Another legacy provision that has been included under the GST laws from erstwhile tax regimes is the concept of Advance Rulings. The purpose of advance rulings is to help an applicant who is already a registered taxable person or is liable to be registered to provide clarity and understanding with regards to any supply which is to be undertaken and which might create an issue with the GST authorities, at a later stage, if the tax liabilities are not correctly discharged.
Supposedly, advance rulings have been thought to act as a bridge which could solve any confusion and avoid litigations regarding any GST issue which may arise and which can have divergent views in the minds of an applicant and GST authorities. As the advance rulings pronounced by AAR or AAAR are binding only on the applicant and on the concerned state officer in respect of that applicant, hence such rulings do not become the ‘law of the land’ and cannot have universal applicability across India. However, rulings passed by AAR which are contrary to existing GST laws or contrary rulings pronounced by the different state AARs on same issue lead to rise of unrest among the stakeholders and then CBIC has to intervene by issuing clarificatory circulars and/or notifications to put an end to these newly created feuds.
Some of the contrary advance rulings issued and corresponding clarificatory circulars/notifications has been detailed below:
Applicant’s question – Bajaj Finance Limited (“applicant”), a NBFC is engaged in extending loans and recovers interest, on the loan along with the repayment of monthly principal, as a consideration of its services and such interest is exempted under S.No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017. The applicant also recovers penal/default interest on dishonour of cheques/ECS, delay in repayment of monthly instalments etc. The question raised by applicant in the instant case was that the penal/default interest should be treated at par with interest due on monthly instalments and therefore, the treatment given to main consideration (i.e. monthly interest) should be equally applicable to penal/default interest and hence such interest should also be exempted from GST.
AAR’s ruling – In the ruling pronounced by the Maharashtra AAR on 06.08.2018, it was held that the activity of collecting penal/default interest by the applicant would clearly qualify as ‘supply’ as per Para 5(e) of Schedule II to CGST Act, 2017, “agreeing to the obligation to refrain front an act, or to tolerate an act or a situation, or to do an act” and will be subjected to GST. This was due to the reason that AAR concluded since there was a written agreement between the applicant and its client that the applicant will tolerate that act or a situation which may occur due to default on timely repayment of interest on the part of its client and the consideration for such tolerance would be will be penal interest.
This ruling adopts a position contrary to existing GST law and deviates from the provisions of Sec 15 of the CGST Act 2017 (‘CGST Act’) which provides that interest or late fee or penalty charged for delayed payment of consideration in respect of principal supply shall be treated at par with the principal supply and will be subjected to same rate on tax.
Clarification by CBIC Circular – Circular No. 102/21/2019-GST dated 28th June 2019 clarified that the transaction of levy of additional or penal interest does not fall within the ambit of Para 5(e) of Schedule II of the CGST Act, 2017 and any penal interest charged for delay in repayment of loan or payment of interest will be exempt from GST as per provisions of S.No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017. However, any interest in respect of delay in payment for consideration of taxable supply of goods or services or both, will not be exempted from GST.
Applicant’s question – Giriraj Renewable Private Limited (“applicant”), is an EPC contractor and has entered into contract with various developers who desire to set up and operate solar power plants for supply of power generated using solar energy. The contract entered into by the applicant included end to end activities i.e supply of required goods and services, setting up of transmission lines, operation and maintenance of a solar power plant etc. Question raised by applicant was that whether the contract entered can be construed as a composite supply in terms of provisions of Sec 2(30) of the CGST Act and as the principal supply being supply of solar power generation equipment primarily called as “PV Modules” which is liable to tax @ 5%, therefore, the composite supply should also be charged at the concessional rate of 5%.
AAR’s rulings – In the rulings pronounced by the Maharashtra AAR on 17.02.2018 and Rajasthan AAR on 03.08.18,it was held that the transaction of setting up and operation of a solar power plant is in the nature of “work contract” as defined by Sec 2(119) of the CGST Act and would be subjected to tax @18%
The above ruling has been passed without considering the fact the solar power plants and other related goods are subjected to GST at the rate of 5% vide Notification no 1/2017-CT(R) dated 28thJune 2017.
Alternatively, in the another ruling pronounced by Karnataka AAR on 21.03.2018 wrt to same applicant, the AAR stated that the PV module, which constitutes 70% of the contract value, are being procured by the customer of applicant himself and the applicant has only supplied goods and services with regard to only setting and commissioning of power plants, therefore, such contract cannot be constituted to be a composite contract and tax levied will depend on individual supplies made.
This AAR has been passed by ignoring the fact that the PV modules has been actually supplied by the applicant to its customer on ‘High Seas Sale’ basis as a legal tax planning measure and AAR has not treated such contract as composite contract.
Clarification by CBIC Notification – Notification No – 24/2018-CT(R) dated 31st December 2018 was issued which added an explanation to entry 234 (GST shall be levied at the concessionary rate of 5% for solar power generating systems, solar PV modules and parts for manufacture of products) of Notification 1/2017-CT(R) dated 28.06.2017, that if the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 (work contract service) of the table mentioned in the Notification No. 11/2017-CT(R), dated 28th June 2017, the value of supply of goods for the purposes of this entry shall be deemed as 70% of the gross consideration charged for all such supplies, and the remaining 30% of the gross consideration charged shall be deemed as value of the said taxable service.
Applicant’s question – Gogte Infrastructure Development Corporation Limited (“applicant”), is engaged in hotel business and provides hotel accommodation and restaurant services. The applicant has been providing such services to the employees and guests of some of the units in SEZ in addition to regular customers and has been charge. d CGST and SGST at the applicable rates. Question raised by applicant was that whether the services provided to employees and guests of SEZ unit within the Hotel premises will be subjected to NIL rate of GST.
AAR’s rulings – In the rulings pronounced by the Karnataka AAR on 21.03.18, it was held that from the reading of Section 16(1)(b) of the IGST Act, 2017 and Rules 46 of the CGST Rules, 2017 that supplies of goods and services towards the authorised operations only shall be treated as Supplies to SEZ Developer / SEZ Unit. Also, the place of supply of the services by way of lodging accommodation by a hotel, shall be the location at which the immovable property (hotel) is located and are outside the SEZ. Therefore, the services rendered by the applicant are neither the part of authorised operations nor consumed inside the SEZ.The supply is intra state and subjected to same rate of CGST and SGST as charged from other customers.
Clarification by CBIC Circular – Circular No. 48/22/2018-GST dated 14th June 2018 clarified that the specific provision shall always prevail over general provision. As 7(5)(b) of the IGST Act is a specific provision relating to supplies of goods or services or both made to a SEZ developer or a SEZ unit, which states that such supplies shall be treated as inter-State supplies. It is therefore, clarified that services of short term accommodation, conferencing, banqueting etc., provided to a SEZ developer or a SEZ unit shall be treated as an inter-State supply and will be subjected to NIL rate of GST.