GST on Annuity Payments in Hybrid Annuity Projects & ITC Accumulation

Apco Arasavalli Expressway Private Limited Vs Assistant Commissioner St and Others (Andhra Pradesh High Court)

The Honourable Andhra Pradesh High Court, in the recent case of Apco Arasavalli Expressway (P.) Ltd. vs. Assistant Commissioner, State Tax has addressed a significant issue regarding the time of supply for discharging GST liability in relation to annuity payments under the Hybrid Annuity Model (HAM). The case discussed that when GST should be levied on payments received by contractors involved in the construction and maintenance of National Highways.

The tax authorities argued that GST should be paid on the entire annuity amount upfront, starting from the concession period, regardless of when payments are actually received or invoices raised. The petitioner, however, contended that GST liability should align with Section 13 of the CGST Act, 2017, which states that the liability arises only when payments are actually received or invoices are raised, whichever is earlier.

The Hon’ble High Court relied on Circular No. 221/15/2024-GST, dated 26th June 2024, issued by the Central Board of Indirect Taxes and Customs (CBIC). This circular has clarified that GST on annuities is payable at the time of issue of invoice or receipt of payments, whichever is earlier. This circular further explained that contracts like these fall under the definition of ‘Continuous supply of services’ as per Section 2(33) of the CGST Act. According to Section 13(2) of the CGST Act, read in conjunction with Section 31(5) of the CGST Act, and the time of supply is determined by the date of invoice issuance or receipt of payment—whichever is first— in cases where the invoice is issued within the specified period or upon event completion, as stipulated in the contract. If the invoice is not issued within the specified timeframe, the time of supply defaults to the date of service provision or payment receipt.

The Hon’ble Court held that tax liability should not be imposed at the beginning of the concession period, as argued by the tax authorities. Instead, it should align with the circular, following the timing of invoicing or payment, whichever is earlier.

Apart from the legal debate on the time of supply, another significant issue that arises under HAM projects is the accumulation of input tax credit (ITC) and its impact on cash flow.

Typically, when a company takes on a project like the construction of a highway, it usually creates an SPV, a separate entity, to manage the project. During the construction phase, the SPV incurs a lot of expenses on materials, labour, and other costs. However, the SPV doesn’t receive the entire consideration. For example, if the total project cost is Rs.500 crore, the SPV might receive only Rs.200 crore (40%) during the construction phase, and the remaining Rs. 300 crore (60%) is paid over 15 years as annual annuity payments.

This payment schedule creates a major cash flow problem. The ITC on expenses incurred during the construction phase accumulates over time because the SPV would receive the payments over the period of 15 years. Meanwhile, the ITC on the expenses (which can be set off from GST liability) accumulates during the construction phase. Thus, since the SPV only gets a small part of the payment each year consequently, where the SPV has already made operational expenditures and hence it cannot fully utilize the accumulated ITC until it receives the annuity payments.

Additionally, the SPV doesn’t get any interest on the ITC that is accumulated in their Electronic Credit ledger (ECL) on the GST portal up to its utilization, At the same time, they have to pay interest to the bank for the cash flows incurred on the project.

While the court’s decision makes it clear when GST needs to be paid, where the companies involved in HAM projects still face cash flow problems because they accumulate ITC, these companies, often set up as SPVs, spend a lot of money upfront but can only utilize the ITC as and when they receive annuity payments over the years. Additionally, there is no interest earned on the accumulated ITC, making the cash flow situation even more challenging.

FULL TEXT OF THE JUDGMENT/ORDER OF ANDHRA PRADESH HIGH COURT

The petitioner is engaged in the construction of roads, national highways etc. and is a registered dealer under the Andhra Pradesh Goods and Services Tax & Central Goods and Services Tax Acts (herein referred to as G.S.T. & C.G.S.T.). As part of its activities, the petitioner had undertaken the construction and maintenance of National Highway No.16 from 580.671 km to 634.861 km (approx.54.19 km) under NHDP Phase-V on Hybrid Annuity Mode. This mode requires the petitioner to design, build, operate and transfer the said section of the national highway on ‘D.B.O.T. Annuity’ or ‘Hybrid Annuity’ basis. For this purpose, the petitioner had entered into a concession agreement, dated 18.01.2018, with the National Highway Authority of India.

2. The relevant terms of the concession agreement were that the petitioner would construct, operate and maintain the said length of the national highway during the period of the agreement and thereafter, transfer the said length of the highway to the National Highway Authority of India. The period of the concession was to be 15 years from the date of commercial operation of the highway. As consideration for undertaking these functions, the petitioner was to be paid a certain consideration during the construction period of the road and subsequently on annuity basis for the period of the concession.

3. The petitioner had completed the construction of the national highway section and was paid the amounts payable for such construction. It is admitted that the G.S.T. payable on such consideration has also been paid.

4. The dispute relating to payment of G.S.T. arose in relation to the annuity being received by the petitioner. It is the stand of the petitioner that G.S.T. would be payable on the annuity received by the petitioner only on the date on which the invoice is raised by the petitioner for such purpose or when payment is made, whichever is earlier. However, the assessing authority took the view that the G.S.T. is payable on all the annuity installments at the very inception of the concession period and the payment of the G.S.T. cannot be deferred to the date of payment of annuity.

5. The assessing authority passed separate assessment orders for three separate periods whose details are extracted in the tables set out below. The petitioner being aggrieved by the said assessments approached the Appellate Authority, namely The Additional Commissioner of State Tax, Appellate Authority, Vijayawada by way of Appeals set out in the table extracted below. All these Appeals were dismissed on the dates set out below:

6. The petitioner being aggrieved by these orders has approached this Court by way of the present set of Writ Petitions. These Writ Petitions are being disposed of by way of a common order in view of the common issue raised in these Writ Petitions.

7. Heard Sri Raghavan Ramabadran, learned counsel for the petitioner and the learned Government Pleader for Commercial Taxes appearing for the respondents.

8. The question that arises before this Court is the date on which the liability to pay G.S.T. would arise. The annuity payable to the petitioner is fixed in the concession agreement, dated 18.01.2018. There is a difference of opinion on the question of when such liability would arise.

9. Under Section 13 of the G.S.T. Act, 2017, the liability to pay G.S.T. on services shall arise at the time of supply as determined in accordance with the provisions of the Section 13.

10. Section 13 (2) of the G.S.T. Act, 2017, stipulates that the time of supply of services shall be the earliest of the dates set out in Sub-Section 2.

11. The assessing authority and the appellate authority have taken the view that the said time of supply of services should be treated as on the date on which the concession period had commenced as the annuity is based for maintenance of the road and management of the said road with the said responsibility commencing from the date of the concession period.

12. The issue as to whether the view of the petitioner is to be accepted or whether the view of the assessing authority and the appellate authority is to be accepted is now settled in view of the circular dated 26.06.2024, issued by the Government of India, Ministry of Finance, Central Board of indirect taxes and Customs bearing No.221/15/2024-GST. In this circular, the C.B.I.C. has taken the view that the tax is payable at the time of issuance of invoice or receipt of payments of annuity, whichever is earlier. The relevant part of the circular reads as follows:

“3. In the light of above, it is clarified that the tax liability on the concessionaire under the HAM contract, including on the construction portion, would arise at the time of issuance of invoice, or receipt of payments, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable. If invoices are not issued on or before the specified date or the date of completion of the event specified in the contract, tax liability would arise on the date of provision of the said service (i.e., the due date of payment as per the contract), or the date of receipt of the payment, whichever is earlier.”

13. In that view of the matter, the orders in Appeal set out in the table above are set aside with a direction to the respondent authorities to collect tax in accordance with the circular issued by the C.B.I.C. mentioned above.

14. Any amounts recovered on account of the assessment orders or the appellate orders shall be refunded to the petitioner in accordance with law. There shall be no order as to costs.

As a sequel, interlocutory applications pending, if any shall stand closed.