18% GST payable on works contract services to TANGEDCO for retrofitting work

In re PSK Engineering Construction & Co. (GST AAAR Tamilnadu)

Question Raised

1. What is the rate of GST to be charged on providing works contract services to TANGEDCO for carrying out retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building at Chennai.

2. Whether the entry in Sl.No.3 item (vi) of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended is applicable to the appellant in instant case.

AAAR upheld following Ruling of AAR on above Questions

1. The rate of GST to be charged on the services provided by the applicant to TANGEDCO for carrying out retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building at Chennai is 18% ((9% CGST + 9% SGST) as per SL.No.3(xii) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.20177 as amended.

2. The entry in SI.No.3 item (vi) of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended is not applicable to the applicant in the instant case for the reasons discussed in Para 8 of the ARA order.

Read AAR Order : GST on Retrofitting works for strengthening NPKRR Maaligai etc.

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

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

The subject appeal is filed under Section 100(1) of the Tamilnadu Goods & Services Tax Act 2017/Central Goods & Services Tax Act 2017 (hereinafter referred to ‘the Act’) by PSK Engineering Construction & co. (hereinafter referred to as ‘Appellant’). The appellant is registered under GST vide GSTIN 33AAGFP24B3EIZF. The appeal is filed against the Order No.08/ARA/2021 dated 25.03.2021 passed by the Tamilnadu State Authority for Advance ruling on the application for advance ruling filed by the appellant.

2. The Appellant has stated that they are engaged in construction activities including retro fitting, restoration etc. of civil structures predominantly for Government, Public Sector Undertakings and Government entities. They had filed an application before Hon’ble Authority for Advance Ruling, seeking clarification on the following questions:-

1. What is the rate of GST to be charged on providing works contract services to TANGEDCO for carrying out retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building at Chennai.

2. Whether the entry in Sl.No.3 item (vi) of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended is applicable to the appellant in instant case.

3. The Original Authority has ruled as under:-

1. The rate of GST to be charged on the services provided by the applicant to TANGEDCO for carrying out retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building at Chennai is 18% ((9%CGST + 9% SGST) as per SL.No.3(xii) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.20177 as amended.

2. The entry in SI.No.3 item (vi) of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended is not applicable to the applicant in the instant case for the reasons discussed in Para 8 of the ARA order.

4.1 Aggrieved by the above decision, the Appellant has filed the present appeal. On the timeline for filing appeal, they stated that CBIC vide Circular No. 157/13/2021-GST dated 20th July 2021 in the context of extension of timelines vide Supreme Court Order on Extension of Limitation has clarified that the Order of Supreme Court shall be applicable for applications before ‘Appellate authority for Advance Ruling’; Supreme Court vide its Order dated 23 September 2021 had withdrawn the order with the direction that ‘notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 03.10.2021’. Therefore, the appeal is filed within the prescribed timelines mentioned in law.

4.2 On merits of the issue, the grounds of appeal are as follows:-

> 4 conditions are required to be fulfilled for the compliance of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017;-

• • Supply must be a composite supply of works contract as defined in Clause 119 of Section 2 of CGST Act, 2017 (effective from 14.11.2017, when the words ‘Services provided’ stands amended as ‘Composite supply of works contract as defined in Section 2 (119) of CGST Act 2017 provided).
  • Supplies must be provided to the Central Government or State Government or Union Territory, a local authority, a Governmental authority or a Government entity.
  • Supply must be by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession
  • In the case of supplies to a Government Entity, there is a condition prescribed in proviso that the supplies should have been procured by the said Government entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

> The first two conditions have been complied and the same has been accepted by the Advance ruling authority themselves.

> Their submissions with respect to compliance of other two conditions mentioned in the notification are as under:-

Condition 3 – Supply must be by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession

> The work carried out should be meant predominantly for use other than for commerce industry or any other business or profession; TANGEDCO is a public utility company operating without any commercial basis. The functions of the TANGEDCO is promoting the coordinated development of Generation and Distribution of electricity within the state in most efficient and economical manner. Rural electrification is one of the services provided by TANGEDCO. 100% Rural Electrification has been completed.

> The company recovers the cost of electricity on the basis of provisions of Section 61 of Electricity Act, 2003. Section 61 of the Electricity Act, 2003 stipulates the guiding principles for determination of Tariff by the Commission and mandates that the Tariff should ‘progressively reflect cost of supply of electricity’, ‘reduce cross-subsidy’, ‘safeguard consumer interest’ and ‘recover the cost of electricity in a reasonable manner’.

> As per the condition, works contract is required to be meant for predominantly for use other than for commerce, industry or any other business or profession. In the give case, the works contract was carried out retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building which is required for providing services of generation and transmission of electricity.

> The LA had mentioned that TANGEDCO recovers charges for electricity and thus it is engaged in the business of sale of electricity and therefore failed to fulfill the condition. LA has not appreciated the said fact while examining the eligibility of condition and thus the order of the LA needs to be set aside on this ground.

Condition 4 – In the case of supplies to a Government Entity, there is a condition prescribed in proviso that the supplies should have been procured by the said Government entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

> The condition prescribed is applicable only for Government entity wherein the supplies should have been procured by the said entity in relation to a work entrusted by Central Government or State Government. The impugned ruling of the Advance Authority vide para 8 is not in accordance to the settled principle of law. The LA has misread the provisions of the law to mean that the said works procured are not in relation to works of generation and distribution of electricity which is the entrusted work on TANGEDCO and therefore the appellant, fails to satisfy the said condition.

> In this connection they rely on the decision of the Collector of Central Excise Vs Rajasthan State Chemical Works 1991 (55) E.L.T. 444 (S.C.), wherein the Honble Supreme Court has held that in or in relation to a manufacture has vide connotation, therefore relates with Manufacture of Goods is part of the Manufacturing process. Applying the same ratio this decision was followed in plethora of cases including availment of credit on capital goods as well as inputs the courts time and again repeatedly held that in or in relation to should give vide connotation and cannot be given narrow interpretation. The issue in hand is directly connected with the activity of generation and distribution of electricity i.e. for proper functioning of the said service without which the management of service cannot be done at any point of time, Therefore giving narrow interpretation to the exemption notification will destroy the intention of the legislature.

> Further the finding of the Para 8.6 of the impugned ruling is not in accordance with the decision of the Hon’ble Supreme Court in the case of Commissioner of C. Ex., Jaipur Vs Mewar Bartan Nirman udyog, 2008 (231) E.L.T 27(S.C.) .

> LA has not at all taken into account the Explanation appended to S. No. 3 (vi) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017, which reads as under.-

Explanation- For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

> The term “public authorities” is not defined either in the Notification or in the CGST Act. and have referred Section 2 (h) of the Right to Information Act, 2005 which defines the term “public authority”. As “TANGEDCO” is a public authority, the activities undertaken by TANGEDCO cannot be considered as “business’ as per the Explanation appended to S.No.3 (vi) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 ibid. On the above grounds the ruling of the LA that the appellant is not entitled to pay GST @ 12% as per S.No. 3 (vi) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 is not at all sustainable in law.

> Without prejudice to the above, they had submitted that TANGEDCO vide its letter CFC/GL/ACCTS/DRCIAO/TAX/EGST/D.No 22/2019 dated 25.04.2019 has clarified that the works contract service provided to TANGEDCO attracts lower rate of tax in terms of aforesaid entry. Vide issuing the aforesaid letter TANGEDCO has sought clarification from State Government vide letter no. Energy (B2) Dept Ltr 4155/B2/2018/dated 25.03.2019.

> Supreme court in the case of LLOYD ELECTRIC AND ENGINEERING LIMITED VERSUS STATE OF HIMACHAL PRADESH AND OTHERS 2015 (9) TMI 370 -SUPREME COURT has held the State Government cannot speak in two voice. The Hon’ble Apex Court has held that ” ………..The State Government is bound by the policy decision taken by the Council of Ministers and duly notified by the Department concerned, viz., Department of Industries.” The aforesaid principle has also been followed in the case of VADILAL CHEMICALS LTD. VERSUS STATE OF ANDHRA PRADESH 2005 (8) TMI 121 – SUPREME COURT

> In the present case, while State Government has been stating that all activities carried out for TANGEDCO is eligible for exemption, the Advance ruling authority which is a Government arm states that the said activity is not eligible for exemption tantamount to two voice by same Government which as per the aforesaid Supreme Court ruling is incorrect and deserves to be set aside.

5. Personal Hearing;

The Appellant was granted personal hearing through Digital mode (Virtually) on the consent of the appellant, as required under law before this Appellate Authority on 28.01.2022. Shri. S. MuthuVenkataraman, Advocate & the Authorised representative, appeared for the hearing virtually. He stated that the notification requires satisfying four conditions of which two conditions have been held to be satisfied. He stated that reference to the order of Kerala Appellate Authority for Advance Ruling is not valid as the ruling is specific to the applicant. The AR stated that as per Sec 61 of Electricity Act, the tariff is to be fixed considering the consumer interest and are to be reasonably fixed. He also referred to the explanation appended to the entry of the Notification and stated that the applicant is a Public Authority considering the definition of Public Authority under RTI Act. He stated that he will furnish the letter of TANGEDCO referred in their submissions and also a written submission. To the query that ‘Are you denying that TANGEDCO being a body corporate (company) do not have “Commercial Purpose”, the AR stated that the Principal activity is to provide service and the element of ‘Commercial purpose’ is secondary.

6. The Appellant submitted the following details on 04.02.2022;

In their written submission the Appellant has submitted the following:-

> Their submissions with respect to Condition 3 and Condition 4 as mentioned in grounds of appeal referred in para supra. They have further emphasized that TANGEDCO is a public utility company operating without any commercial basis and the IAS officers, designated as secretaries to Government are the Ex-officio Board of Directors.

> Explanation to Notification 11/2017 states that business shall not include activity or transaction undertaken by public authorities. As TANGEDCO is a public authority as per definition of public authority under RTI Act 2005, activities undertaken by TANGEDCO cannot be considered a business. Accordingly, satisfied the condition that the supply was made other than for business or commerce.

> Submitted copy of TANGEDCO letter CFC/GL/ACCTS/DRCIAO/TAX/ EGST/D.No 22/2019 dated 25.04.2019.

> Copies of the following case laws of Supreme court:-

i .Commissioner of LT vs Sutlej Cotton mills supply agency (SC) 1975 (100) ITR 706(SC)

ii . Commissioner of I.T Madras Vs PKN company (SC) 1966(60) ITR 65(SC)

iii. Rajputana textiles vs The Commissioner of LT 1961(42) ITR 743(SC)

iv. collector of central excise vs Rajasthan State Chemical Works) 1991 (55) E.L.T. 444 (S.C.)]

v. Lloyd Electric and Engineering Limited versus State of Himachal Pradesh and others 2015 (9) TMI 370 – supreme court

Discussion and Findings:

7. We have gone through the entire facts of the case, documents placed on record, Order of the Lower Authority & submissions made by the appellant before us. The appeal is against the Order No. 08/AAR/2021 dated 25.03.2021 and is filed beyond the statutory period for filing appeal as per Section 100 of the GST Act. The appellant citing CBIC Circular dated 20th July 2021 on applicability of timelines for filing of the appeal and Order of Hon’ble Supreme Court dated 23rd September 2021 issued in Suo Moto W.P.(C ) No. 3 of 2020, owing to the prevailing pandemic situations, has stated that appeal is filed within the timeline for filing appeal. We find Hon’ble Supreme Court vide Order dated 10.01.2022, has modified its Order dated 23rd September 2021 relied by the appellant and has held that the period from 15th March 2020 to 28th February 2022 would stand excluded for the purpose of Limitation in Mise. Appeal No. 21 of 2022 of Suo Moto W.P.(C ) No. 3 of 2020. Therefore, the appeal is to be considered as filed within the timeline and admitted for consideration on merits.

8.1 From the submissions we find that the appellant provides ‘works Contract’ services to TANGEDCO for carrying out retrofitting works and strengthening of the NPKRR Maaligai against seismic and wind effect and modification of elevation of NPKRR Maaligai in TNEB Headquarters complex, Chennai-2 as per the Tender Specifications(hereinafter referred to as Works’). They had sought clarification on the applicability of the concessional rate of GST as per entry No. 3(vi) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended for providing such services to TANGEDCO. The LA has found that (1) the supply made is a composite supply; (2) TANGEDCO is a Government Entity; (3) the supply cannot be considered as that meant predominantly for use other than commerce, industry, or any other business or professional purposes and (4) the said works are not of ‘Generation and Distribution’ of Electricity which is the entrusted work for TANGEDCO and therefore, as the appellant has not satisfied the conditions at (3) and (4) above, the concessional rate as per entry no. 3(vi) is not applicable to them and the services are chargeable to 18% GST.

8.2 Before taking up the contentions, the relevant entry is examined:

From the above, it is evident that the entry is available when the Composite supply of Works contract are made to ‘Government entity’ by way of fitting out, renovation or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry or any other business or profession and when such supply is made to a ‘Government entity’, they should have been procured in relation to a work entrusted to it by the Central/State Government or the Local Authority as the case maybe.

9.1 The appellant contends that they have satisfied the condition at (3) i.e., the supply was made for use other than for business or commerce, in as much as,-

> TANGEDCO is a public utility company operating without any commercial basis;

> works contract carried out was retrofitting work for strengthening the NPKRR Maaligai against seismic and wind effect and modification of elevation in TNEB headquarters building which is required for providing services of generation and transmission of electricity;

> TANGEDCO’ is a public authority as per the definition of public authority under RTI Act 2005;

9.2 We find that, NPKRR Maaligai on which the retrofitting work for strengthening against seismic and wind effect & Modification of elevation undertaken houses the headquarters of TANGEDCO. TANGEDCO undertakes generation and distribution of electricity in the State of Tamilnadu. On the Generation front, they extend license to various applicants seeking permission for generation of electricity for a ‘licence fee’ and as the distribution utility, undertakes sale of electricity to residential and commercial units after extending the necessary infrastructure (for charge) and fixing of Meters to monitor the consumption for collection of tariff for such usage of electricity. Thus, the activities of TANGEDCO are commercial in nature and for fixed tariff. The contention that the tariff is fixed as per Section 61 of the Electricity Act 2003 considering the ‘consumer interest’ and to ‘recover the cost of electricity in a reasonable manner’ does not establish that TANGEDCO LTD, is not a ‘commercial concern’. Further, while ‘Commerce’ is not defined in the GST Act, Business is defined under Section 2(17) of the Act and it includes any trade, commerce, etc, whether or not, it is for pecuniary benefit i.e., the necessity to have a profit motive is not the criteria to be considered as business/commercial.

9.3 The appellant has referred to the Explanation to Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 and has stated that as per the Explanation, ‘business’ shall not include activity or transaction undertaken by Public Authorities and have claimed themselves as ‘Public Authorities’ as per the definitions under the Rights to Information Act, 2005. Adopting the definition from a different Act which is not pari-materia with the provisions under discussion is not safe as the purposes and intent are entirely different between the ‘GST Act’ and the ‘RTI Act’. Further, Explanation to the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 relied on by the appellant is applicable only to ‘Central Government, State Government or any local authority’ and is not applicable to the case at hand as TANGEDCO is not a State Government or any local authority but a Government entity. The said Explanation is as under:-

Explanation.- For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities. “.

9.4 In the case at hand, the works are undertaken by the appellant to the Headquarters of TANGEDCO Ltd, a commercial company in as much as TANGEDCO is involved in Generation and Distribution of Electricity against fixed Tariff. The words of the entry is clear and excludes the works supplied to Government entity, in respect of a Civil Structure or any other original works meant predominantly for commerce, industry or any other business or profession. Therefore, we don’t find any reason to disagree with the findings of the LA that the supply cannot be considered as that meant predominantly for use other than commerce, industry, or any other business or professional purposes.

10.1 The appellant has further contended that they have satisfied the conditions at (4) in as much as,-

> TANGEDCO being the subsidiary of TNEB, the sole Power supplier to the state of Tamil Nadu, is essentially performing the activity entrusted to it by the State;

> The phrase “in or in relation to a manufacture” as held by Hon’ble Supreme Court has wide connotation and in the present case, the activity undertaken by them is also in relation to a work entrusted by Government;

> TANGEDCO vide letter CFC/GL/ACCTS/DFC/AO/TAX/EGST/D.No.22/ 2019 dated 25.04.2019 has clarified that the works contract service provided to TANGEDCO attracts lower rate in terms of aforesaid entry; TANGEDCO has sought for clarification from State Government vide letter no. Energy (B2) Dept Lr.No. 4155/B2/2018 dated 25.03.2019 while issuing the said clarification; Supreme Court in the case of Lloyd Electronics Engineering Limited Vs. State of Himachal Pradesh has held that State Government cannot speak in two voice

10.2 The factual Matrix of the constitution of TANGEDCO is, TANGEDCO Ltd is established by Government of Tamil Nadu vide G.O. Ms. No. 94 Energy (B2) Department dated 16.11.2009 with the primary object to function as generation and distribution utility in terms of the provisions of Electricity Act 2003; It is a public company wherein 99 percent shares are held by TNEB, the Holding Company established by Government of Tamil Nadu with more than 90 percent equity shares and control; The appointments of the directors to TANGEDCO are by the Government and TANGEDCO is a ‘Government entity’ for the purposes of GST as has been held by the LA. From the letter CFC/GL/ACCTS/DFC/AO/TAX/ EGST/ D.No.22/2019 dated 25.04.2019 of TANGEDCO, it is seen that TANGEDCO has sought clarification as to whether, they are ‘Government Entity’ under GST, considering the Equity share pattern by TNEB Ltd, the holding company which is 100% owned by Government of Tamilnadu and the Government of Tamilnadu has clarified vide Energy (B2) Dept Lr. No. 4155/B2/2018 dated 25.03.2019, that,-

Tamilnadu Generation and Distribution Corporation Ltd qualifies to be treated as “Government Entity” in view of the control exercised by Government of Tamilnadu through TNEB Ltd

In the case at hand, it has been held by the LA that TANGEDCO is a ‘Government Entity’ and therefore there is no difference in the clarification issued by the State Government and the stand held by the LA and the claim that the State Government cannot speak in two voice is void. Based on the clarification received from the Government to the status that TANGEDCO is a Government Entity, the Finance Director has addressed, the Chief Engineers & others to take action to absorb the benefits of GST concessions to ‘Government entity’, which is their own interpretations and not clarification of the State Government and therefore, this contention fails.

10.3 The appellant relying on the decision in the case of CCE Vs. Rajasthan State Chemical Works, has stated that the phrase ‘in relation to’ is to be given a wide connotation and therefore the work undertaken by them to the TANGEDCO Headquarters should be considered as works in relation to the work entrusted to TANGEDCO. In the cited decision, the Apex Court has considered ‘what activity amounts to process in or in relation to manufacture’ and has held that processing of the raw materials even though are stages prior to the commencement of manufacture, are process in relation to manufacture, since they are integral to ‘manufacture’. In the present case, TANGEDCO is established with the primary object to function as ‘Generation and Distribution Utility’ and the work undertaken by the appellant, i.e., retrofitting work for strengthening against seismic and wind effect & Modification of elevation of NPKRR Maaligai, cannot be in any way said to be in relation to the said work entrusted to TANGEDCO by the State Government. It is worth mentioning that it is not the proportionality of the activity which determines whether an activity is ‘in relation to’ the work entrusted but the implications of the legislative assessment of the term ‘in relation to’ is more tilted towards nexus, inseparability and identity of the activities involved with the work entrusted and not merely on other parameters. It is also pertinent to mention that the Constitution Bench of the Hon’ble Supreme Court in the case of Commissioner of Customs(Import) Mumbai Vs. M/s. Dilip Kumar And Co.8s others in C.A. No.3327 of 2007 [2018 (361) E.L.T. 577 (S.C.)], after a detailed analysis of various decision of the Apex Court in the context of interpretation of exemption has held that,-

(1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.

10.4 In the case at hand, the condition imposed for availing the concessional rate at the said entry is unambiguous in as much as it says that the services should have been procured by the Government entity, in relation to a work entrusted to it and the strengthening of the Headquarters building of TANGEDCO is definitely not an activity ‘in relation to’ Generation and Distribution of Electricity’, the work entrusted to it. Therefore, the contentions of the appellant in this regard are rejected.

11. In view of the above, we rule as under:

RULING

For reasons discussed above, we do not find any reason to interfere with the Order of the Advance Ruling Authority in this matter. The subject appeal is disposed of accordingly.