Mobilization Advance for EPC Contracts Taxable on Receipt: Gujarat AAAR

In re S P Singla Constructions P. Ltd. (GST AAAR Gujarat)

The Gujarat Appellate Authority for Advance Ruling (AAAR), in the case of S P Singla Constructions P. Ltd., deliberated on the taxability of mobilization advances under the GST framework. The core issue was determining the time of supply for GST purposes concerning mobilization advances received by the appellant for constructing a four-lane signature bridge under an Engineering, Procurement, and Construction (EPC) agreement. The AAAR upheld the Gujarat Advance Ruling Authority’s (GAAR) decision that the mobilization advance is taxable on the date of receipt.

The agreement specified that mobilization advances, constituting 10% of the contract value, are paid in two installments against a bank guarantee. These advances, deemed interest-bearing, are repaid through deductions from subsequent stage payments as certified by the engineer. Under Section 2(31) of the CGST Act, 2017, advances are treated as “consideration” if applied towards the supply of services. Section 13 further clarifies that the liability to pay GST arises at the earlier of invoice issuance or payment receipt. As the mobilization advance is adjusted against service consideration, it satisfies the legal definition of taxable supply under GST.

The appellant argued that the mobilization advance is a mere financial transaction or deposit and does not constitute taxable consideration. However, AAAR refuted this claim, citing contractual terms that specify its usage for project execution and repayment terms. The bank guarantee furnished does not negate the taxability of the advance, as it serves as a financial security mechanism rather than altering the payment’s nature.

AAAR concluded that mobilization advances are taxable upon receipt since they directly relate to the supply of services under the EPC agreement. The ruling reinforces the principle that advances, when adjusted against future payments, attract GST liability.

Read AAR Order: Time of supply for discharge of GST in respect of Mobilization Advance

FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING, GUJARAT

At the outset we would like to make it clear that the provisions of the Central Goods and Services Tax Act, 2017 and Gujarat Goods and Services Tax Act, 2017 (hereinafter referred to as the `CGST Act, 2017′ and the CGST Act, 2017′) arc pan materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act, 2017 would also mean reference to the corresponding similar provisions in the GGS’I’ Act, 2017.

2. The present appeal has been filed under Section 100 of the CGST Act, 2017 and the GUST Act, 2017 by M/s. S P Singla Constructions P Ltd., (hereinafter referred to as Appellant) against the Advance Ruling No. GUJ/GAAR/R/2022/06 dated 07.03.2022.

3. Briefly, the facts are enumerated below for ease of reference:

• the appellant undertakes EPC I Engineering, Procurement, Construction I contract for construction of bridges & other projects for Government of India/State Government;
• as a sample, EPC contract dated 15.1.2018, relating to construction of 4 lone Signature bridge between Okha and Beyt Dwarka on NI I:­51 is submitted, which has been entrusted by Ministry of Road Transport and Highways, New Delhi I `authority‘/MOR.T&III to the appelli.int.
• in terms of the EPC contract, the authority gives an interest bearing advance equal to 10% of contract price for mobilization expenses, to extent financial assistance to mobilize resources for timely & smoot I take off of the project;
• this ^,utilization advance, is in lieu of counter bank guarantee 113(31 of 11 .)°/0 of the advance which would remain effective till comp! tion and full repayment of the advance;
• the payment for construction work is done by the authority on comp! lion of payment stage, as defined in the EPC contract & post this II i2 appellant raises the invoice; a part of the mobilization advance e is reduced in proportion to the value of the work completed, as shown in the invoice; 13G is also reduced in proportion to the mobilization advance adjusted in the invoices;
• the appellant, in his books, shows mobilization advance as a non-current liability, which is thereafter provisionally transferred to sale/consideration for service as and when proportionate amount is deduce cd from the invoices raised on the customers.

4. In vie vi of the foregoing facts, the appellant had sought Advance Ruling on the correction as to what is the time of supply for the purpose of discharge of G:;^–1: in respect of mobilization advance received by it for construction sera ices.

5. Consequent to hearing M/s. S P Singla Constructions P Ltd., the Gujarat Authority for Advance Ruling [GAAR], recorded the following findings viz

• that M s. S P Singla does not contest the taxability on said Advance, but seaks a ruling for deferment of GST on such advance from date of its accept to date of issue of invoice;
• that i terms of sections 2(31), 1 3(1), 13(2), notification No. 66/20 7-CT dtd 15.11.2017, circular No. 26/26/2017-GST dtd 29.12.1017, the time of supply of services on advance received, is date o its receipt;
• that case laws pertaining to service tax, is not applicable to GST;
• the argument, that full advance is re-paid is misleading as advance is adjusted into payments;
• that neither section 13(2) nor proviso to section 2(31) differentiates between an advance & an interest bearing advance;
• that contractual I3G shall not obscure the provision of time of supply for services on advance received;
• that advance received is adjusted towards the bill raised to its service recipient; the argument that advance is not towards discharge of recipients obligation is without merit;
• that the appellant has misplaced its reliance that the said advance is a deposit;
• that even as per the GST flyer no. 6 dated 1.1.2018, the time of supply to the extent advance received shall be the time of receipt of advance.

6. The GAAR, vide the impugned ruling dated 22.3.2022, held as follows:

7. Aggrieved by the aforesaid advance ruling, the appellant is before us, raising the following contentions, viz

• mobilization advance is not in the nature of payment & is not taxable at the time of receipt; that it is merely a transaction in money as at the time of receipt of advance, it is not in the nature of supply of goods/service but merely a transaction in money; that it will not be susceptible to GST -as there is no supply & since it is not in the nature of consideration_;
• that consideration excludes deposit unless the supplier applies such deposit as consideration/payment towards a supply at which point it ceases to be a deposit & becomes a payment/consideration;
• that when a 13G is given to secure mobilization advance it cannot be said to be towards discharge of an obligation; that where money is paid in discharge of an obligation, there is no question of repayment of the said sum;
• that if the mobilization advance was in the nature of a payment, there would be no requirement for the appellant to give a 13G;
• that since mobilization advance is received towards procurement of machinery, ie goods, in terms of notification No. 66/2017 dated 15.11.2017, CBIC has exempted payment of GST on advance paid on goods;
• that the time of supply in respect of mobilization advance would be when it is set off or appropriated against the consideration.

8. Personal hearing in the matter was held on 15.10.2024, wherein Shri Rajat Mittal, Advocate, Shri Sanjay Shah, Advocate, Shri Mohinder Kumar, I lead Taxation of the appellant, appeared and reiterated the submissions made in the appeal. During the course of personal hearing the authorized representative submitted a compilation consisting of the below mentioned case laws viz

• Five Star Construction P Ltd1
• Punjab Tractors Cooperative Multi purpose Society Ltd²
• Thermax instrumentation Ltd³
• SMS Infrastructure Ltd⁴
• Gammon India Ltd⁵
• Reliance Infratel Ltd⁶
• Ario Infrastructure P Ltd⁷
• Thermax Instrumentation I itd⁸
• Ahlcon In is P Iitd⁹

FINDINGS

9. We have carefully gone through and considered the appeal papers, written submission filed by the appellant, submissions made at the time of personal hearing the Advance Ruling given by the GAAR and other materials available on record.

10. The primary issue to be decided is as to what. is the time or supply for the purpose discharge of GST in respect of the mobilization advance received by the appellant. The GAAR, as is already mentioned supra, has held that the time of supply in respect of the mobilization advance received by the appellant, is the date of receipt of the said advance.

11. The appellant, as a part of the appeal papers, has enclosed certain extracts of the EPC [Engineering, Procurement and construction] agreement for construction of new 4-lane signature bridge connecting missing link between Okha and Beyt Dwarka on ITC mode including construction of approaches on new national highway No. NH-51. The relevant clauses, as culled out from the extracts provided, is as under:

19.2 Advance Payment

19.2.1 The Authority shall make an interest bearing ((a) Bank Rate ^s) advance payment (1¹ie “Advance payment”), equal in amount to 10 (ten) percent of^. the contract vice, exclusive for mobilization expenses. The advance payment  for mobilization  expenses shall be made in two instalments each equal to 5% (five percent) of the contract price. The second 5% (five percent) mobilization advance would be released after submission of utilization certificate by the contractor for the first 5% advance already released earlier.

In addition to the above, the Authority shall make an additional interest-bearing advance payment against newly purchased key construction equipment required for the works as per agreed construction programme and brought to the sites, if so requested by the Contractor subject to the same terms and conditions specified for Advance payment mobilization expenses in this Agreement. The maximum of such advances shall be 5% (five percent) of the Contract price against Bank Guarantee. This advance shall be further subject to the condition that (i) such new equipment are considered by the Authority’s Engineer to be necessary for the works and (ii) these new equipment should be procured in the name contractor and is verified by Authority’s Engineer to have been brought to site.

The Advance payment for mobilization expenses and for acquisition of key new construction equipment would be deemed as interest bearing advance at Bank rate, to be compounded annually. The interest would be recovered along with the recovery of mobilization advance payment in equal installments as per provision laid down for the mobilization advance recovery.

19.2.2 The contractor may apply to the Authority for the _.first instalment of the Advance payment at any time after the appointed date, along with an irrevocable and unconditional guarantee fi-om a Bank for an amount equivalent to 110% (one hundred and ten percent) of such instalment, substantial!) in the ‘brill provided at Annex-Ill of^. Schedule-G, to remain effective till the complete and full repayment thereof*

19.2.4 At any time after 60 (sixty) days from the Appointed date, the contractor may apply to the Authority for the second instalment of the advance payment along with an irrevocable and unconditional guarantee _.from a Bank for an amount equivalent to 110% (one hundred and ten percent) of such instalment, substantially in the from provided at Annex-III of Schedule-G, to remain effective till the complete handful repayment thereof

19.2.7 The advance payment shall he repaid through percentage deductions from the stage payments determined by the Authority’s Engineer in accordance with Sub-Clauses 19.5, as follows:

(a) deductions shall commence in the next stage payment statement following that in which the total of all certified stage payments (excluding the advance payment and deductions and repayments of retention) exceeds 20% (twenty percent) of the contract price: and

(b) deductions shall he made at the rate of 15% (fifteen percent) of^. each Stage payment statement until such time as the advance payment has been repaid: provided that the advance payment shall be completely repaid prior to the time when 80% (80 percent) of the contract price has been certified for payment.

19.2.8 if the advance payment has not been fully repaid prior to Termination under clause 21.7 or Article 23, as the case may he, the whole of the balance then outstanding shall immediately become due and payable by the contractor to the Authority. Without prejudice to the provisions of clause 19.2.7, in the event of termination for contractor default, the Advance payment shall be deemed to carry interest at the rate of 10% (ten percent) per annum from the date of advance payment to the date of recovery by encashment of the Bank Guarantee _.for the Advance payment. 1-or the avoidance of doubt the aforesaid interest shall be payable on each instalment of the advance payment regardless of whether the instalment or any part thereof has been repaid to the authority prior to the termination.

19.3 Procedure for estimating the payment of Works

19.3. 1 The Authority shall make interim payments 10 the Contractor as certified by the Au’ drily Engineer on completion of a stage, in a length, number or area as specific and valued in accordance with the proportion of the Contract price assigned 1( each item and its .stage in Schedule-II

12. In terms is of section 2(119), works contract inter alia means a contract for construction, completion, erection, or commissioning, etc of any immovable prop say wherein transfer of property in goods (whether as goods or in some other Corm) is involved in the execution of such contract. Further. in terms of’ Sr. 1\ ). 6(a) of schedule-II to CGST Act, 2017, provision of works contract will be created as supply of services. Thus, EPC agreement between the appellant an( MORT&I I for construction of new 4-lane signature bridge connecting missing link between Okha and Beyt Dwarka, is a supply of service.

13. Section 2(31) defines the term ‘consideration’ as under viz

(31) “consideration” in relation to the supply of goods or services or both includes-

(a) 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 Government or a State Government;

(b) the monetary value of any act or forbearance, 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 Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

Likewise, time of supply of services, in terms of section 13, states as follows viz ‘relevant extract

Section 13. Time of Supply of Services

(1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section.

(2) The time of supply of services shall be the earliest of the following dates, namely:—

(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed 3 under4section 31 or the date of receipt of payment, whichever is earlier; or

(b) the date of provision of service, if the invoice is not issued within the period prescribed under 5section 31 or the date of receipt of payment, whichever is earlier; or

(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply:

Provided that where the supplier of taxable service receives an amount up to one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice relating to such excess amount.

Provided that……………….

Explanation .-For the purposes of clauses (a) and (b)-

(i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment:

(ii) “the dale of receipt of payment” shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his hank account, whichever is earlier.

14. A conjoint reading of both the sections 2(31) and 13. leads to a conclusion that the liability to pay tax on services shall arise at the time 01 supply, which will He the earliest of the date 01′ issue of invoice by the supplier, if it is issued within the prescribed period or the date of receipt of payment, whichever is earlier. The explanation to section 1 3(2) through a deeming provision states that the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment & that “the date of receipt of payment” shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his bank account, whichever is earlier. Further, the proviso to section 2(31) goes on to add that a deposit in respect of the supply of^. services shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

15. A perusal of clause 19.2.7, reproduced supra, spells the mode of repayment of mobilization advance/advance payment. What it contemplates is that the advance payment shall be repaid through percentage deductions from the stage payments determined by the Authority’s Engineer in accordance with sub-clause 19.5. As the mobilization advance/advance payment, is adjusted as a consideration towards the said supply, the proviso to section 2(31), reproduced supra, stands satisfied & hence, the mobilization advance/advance payment is a consideration as defined under section 2(31) of the CGST Act, 2017, in respect of the said supply or services.

16. In view of the foregoing, the averment or the appellant that the mobilization advance is not in the nature of payment; that it is merely a transaction in money; that consideration excludes deposit, is not a legally tenable argument. Further, we concur with the findings of the GAAR, that the time of supply in respect of the mobilization advance/advance payment received by the appellant in respect of supply of service, is the date of receipt of^– such advance

17. We find that the applicant has raised an averment that when a bank guarantee is given to secure mobilization advance, it cannot he said to he towards ditcher of an obligation; that where money is paid in discharge of an obligation, there is no question of repayment or the said sum and that the mobilization ad ante was in the nature of a payment, there would be no requirement for he appellant to give a I3G. The averment stands addressed in para 48(iii) impugned ruling of GAAR. We concur with the same. given otherwise. we rind that nothing is produced by the appellant to repudiate the said finding.

18. The next averment raised by the appellant is that since mobilization advance is received towards procurement of machinery, is goods, in terms of notification No. 66/2017 dated 15.11.2017, CI3IC has exempted payment a GST on advance paid on goods. We do not find much merit to the averment. The question 0: applicability of notification No. 66/2017-CT (Rate) dated 15.11.2017. d(\e not arise, owing to the fact that in paragraph 12, we have already held apt in terms of’ the agreement between the appellant and MORT&II, the supply is in respect of services. The said notification is applicable only 11 respect of supply of goods.

19. The next averment raised is that the mobilization advance is a short term advance & recorded as such in books of accounts; that it is not a revenue; that it being a deposit, is not a consideration. This averment belies the Fact and our finding as recorded in para 15, supra.

20. Lastly we find that the appellant has relied upon several citations, a compilation of v which is submitted during the course of personal hearing. On going through the same, it is observed as under:

• Five Sta Construction P Ltd, Punjab Tractors Cooperative Multipurpose,  Society Ltd, and M/s. Ahlcon India P Ltd., ibid, pertain to Income Act and is there lore, not relevant.
• Thermax Instrumentation I ,td., SMS Infrastructure 1 ,td. and Gammon India Ltd, The case law is not applicable to the present dispute, owing to the fact that the definition of ‘consideration’ as per Section 67 under the Finance Act, 1994 and under the CGST Act, 2017 are different.
• Reliance Infratel Ltd, ibid. On going through the case law, it is observed that the facts are different. The Hon’ble Tribunal in the case concluded that a combined reading of clauses 4.1 & 4.2 and 11 of Master Service Agreement, does not lead to a conclusion that the amount which was received by the appellant was in the nature of advances for the services to be rendered. This not being the factual position in respect of the mobilization advance received by the appellant in the present dispute, this judgement would not he of any help to the appellant.
• Arlo Infrastructure P Ltd, ibid. The facts in the dispute, the law involving the dispute not being the same, the reliance on this case law is legally not tenable.

21. In view of the above findings, we reject the appeal filed by appellant M/s S P Singla Constructions Pvt. Ltd., against Advance Ruling No. GUPGAAR/R/2022/06 dated 07.03.2022 of the Gujarat Authority for Advance Ruling.

Note:-

¹Order dated 2.11.2012 in ITA no. 1861/Del/2011

² Manu/PII/0141/1997

³ 2016 (42) SIR 19 (Tri-Bom)

⁴2017 (47) SIR 17 (Tri-Bom)

⁵2021 (44) GSTL 373 (Tri-Bom)

⁶ 2015 (39) SIR 820 (Tri-Bom)

⁷ 2016 SCC Online Del 5371

⁸ 2019 (22) GSTI, (Tri-Born)

⁹ Order dated 19.10 2012 in ITA no. 1924/De1/2011