In re Adani Enterprises Limited (GST AAR Madhya Pradesh)
Q1. Whether the services of construction of the R&R Colony supplied by the Applicant would be taxed as a part of the composite supply of mining service or the same would be taxed separately as a supply of works contract service.
In respect of 1st question, the Authority hereby is of the opinion that the services of construction of the R&R Colony supplied by the Applicant would be taxed under the Works Contract Service.
Q2. Whether the Applicant will be eligible to avail Input Tax Credit of tax paid to the sub-contractor on works contract services for construction of R&R colony, or the same would be disallowed in terms of Section 17(5)(c) of the CGST Act, 2017.
In respect of 2nd question, the Authority hereby is of the opinion that the Applicant will be eligible to avail Input Tax Credit of tax paid to the sub- contractor on works contract services for construction of R&R colony and utilize same for providing/supply of Works Contract service only. Further in terms of 17(5)(c) of the CGST Act, 2017, the said credit should not be utilized towards the payment of GST liability with regards to any other service including Mining Service.
FULL TEXT OF ORDER OF THE AUTHORITY OF ADVANCE RULING, MADHYA PRADESH
1. Adani Enterprises Limited (hereinafter referred to as ‘Applicant’), is a company incorporated under the Companies Act, 1956. It is registered with the GST Authorities in the State of Madhya Pradesh and has been granted Registration No 23AABCA2804L1Z2.
2 . The provisions of the CGST Act and MPGST Act are identical, except for certain provisions. Therefore, unless a specific mention of the dissimilar provision is made, a reference to the CGST Act would also mean a reference to the same provision under the MPGST Act. Further, henceforth, for the purposes of this Advance Ruling a reference to such a similar provision under the CGST or MP GST Act would be mentioned as being under the GST Act.
BRIEF FACTS OF THE CASE AND SUBMISSION OF THE APPLICANTS IN THEIR APPLICATION IS AS UNDER –
3 The Applicant has entered into Agreement dated 08.03.2019 with Andhra Pradesh Mineral Development Corporation Limited (hereafter referred to as “APMDCL”), in terms of which, it has been appointed as a Mine Operator (hereinafter referred to as “MO”) for planning, engineering, financing, construction, development, operation and maintenance of Suliyari coal mine and subsequent delivery of coal to the Owner.
3.1 In terms of Clause 2 of the Agreement, the Applicant is to provide “Mining Services” which has been defined in the definition clause 1.1, to mean “mining and related services more particularly set forth in Schedule 2”.
3.2 Schedule 2 to the Agreement inter alia envisages that the Applicant shall undertake the following activities:-
i. Land Acquisition (1A) – The MO will assist and facilitate the acquisition of all types of land which include Government, Private, Forest land etc. All the land will be acquired in the name of APMDCL.
ii. Rehabilitation and Resettlement (1B) – The MO will be responsible for preparing Rehabilitation and Resettlement plan for the Project and get it approved by the State Government. The MO was also responsible construction of the Rehabilitation and Resettlement colony (“R&R Colony”) basis the mutual finalisation of the design. Further the payment for the said construction was to be reimbursed by APMDCL.
iii. Mining Method (2) – The MO will be responsible for deployment of trucks and shovels and Surface Miners to mine the Site as specified in the Mining Plan
iv. Mining Equipment (3) – The MO will be responsible for deployment of state of the art mining equipment.
v. Mine Engineering (4) – The MO will interalia be responsible to undertake provision of engineering and mining staff, geological Modelling & In-filling, Mine Planning etc.
vi. Mine Operations (5) – The MO will interalia be responsible to undertake a variety of operations ranging from planning the mine (Site), its development and construction, mining and extracting coal in accordance with the requirements of Owner, construction, maintenance and operation of mine dewatering plant, sump, and garland drains with de-silting provisions, construction and maintenance of all access ways and haul roads, arrangement and use of explosives.
vii. Mine Maintenance (6)
viii. Mine Infrastructure (11) – The MO will be responsible for constructing, operating and maintaining the mine infrastructure
3.3 The Applicant submits that as a MO, apart from setting up the mine and subsequently operating and maintaining it, the Applicant has also been given the mandate of constructing the R&R colony in terms of Clauses 1 & IB of Schedule 2 to the Agreement for the purpose for rehabilitation & resettlement of the displaced individuals (“Project Affected Families”/” PAP”). The cost incurred for constructing the R&R Colony will be reimbursed by APMDCL. It is relevant to note that the Applicant in terms of the said agreement is only required to construct the R&R colony for APMDCL. The land on which the R&R colony is built, belongs to APMDCL as well as the super-structure that will be constructed will also belong to APMDCL, and that, the Applicant will not have any title or ownership of the R&R Colony at any point in time. A copy of the Agreement with APMDCL dated 08.03.2019 along with the Schedules is attached and marked as Exhibit “A”
3.4 For the construction of the R&R Colony, the Applicant had appointed a sub-contractor, who will undertake the said construction work and invoice the Applicant for the supply of works contract services. In turn, the Applicant will raise an invoice on APMDCL for supply of works contract services, seeking reimbursement towards the actual expenditure, incurred on the construction of the R&R Colony without any mar-up or margin.
3.5 The applicant submitted that
(a) The nature of Mining activity and the construction are totally independent of each other. The risks, rewards and the skillset required for execution of the works are totally independent of each other.
(b) Both the works can be very well handled by different contractors. Even in the instant case, the applicant is not actually executing the work, but had entered into a back-to back arrangement with the contractors who are responsible for the actual execution of the construction work.
(c ) While the construction is a one-time activity that will start independently and will conclude soon, the mining contract stretches over a period of time.
(d) The manner of determination of consideration of both the contracts are different ‘ from each other. While the construction cost is reimbursed at actuals without any mark-up or margin, the consideration under mining are based on the actual quantity mined and other factors which are elaborated in the Contract enclosed
3.6 The Applicant’s interpretation with respect to the questions posed by it is as under:
Submissions of applicant with respect to Question 1
(i) The Applicant submits that Section 2(30) of Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act), defines “Composite Supply” to mean:
“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;”
(ii) On perusal of the above definition, it appears that a “composite supply” essentially and irreplaceably has the following ingredients:-
i. consisting of two or more taxable supplies of goods or services or both, or any combination thereof,
ii. which are naturally bundled
iii. and supplied in conjunction with each other
iv. in the ordinary course of business, one of which is a principal supply.
(iii) In the facts of the present case, undoubtedly there are at least two taxable supplies viz. supply of mining services & supply of works contract services. The question that arises is whether the said services can be said to naturally bundled. Though the phrase “naturally bundled” has not been explained, interpreting the same contextually, it would mean that the supplies involved should be such that the same are naturally supplied together. In other words, there should not be an artificial bundling of the supplies, like that in the instant case, where supply of works contract of a construction of colony is not naturally or ordinarily bundled with the supply of mining services rendered by a mine operator.
(iv) Further the definition of “Composite Supply” requires that the supplies which are naturally bundled should be supplied in conjunction with each other “in the ordinary course of business”. The CBIC has, in its flyer on “Composite and Mixed Supplies”, listed out some indicators for determining whether a supply can be said to be bundled in the “ordinary course of business”. The indicators are listed out herein below for ease of reference:-
> 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 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.
> 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. 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.
> Other illustrative indicators, not determinative but indicative of bundling of . services in ordinary course of business are-
> There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
> The elements are normally advertised as a package.
> The different elements are not available separately.
> The different elements are integral to one overall supply
> If one or more is removed, the nature of the supply would be affected.
(v) As manifest from above, it is clear that there is no straight jacket formula for the determining whether the two supplies, which are supplied in conjunction with each other are naturally bundled in the ordinary course of business or not. The determination of the same will vary in each case.
(vi) In the present case, it is submitted in terms of Agreement dated 08.03.2019, the Applicant has been appointed by APMDCL as a MO to set up the mine and subsequently operate and maintain the same. The Applicant has additionally been given the mandate of construction of the Rehabilitation & Resettlement (“R&R”) colony for which it will be reimbursed on actuals. The two activities are independent supplies and are not in the ordinary course of business supplied in conjunction with each other, so as to qualify as a composite supply. Normally a mine operator supplies the service of setting up the mine and operating and maintaining it. However, in the present case, the Applicant is required to construct a R&R colony for the project affected persons, in addition to supplying the services of a mine operator.
(vii) In view of the above submissions, it is clear that the rendition of construction services (of the R&R Colony) and Mining Services is not a “composite supply” for the purposes of the CGST Act, 2017.
(viii) Furthermore, it is submitted that activity of construction of R&R Colony clearly falls within the scope of the “works contract” as defined under Section 2(119) of the CGST Act, 2017. For reference purposes, the said definition has been reproduced hereunder:
“-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;”
(ix) On the perusal of the above definition, it appears that the activity of constructing a building (immovable property) is one of the specified activities in the definition of works contract The other condition of there being a transfer of property in goods is also satisfied inasmuch as the title of the steel, cement, etc. which goes in the construction of the building is transferred to APMDCL. Thus the, activity of construction of R&R colony squarely falls within the scope of the definition of “Works Contract” Services inasmuch as the activity involves “construction” of an Immovable Property and there is a “transfer of property in goods” involved in the execution of the construction of R&R colony.
Submissions of applicant with respect to Question 2
(x) The Applicant submits Section 17(5) deals with blocked credits under the GST law. It enlists various circumstances under which the Input Tax Credit cannot be availed by the Recipient of Supply, notwithstanding the provisions of Section 16(1) & 18(1) of CGST Act. Sub-Section (c) section 17(5) deals with blocked /ineligible credit relating to “Works Contract Services””. The relevant provisions are as follows:
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
Explanation.- For the purposes of clauses (c) and (d), the expression construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;\
………………
Explanation.- For the purposes of this Chapter and Chapter VI, the expression -plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or
(xi) On a reading of the Section 17(5)(c) of the CGST Act, 2017, it appears that the said provision attracts disallowance of Input Tax Credit in respect of works contract services when supplied for construction of an immovable property (other than plant and machinery) except where, it is an input service for further supply of works contract service. Thus, ITC for works contract can be availed only by a registered person who is in the same line of business, and is using such services received for further supply of works contract services.
(xii) The Applicant submits that as stated above, services of construction of the R&R Colony clearly fall within the scope of the “Works Contract Services” and therefore, if the sub-contractors raise invoices on the Applicant for “Works Contract Services”, the Applicant will be eligible for the ITC, as it is in the same line of business in other words, such input services will be used for providing works contract services as it’s outward supply. In view of the above, disallowance under Section 17(5)(c) is not attracted.
(xiii) The disallowance u/s 17(5(c) are attracted only when the works contract service is procured otherwise than in the course of further supply of work contract service. In the present case, the applicant is procuring the works contract service and is in turn rendering the same to the APMDC. Hence the disallowance u/s 17(5)(C) shall not arise in the hands of the applicant, but may only arise in the hands of APMDC. In case the disallowance u/s 17(5)(C) is given effect in the hand of the ultimate consumer being APMDC, then applying the same in the hands of Applicant will amount to double restriction of ITC which is never the intention of the ACT.
(xiv) Hence in the view of the Applicant the service of Mining and Service of construction or monitoring of construction are two independent activities. The consideration for both is independently determined. Hence the question of which is predominant of these two shall not arise at all. As the applicant is receiving the Work contract services in the course of further supply of the same as works contractor, the restriction of section 17(5)(C) shall not arise in the hands of Applicant, but in the hands of the ultimate consumer only.
4. QUESTION RAISED BEFORE THE AUTHORITY-
The Applicant has filed present application in order to obtain a Ruling with regard to the below mentioned questions:-
(i) Whether the services of construction of the R&R Colony supplied by the Applicant would be taxed as a part of the composite supply of mining service or the same would be taxed separately as a supply of works contract service.
(ii) Whether the Applicant will be eligible to avail Input Tax Credit of tax paid to the sub-contractor on works contract services for construction of R&R colony, or the same would be disallowed in terms of Section 17(5)(c) of the CGST Act, 2017.
5. DEPARTMENT’S VIEW POINT:-
This office vide letter No. AAR/459 dated 03.06.2021 called the report/department view on the questions raised by the applicant from the jurisdictional Commissioner. Commissionerate, Jabalpur. The Additional Commissioner(Technical) CGST and Central Tax, Hqrs. Jabalppur vide letter GEXCOM/TECH//GST/473/ dated 05.08.2021 have submitted his reply/view after going through the provisions of law and Agreement between Applicant and APMDC in respect of Question No.l in para 3 of the said letter that “There is no Lucid formula in CGST Act/Rules to determine “Naturally bundled” services. In the instant case it appears that there is no relation between Construction service for R&R colony and Mining Services and hence it appears that the said services are not bundled either in the ordinary course of business or a composite supply rather it appears to be a supply of Works Contract Service.”
Further, the Additional Commissioner(Tech) CGST, Jabalpur in respect of question No.2 submitted in para 5 of said letter dated 05.08.2021 that “However, in the instant case as per the application filed by the Applicant, they have engaged sub-contractor for supply of services for construction of R&R colony in the same line of business and such services received for further supply of Works Contract service to APMDC. The Sub-contractor will charge GST on account of supply of construction service of R&R colony in their tax invoice to the Applicant i.e. M/s Adani Enterprises Limited (GSTIN.23AABCA2804LIZ2) and the applicant may be entitled to take & utilize ITC as per GST Act & Rule on the basis of Tax invoice raised by his sub-contractors as his output works contract service for construction of R&R colony only to APMDC & the said Input tax credit should not he utilized towards the payment of GST liability with regards to supply of Mining Services.”
6. RECORD OF PERSONAL HEARING –
Shri Gopal Chosla, GM, Finance, Mr. Vishal Agrawal, Tax Consultant and shri. Haresh Nikaam, Manager, Finance & Account, Shri Deep Khare, Deputy Commissioner, Satna, the concerned officer SGST and Shri Deelip Kumar, Asstt. Commissioner, CGST, Rewa appeared for personal hearing through virtual hearing. The representative of the applicant reiterated the submissions already made in the application. The applicant during virtual hearing emphasizes on the definition of Composite supply given in the Section 2(30) of CGST Act and submitted that the construction of R&R colony is not covered under the Composite supply and covers under Works contract service. He further emphasizes that:-
(a) The nature of Mining activity and the construction are totally independent of each other. The risks, rewards and the skillset required for execution of the works are totally independent of each other.
(b) Both the works can be very well handled by different contractors. Even in the instant case, the applicant is not actually executing the work, but had entered into a back-to back arrangement with the contractors who are responsible for the actual execution of the construction work.
(c) While the construction is a one-time activity that will start independently and will conclude soon, the mining contract stretches over a period of time.
(d) The manner of determination of consideration of both the contracts are different from each other. While the construction cost is reimbursed at actuals without any mark-up or margin, the consideration under mining are based on the actual quantity mined and other factors which are elaborated in the Contract.
6.1 The Applicant further through mail dated 26.07.2021 submitted as under:-
(i) That Adani Enterprises Ltd, the Applicant has been awarded a contract by Andhra Pradesh Mineral Development Corporation Ltd (APMDCL) for planning, engineering, financing, construction, development, operation and maintenance of Suliyari coal mine located in Madhya Pradesh.
(ii) That APMDCL has been allotted the said Suliyari Coal Mine located in Madhya Pradesh by the Ministry of Coal, Government of India in terms of Order No. 103/10/2016/NA dated 29.9.2016, is recorded in the definition of ‘Mine’ in agreement dated 8th March, 2019 executed between the Applicant and APMDCL (hereinafter referred to as the Agreement).
(iii) That in terms of clause 2.1 of agreement dated 8th March, 2019, Applicant has been appointed as the Mine Operator (hereinafter referred to as MO) to provide Mining Services. The expression Mining Services has been defined in the agreement to mean ‘Mining and Related services’ more particularly set forth in Schedule 2.
(iv) That Schedule 2 of the Agreement specifies that the Applicant shall inter alia undertake the Rehabilitation & Resettlement and would be responsible for preparing Rehabilitation and Resettlement plan for the Project and get it approved by the State Government. The MO was also responsible construction of the Rehabilitation and Resettlement colony (“R&R Colony”) basis the mutual finalization of the design. Further the payment for the said construction was to be reimbursed by APMDCL.
(v) That as per clause 8.1 of the Agreement, while setting out APMDCL’s obligation interalia provides that it would make payment to the applicant towards construction of R & R colony.
(vi) That insofar as payment towards R&R colony is concerned, Schedule 2 read with Schedule 15 to the Agreement stipulates that the entire cost towards construction of the R&R colony would be paid on milestone basis as under:
