Case Law Details
In re Madhvanchal Vidyut Vitran Nigam Limited (GST AAR Uttar Pradesh)
In the dynamic landscape of India’s Goods and Services Tax (GST) regime, businesses often seek clarity on tax liabilities for different operational models. A recent ruling by the GST Authority for Advance Rulings (AAR) in Uttar Pradesh addressed a crucial query from Madhvanchal Vidyut Vitran Nigam Limited (MVVNL) regarding GST applicability on supervision fees for electric line installations arranged by customers. This article delves into the details of the case, the ruling, and its implications for similar businesses.
Detailed Analysis
Background of the Case
Madhvanchal Vidyut Vitran Nigam Limited (MVVNL), a prominent electricity distribution company, operates under two distinct models for installing electric lines:
1. MVVNL-Arranged Installations: Here, MVVNL manages the entire project, including procurement of materials and hiring contractors. The costs incurred are reimbursed by the customer, and MVVNL charges a supervision fee.
2. Customer-Arranged Installations: In this model, customers procure the materials and hire contractors, while MVVNL’s role is limited to supervision, for which it charges a 15% supervision fee on the cost of materials.
The core question posed by MVVNL to the GST AAR was whether GST should be levied only on the supervision fee in the customer-arranged model or on the entire amount, including material and labor costs.
Provisions and Sections Involved
The ruling revolves around several key sections of the CGST Act, 2017:
- Section 7(1): Defines “supply” and outlines the scope of goods and services under GST.
- Section 2(31): Defines “consideration” for the supply of goods or services.
- Section 15(1): Details the valuation of taxable supply based on the transaction value.
- Section 2(105): Defines “supplier” in relation to goods or services.
MVVNL’s Argument
MVVNL contended that GST should only apply to the supervision fee in the customer-arranged model because:
1. Nature of Service: The only service provided by MVVNL in this scenario is supervision.
2. Transaction Value: According to Section 15(1), the taxable value should be the transaction value, which in this case is the supervision fee.
3. Supplier Definition: MVVNL is not the supplier of goods or services related to the installation, as the materials and contractors are managed by the customers.
GST AAR Ruling
The GST AAR, Uttar Pradesh, ruled in favor of MVVNL, providing the following clarifications:
1. GST on Supervision Fee: GST is applicable only on the supervision fee charged by MVVNL in the customer-arranged installation model.
2. Exclusion of Material and Labor Costs: The value of materials and installation costs borne by the customer should not be included in the taxable value for GST purposes.
This ruling aligns with previous decisions, such as the case of M/s Purvanchal Vidyut Vitran Nigam Ltd and M/s National Highways Authority of India, reinforcing a consistent interpretation of similar scenarios.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, UTTAR PRADESH
1. M/S Madhvanchal Vidyut Vitran Nigam Ltd., having registered office at Gokhley Marg, Lucknow -226001, U.P.(hereinafter referred as “the applicant”) having GSTIN-09AAECM0108J1ZO, have filed an application for Advance Ruling under Section 97 of the CGST Act, 2017 read with Rule 104 of the CGST Rules, 2017 and Section 97 of UPGST Act, 2017 read with Rule 104 of the UPGST Rules, 2017 in Form GST ARA-01 (the application form for Advance Ruling), discharging the fee of Rs. 5,000/-each under the CGST Act and the UPGST Act.
2. The applicant has submitted an application for Advance Ruling dated 02.09.2023 enclosing dully filled Form ARA-01 (the application form for Advance Ruling) along with written statement in the form of attachment.
3. The applicant submitted that there are two methods of installing the line:
(i) The entire works with material and installation is arranged by MVVNL on behalf of the customer and is carried under supervision of MVVNL. The entire cost of material and labour incurred by MVVNL is reimbursed by the customer on cost to cost basis and accordingly the net income charged by the MVVNL is supervision fee only.
(ii) In the second mode the entire work with material is arranged by the customers and installation work is done by the contractors hired by the customers. In this case the role of the MVVNL is limited to supervision only for which it charges supervision fee. The supervision fee is charged @15% on the cost of material.
4. The applicant submitted that so far as the first method is concerned, wherein the entire work including arranging of material and labour is carried upon by MVVNL, Section 15(1) & Section 15(2) of CGST Act, 2017 would apply and GST would be applicable on entire amount charged from the customer (including material and labour claimed as reimbursement).
However, the applicant seeks clarification on applicability of GST on construction/shifting of lines under the second method. The applicant seeks clarification as to whether:
– GST would be applicable only on supervision fee; or
– GST would be applicable on entire amount including material and labour.
5. The question is about applicable GST rate under the provisions of CGST Act and liability to pay GST, hence is admissible under Section 97(2)(a) of the CGST Act 2017. Further, as per declaration given by the applicant in Form ARA-01, the issue raised by the applicant is neither pending nor decided in any proceedings under any of the provisions of the Act, against the applicant..
6. The applicant has submitted that=
6.1 We are of the opinion that GST would be applicable only on supervision fee charged by MVVNL for reasons as below:
Section 7(1) of the CGST Act, 2017 defines “supply” as
“Supply includes all forms of supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business–.
Section 2(31) of CGST Act, 2017 defines ‘Consideration’ as
“Consideration” means 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”.
Section 15 of CGST Act 2017 reads as under:
15. Value of Taxable Supply- (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
As stated in section 15 (1) value of supply will be transaction value for supply of goods or services. In the present case, supply of service is only supervision work. The installation of line is responsibility of the customers and we arc responsible only for the supervision work. Thus, supply of services is only the supervision work and transaction value is the amount received i.e. the supervision fee and accordingly GST should be charged only on the supervision fee received from the customer.
Section 2(105) defines “Supplier” as
“Supplier in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied”
6.2 In the present case, MVVNL is not a supplier of goods and services as per provisions of Section 2(105) of CGST Act, 2017 as the work is being undertaken by the customer itself. There is no relationship between the customer and MVVNL which can be categorized as that of supplier and recipient except for the services of the supervising the whole work.
6.3 It is also pertinent to note that in the present transaction there is no consideration which comes under the purview of section 2(3” of CGST Act, 2017. All the payments are being made by the customer directly to the vendor and contractors and no payment is being made to MVVNL except supervision charge for the work.
6.4 The work contract services supplied in the course of construction/ dislocation/shifting are neither supplied by nor the consideration for the same has been received by MVVNL hence there is no supply of works contract services by the Discom
6.5 The work contract services in the present case is being supplied by an independent contractor and is covered under SAC 9954, it is distinct service which is being supplied by a registered person other than Discom.
6.6 Though the property subjected to works contract services belongs to the Discom but the supply of works contract services is not made on behest of Discom. The contracts for works contract services are executed between the concerned party and a third party works contractor and hence Discom is a stranger to this contract.
6.7 In a case where the third party works contractor remains unpaid for the services supplied by him, he can sue only the customer and not the Discom. So, there is no liability to pay on the part of MVVNL.
6.8 As the construction or dislocation work is not made on the behest of MVVNL and there is only a consent or tolerance for such shifting hence the Discom is not liable to pay for the expenses incurred in such shifting.
6.9 Since there is no obligation to pay on part of Discom hence the provisions of section 15(2)(b) of CGST Act, 2017 are not applicable in this case.
6.10 Further section 2(52) of CGST Act defines “Goods” as:
“Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
In the view of the above definition, we arc of the opinion that the assets created in this case by the Discom is a Power Line and being an immovable property does not fall under the definition of goods as mentioned in the CGST Act, 2017.
Further, since the assets created is not a good under the definition of CGST Act, 2017, the provision of transfer of business assets made with or without consideration as specified in Schedule II of GST Act, 2017 does not apply in this case.
6.11 The Appellant Authority for Advance Ruling. Goods and Service Tax, Uttar Pradesh in Appeal order no 09/AAAR/6/08/2023 dated 16.08.2023 in the case of M/s Purvanchal Vidyut Vitran Nigam Ltd has also held that “in case where the work of constructing/shifting of lines is carried under the supervision of Discom and the entire material and installation is arranged by the customer. GST would only be applicable 017 the supervision fee charged by the Discom and not on the entire amount”
Similar opinion has been held by Authority of Advance Ruling, GST, UP inadvance ruling no 17/2022 dated 08/12/2022 in the case of M/s National Highways Authority of India.
7. The application for advance ruling was forwarded to Assistant Commissioner, Central Tax & Central Excise, Division- Lucknow-1 vide letter dated 16.01.2024 to offer their comments/views/verification report on the matter. No views/comments have been offered from the concerned office.
8. The applicant was granted a personal hearing on 30.01.2024 which was attended by Shri Manish Manocha , CA, the authorized representative of the applicant during which he reiterated the submissions made in the application of advance ruling.
DISCUSSION AND FINDING
9. At the outset, we would like to make it clear that the provisions of both the CGST Act and the UPGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the UPGST Act. Further for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / UPGST Act would be mentioned as being under the `CGST Act’.
10. We have gone through the Form GST ARA-01 filed by the applicant and observed that the applicant has ticked following issues on which advance ruling required-
(1) Determination of time and value a/supply of goods. or services or both.
At the outset, we find that the issue raised in the application is squarely covered under Section 97(2) of the CGST Act 2017. We therefore, admit the application for consideration on merits.
11. We have gone through the submissions made by the applicant and have examined the same. We observe that the applicant has sought advance ruling on the following questions-
There are two methods of installing a line- one in which the entire work with material and installation is arranged by MVVNL on behalf of the customer and is carried under supervision of MVVNL. In such case GST is to be paid on the entire value (including reimbursement) and the same is not disputed by the applicant.
In the second mode the entire work with material is arranged by the customers and installation work is done by the contractors hired by the customers. In this case the role of the NIVVNL is limited to supervision only for which it charges supervision fee. The supervision fee is charged @15% on the cost of material. The question of the applicant is –
(a) GST would be applicable only on supervision fee; or
(b) GST would be applicable on entire amount including material and labour.
12. The Applicant is Electricity Distribution Company. Being expert in the area, Electricity Lines are installed in their supervision where electricity lines needs to be installed, to supply the electricity at the designated location on the request of customers. Where installation of lines is arranged by MVVNL on behalf of the customer, the entire amount, including reimbursement amount is taken for the calculation of GST and the applicant has not disputed the same.
13. In the second method, entire work with material is arranged by customers and installation work is done by the contractors hired by them. Role of the Applicant is limited to supervise the work.
14. Here, MVVNL is not a supplier of goods and services as per provisions of section 2(105) of CGST Act, 2017 as the work is being undertaken by the customer itself. There is no relationship between the customer and MVVNL which can be categorized as that of supplier and recipient except for the services of the supervising the whole work.
15. It is also pertinent to note that in the present transaction there is no consideration which comes under the purview of section 2(31) of COST Act, 2017. All the payments are being made by the customer directly to the vendor and contractors and no payment is being made to MVVNL except supervision charge for the work.
16. The work contract services supplied in the course of construction/ dislocation/shifting are neither supplied by nor the consideration for the same has been received by MVVNL hence there is no supply of works contract services by the MVVNL.
17. In this case the ownership of the property being dislocated / shifted is vested with MVVNL, the MVVNL receives money in the form of dislocation / shutting charges. The services supplied in such cases is related to an act of tolerance with respect to such immovable property and hence covered under ” agreeing the obligation to refrain from an act , or to tolerate an act or a situation , or to do an act” and are classified under SAC999794.
18. The work contract services in the present case is being supplied by an independent contractor and is covered under SAC 9954, it is distinct service which is being supplied by a registered person other than MVVNL.
19. Though the property subjected to works contract services belongs to the MVVNL but the supply of works contract services is not made on behest of MVVNL. The contract for works contract services is executed between the concerned party and a third party works contractor and hence MVVNL is a stranger to this contract.
20. In a case where the third party works contractor remains unpaid for the services supplied by him, he can sue only the customer and not the MVVNL. So, there is no liability to pay on the part of MVVNL.
21. As the construction or dislocation work is not made on the behest of MVVNL and there is only a consent or tolerance for such shifting hence the MVVNL is not liable to pay for the expenses incurred in such shifting. Since there is no obligation to pay on part of MVVNL hence the provisions of section 15(2)(b) of CGST Act, 2017 are not applicable in this case.
22. In this case the consideration for works contract services is fully paid by concerned party and there is no shared / part payment by the same. In such cases it is not feasible for having two considerations for a single supply.
23. Accordingly, we are of the view that in the facts and circumstances, where the value of materials and cost of execution of work for installation of electric lines are borne by the recipient of service and the applicant charges supervision fees only, the value of materials and cost of installation shall not be included in the value of supply for determination of taxable value under GST and the applicant shall be liable to pay GST only on the supervision charges.
24. In view of the above discussions, we pass the ruling as follows:
RULING
There are two methods of installing a line- one in which the entire work with material and installation is arranged by MVVNL on behalf of the customer and is carried under supervision of MVVNL. In such case GST is to be paid on the entire value (including reimbursement) and the same is not disputed by the applicant.
In the second mode the entire work with material is arranged by the customers and installation work is done by the contractors hired by the customers. In this case the role of the MVVNL is limited to supervision only for which it charges supervision fee. The supervision fee is charged @15% on the cost of material. The question of the applicant is –
(a) GST would be applicable only on supervision fee; Answer: Replied in Affirmative
(b) GST would be applicable on entire amount including material and labour. Answer: Replied in Negative
25. This ruling is valid only within the jurisdiction of Authority for Advance Ruling Uttar Pradesh and subject to the provisions under Section 103(2) of the CGST Act, 2017 until and unless declared void under Section 104(1) of the Act.
