling on the questions as to whether:

(i) The amount collected as membership subscription and admission fees from members is liable to GST as supply of services?

(ii) If the above receipts are liable to GST, can the appellant claim Input tax credit of the tax paid on the Banquet and Catering services for holding members meetings and various events?

18. Advance ruling authority admitted the appellant’s application in preliminary hearing held on 27.02.2019. Final hearing in respect of above matter was fixed on 03.04.2019. The appellant filed additional submissions dated 22.02.2019, 18.03.2019 and 09.04.2019 and re-iterated submissions made in the application filed with Advance ruling authority.

Advance Ruling dated 30.04.2019 passed by AAR, Maharashtra

19. Advance ruling authority (Maharashtra) vide their order no. GST-ARA-118/2018-19/13-46 dated 30.04.2019 = 2019 (7) TMI 616 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA passed the following order:

(i) The amount collected as membership, subscription and admission fees from members is liable to GST as supply of services.

(ii) Input tax credit of tax paid on Banquet and catering services cannot be availed.

20. Aggrieved by the above rulings passed by the AAR, the appellant has preferred appeal on the basis of the grounds mentioned herein under:

Grounds of Appeal

21. The appellants are filing the present appeal on the following grounds, which are urged herewith without prejudice to one another.

22. Ground No. 1: – On the facts of the case and in law, Advance ruling authority has erred in holding that the amount collected as membership subscription and admission fees from members is liable to GST as supply of services.

Detailed submissions:

I. As per the definition of the term “Person” under section 2(84) of the CGST Act, 2017, there is no deeming fiction to treat the appellant and its members as different persons. Therefore, the vital condition for a transaction to be taxed under GST, that a supplier and recipient should be different persons is not satisfied.

II. Appellant is an autonomous unit which collects its fees from its members to meet its administrative costs and to manage its activities. Therefore, the principle of mutuality is applicable and since the fees so collected are only pooled together for convenience and for defraying administrative and other expenses and hence, the same should not be brought under the purview of GST.

III. Taxability of contribution received by club from its members:

a) Section 9 of the CGST Act, 2017 stipulates the taxable event for levying GST as supply of goods or services.

b) Section 7 of the CGST Act, 2017 reads as under:

7. (1) For the purposes of this Act, the expression “supply” includes-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule 1, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

c) Therefore, in order to tax the transaction between an association or club and its members, said transaction must either fit clause (a) or (c) above.

d) Explanation for transaction to be outside the purview of Clause (a) of section 7(1):

i. Clause (a) of section 7 (1) covers all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

ii. Therefore, in order to tax the transaction, the supply must be for a consideration and it should be in the course of furtherance of business.

(a) Business:

• Appellant is not engaged in any activity in nature of trade, commerce, manufacture, profession, vocation or adventure or any similar activity so as to constitute a business.

• Clause (e) of section 2 (17) specifies the term “Business” to include:

“provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members”

• Therefore, in order to satisfy the term business, there must be some benefit/facility provided to its members. In appellant’s case, there is no facility or benefit provided to the members. The appellant cannot be said to be in business. The object of the appellant is to promote peace, Fight Diseases, Provide Clean Water, Sanitation and hygiene, Support Education, etc. It does not tantamount to business activity carried out by the appellant.

(b) Consideration:

• Under section 2(105), the term “supplier” has been defined as follows:

“Supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied;

• Under section 2 (93), the term recipient has been defined as follows:

“recipient” of supply of goods or services or both, means-

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or bath supplied;

• Harmonious reading of both the above definitions provides that where a consideration is involved in a transaction, the recipient is the “person” who pays the consideration to the supplier. Hence, two different persons have been envisaged in the law to tax a transaction as a supply made for a consideration.

• The term person is defined in section 2 (84) of the CGST Act, 2017 to include an association of persons or a body of individuals, whether incorporated or not, in India or outside India.

Further, Schedule II of CGST Act, 2017 enumerates activities which are to be treated as supply of goods or as supply of services.

It states in para 7 that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods.

• Recent circular implies that “supply of services by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services.

Above entry in Schedule II is analogous to and draws strength from the provision in Article 366 (29A)(e) of the Constitution according to which a tax on the sale or purchase of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.” It does not enable to tax supply of service as a deemed service.

Above circular has not considered the definition of “supplier” as well as “recipient” before taxing a transaction u/s 7(1)(a).

• There must be two different persons to tax a transaction under said provision. Merely because an association of person has been included as person u/s 2 (84) does not imply that members of such association are different persons.

Unless provision similar to that of deemed sale is made either in the Constitution or the Act, services provided by an association to its members cannot be taxed.

iii. Concept of Mutuality

(a) Foreign Jurisprudence:

In the case of English and Scottish Joint Co-operative Whole Society Ltd. V. Commr. Agr of I. T. (1948) 16 ITR 270 (PC) = 1948 (4) TMI 2 – PRIVY COUNCIL, there are three conditions stipulated by the judicial committee, the existence of which establishes the doctrine of mutuality:

• The identity of the contributors to the fund and recipients from the fund.

• The treatment of the company, though incorporated as a mere entity for the convenience of the members and policyholders, in other words, as an instrument obedient to their mandate, and

• The impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expelled or returned to themselves.

(b) Indian Jurisprudence:

• Income Tax Law:

Honorable court has also discussed the principles of mutuality in the case of CIT vs. Bankimpur Club Ltd. = 1997 (5) TMI 392 – SUPREME COURT as follows:

“It should be noticed that in the case of a mutual society or concern (including a member’s club), there must be complete identity between the class of contributors and the class of participators. The particular label or form, by which the mutual association is known, is of no consequence.”

• Service Tax Law:

■ Principle of mutuality was always a point of debate in service tax regime prior to 01.07.2012. Whether club and its member can be regarded as two separate taxable person was the issue of concern.

■ Honorable Jharkhand High court in case of Ranchi Club Ltd. v. Chief Commissioner [2012] 26 S.T.R. 401(Jhar.) = 2012 (6) TMI 636 – JHARKHAND HIGH COURT examined the concept of mutuality. Main contention before the court was that considering the concept of mutuality, a club/association cannot provide services to itself. Only service provided to another person is taxable. In absence of deeming fiction treating club/association and its member as distinct person, service tax shall not be payable.

■ High Court accepted the contention of petitioner and held that the levy is ultra vires to the extent of money collected from members. Relevant extract is reproduced below:

‘It is true that sale and service are two different and distinct transaction. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transactions requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members’ club has been already considered and decided by the Hon’ble Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res integra and issue is to be answered in favor of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax.’

■ Subsequently Hon. Gujarat High Court in the case of Sports Club of Gujarat Ltd v. UOI [2013] 40 STT 486 (Guj.) = 013 (7) TMI 510 – GUJARAT HIGH COURT concurred with Hon. Jharkhand High Court and held that club and members are not distinct persons, levy of service tax on such clubs/associations is ultra vires.

To nullify the effect of above judgements w.e.f. 01.07.2012, clause (a) to explanation 3 to Section 65B(44) was inserted to provide that an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.

iv. As per the definition of ‘person’ provided u/s 2(84) of the CGST Act, 2017, there is no deeming fiction to treat association and members as different persons. ‘Principle of mutuality’ has its relevance in all taxation laws i.e. Income Tax Act, Service Tax Act, VAT laws, etc. Appellant is of the considered view that in absence of deeming fiction under GST legislation, decisions of Jharkhand High Court as well as Gujarat High Court shall squarely apply in the context of GST.

Association or club and its members cannot be treated as different persons. Hence key condition to tax a transaction u/s 7 (1) (a), that supplier and recipient must be different, is not satisfied. Therefore, transaction of providing services by an association to its members cannot be taxed u/s 7(1)(a).

e) Explanation for transaction to be outside the purview of Clause (c) of section 7(1):

i. Clause (c) of section 7 (1) clause covers the activities specified in Schedule I, made or agreed to be made without a consideration. If self-supply is taxable, it must be covered under Schedule I.

ii. Entry Number 2 of schedule I provides that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business shall be taxable.

iii. Members are not covered under section 25 as distinct person.

iv. Explanation to section 15 of the act explains the term related person as follows:

For the purposes of this Act, –

(a) persons shall be deemed to be “related persons” if-

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognized partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares or both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or

(viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

On perusal of the above definition we can conclude that there must be more than one person who can be considered as related as per the above specified conditions.

As an association and its members are the same because of principle of mutuality, they cannot be regarded as related person.

From the foregoing analysis, we interpret that transaction between an association or club and its members is not covered in the scope of supply u/s. 7 (1) (c) of the CGST Act, 2017.

Since the transaction between the appellant and its members does not tantamount to supply u/s 7 of the CGST Act, 2017, GST is not leviable on membership fees collected by the appellant from its members.

23. Ground No. 2: On the facts of the case and in law, Advance ruling authority has erred in holding that Input tax credit of the tax paid on Banquet and catering services for holding members meetings and various events cannot be claimed.

Detailed submissions:

Assuming (but not admitting) and without prejudice to above grounds, if your honor holds membership fees charged from members is taxable supply liable to GST, then appellant should be entitled to claim ITC in respect of banquet and catering services:

24. As stated earlier, the objects of the appellant are to promote peace, fight diseases, provide clean water, sanitation and hygiene, support education, etc.

25. For the smooth functioning of the association and obtaining donations, the appellant conducts various meetings at hotels which are attended by members. Such meetings may be in the form of cultural programs followed by Lunch or Dinner.

26. Membership fees charged by appellant to the members covers such meeting expenses, other administration charges such as printing and stationery, audit fees, etc. The membership fees are towards recovery of expenses, one of which is banquet and catering services. Membership fees are collected by appellant well in advance from the members.

27. Since a bundle of expenses are recovered in name of ‘membership fees’ from members, reference to the concept of ‘composite supply’ under CGST Act, 2017 is required:

(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;

28. All the expenses of appellant are recovered well in advance from members in name of membership fees. To determine natural bundling, Education Guide issued by CBEC in 2012 provides that whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business.

Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below-

a) The perception of the consumer or the service receiver

(In appellant’s case it would be the perception of members)

b) Majority of service providers in a particular area of business provide similar bundle of services.

For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.

c) If the nature of services is such that one of the services is the main service and

the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service.

29. That above indicators being applied in the appellant’s case it evidently appears that the membership fees charged by the applicant to the members represents bundle of benefits / facilities granted to the members.

30. Further, principal supply is defined as under:

“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;

31. The primary factor to determine the principal supply is the essential nature of the composite supply and element of the supply imparts that essential nature to the composite supply.

32. Section 8 of Central Goods and Services Tax Act, 2017 provides as under:

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; an

b. a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

33. Hence, the composite supply provided by the appellant to the members shall be treated as a supply of club / association service by the appellant. Organization of meetings, banquet and outdoor catering services will all form part of ancillary services provided to its members.

34. To determine input tax credit on food and beverages supplied by outside caterers, Section 17 (5) of GST Act, 2017 (as amended) provides as under: –

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following supply of goods or services or both, namely: –

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause(a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods and services or both shall be available where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

35. Appellant procures various supplies such as services of professionals, auditors, banquet hall services, outdoor catering services, etc. in order to provide benefits / facilities to its members and to achieve the objects of Rotary. All such expenses are recovered from members in form of membership / subscription fees on which appropriate GST liability is being discharged by the appellant.

36. Appellant is availing banquet and catering services, professional’s services, auditor’s services, etc. for providing outward composite supply in nature of club membership / subscription fees. Club membership / subscription fees is a taxable composite supply liable to GST.

37. Further the invoice raised by the appellant on its member clearly mentions that the membership contribution is towards Meetings, Banquet, Catering and other expenses.

Sample copy of invoice raised by the appellant on its member is attached herewith.

38. While going through the above provisions of Section 17 (5), it can be concluded that ITC of tax paid on food and beverages should be available to the appellant because it will use such inward supply as an element of an outward supply of club membership which is a taxable composite supply.

39. Advance ruling authority in the case of All Rajasthan Corrugated Board and Box Manufacturers Association has held that “ITC of tax paid on food and beverages will be available to the applicant because the applicant will use such inward supply as an