GST on installation of Fire Fighting System

ARA, Rajasthan has pronounced judgment on 15.12.2021, in the case of Lakhlan & Quereshi Construction Company (2022) 37 J.K.Jain’s GST & VR 112, that;

The services provided by the applicant in installing Fire Fighting System will be covered under Item number (xii) in Col.(3) of entry No.3 of notfn No.11/2017-CT(R) dated 28.6.2017 as amended & liable to GST @18%. The road cutting charges paid/payable to Jaipur Nagar Nigam under reverse charge mechanism, by the Applicant will be included in the value of supply liable to GST @18% as the applicant is not qualified as a pure agent in the instant case.

The ARA further held that “Jaipur Smart City Ltd. is not a Governmental Authority”.

1.Background.─The Applicant i.e., M/s Lakhlan & Qureshi Construction Company is a civil contractor which awarded the work of installation of “Fire-fighting system with pump house in ABD Area & Purohit ji ka Katla, including 5 years Operation & Maintenance” in Jaipur city by the Jaipur Smart City Ltd.

As per NOP, the project commencement and completion dates are 8.3.2021 and 7.2.2022 respectively. The project would involve design, erection, installation, operation and maintenance of the Fire Fighting system.

The applicant in their written submission wants to seek clarity on questions as mentioned in aforesaid point B of this order.

2. Findings by ARA.─ It would be proper in the fitment of justice to discuss the relevant provisions of the statute which are as under.‒

Governmental Authority has been defined through item No. ix (of paragraph 4) of an explanation to notfn No.11/2017CT(R) dated 28.6.2017. The same has been reproduced below.‒

“Governmental authority” means an authority or a board or any other body,‒

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by any Government, with ninety per cent or more participation by way of equity or control, to carry out any function entrusted to a Panchayat under article 243G or to a municipality under article 243W of the Constitution.

The functions entrusted to a municipality under the Twelfth Schedule to Article 243W of the Constitution are as under:‒

(a) Urban planning including town planning.

(b) Regulation of land-use and construction of buildings.

(c) Planning for economic and social development.

(d) Roads and bridges.

(e) Water supply for domestic, industrial and commercial purposes. Public health, sanitation conservancy and solid waste management.

(g) Fire services. (h) Urban forestry, protection of the environment and promotion of ecological aspects.

i) Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.

(j) Slum improvement and up gradation.

(k) Urban poverty alleviation.

(l) Provision of urban amenities and facilities such as parks, gardens, playgrounds.

(m) Promotion of cultural, educational and aesthetic aspects.

(n) Burials and burial grounds; cremations, cremation grounds; and

(o) Cattle pounds; prevention of cruelty to animals.

(p) Vital statistics including registration of births and deaths.

(q) Public amenities including street lighting, parking lots, bus stops and public conveniences.

(r) Regulation of slaughter houses and tanneries.

Notfn No.11/2017 CT (rate) dated 28.06.2017 as amended by notfn No. 46/2017-CT(R)  dated 14.11.2017 and 3/2019-CT(R)  dated 29.3.2019:‒

In the said notfn, in the Table, against serial number 3, for item (vi) in column (3) and the entries relating thereto, in columns (3). (4) and (5), the following shall be substituted, namely:‒

S. No.	Heading	Description of Service	Rate %
(1)	(2)	(3)	(4)
3	Heading 9954 (Construction services)	vi) “Composite supply of works contract as defined in clause (119) of S.2, CGST Act, 2017,  ( “other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above”) provided to the Govt., State Government, Union Territory, a local authority or a governmental authority or a government entity by construction, commissioning way of erection, installation, completion, fitting out, repair, maintenance, renovation, or alteration of─ (a) a civil structure or any other original predominantly for use other than for commerce, industry, or works meant any other business profession; (b) a predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or (c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Sch. II of the CGST Act, 2017. [Explanation.‒For the purposes of this item, the term business’ shall not include any activity undertaken by the Central Government a State Government or any local authority in which they are engaged as public authorities.”.]	6
		(“(xii) Construction services other than (i), (ia), (ib), (ic), (id), (ie), (if), (iii), (iv), (v), (va), (vi), (vii), (vii), (ix), (x) and (xi) above. Explanation.‒For the removal of doubt, it is hereby clarified that, supply by way of services specified at items (i), (ia), (ib), (ic), (id), (ie) and (if) in column (3) shall attract central tax prescribed against them in column (4) subject to conditions specified against them in column (5) and shall not be levied at the rate as specified under this entry.”;	9

Exemption notfn No. 12/2017-CT(R) dated 28.6.2017:‒

S.No.	Heading	Description of Service	Rate
(1)	(2)	(3)	(4)
3	Chapter 99	Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Govt., State Govt. or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243 W of the Constitution.	NIL
9	Chapter 99	Services provided by Central Govt., State Govt. Union territory or a local authority where the consideration for such services does not exceed five thousand rupees: Provided that nothing contained in this entry shall apply to─ (i) services by the deptt. of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Govt., State Govt., Union territory; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers: Provided further that in case where continuous supply of service, as defined in S.2(33), CGST Act, 2017, is provided by the Central Govt., State Govt., Union territory authority, the exemption shall apply only where the consideration charged for such service does not exceed five thousand rupees in a financial year.	NIL

S.9(3), CGST Act, 2017 (RCM)

S.9.Levy and collection.‒(3) The Govt. may, on the recommendations of the Council, by notfn, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Notfn No. 13/2017-CT(R) dated 28.6.2017:‒

The supply of services mentioned in col.(2) of the Table below, supplied by a person as specified in col. (3) of the said Table, the whole of central tax leviable u/s 9, said CGST Act, shall be paid on reverse charge basis by the recipient of the such services as specified in col.(4) of the said Table:‒

S.No.	Category of Supply of Services	Supplier	Recipient
(1)	(2)	(3)	(4)
5	Services supplied by the Central Govt. State Govt., Union territory or local authority to a business entity excluding,‒ (1) renting of immovable property  and (2) services specified below─ (i) services by the deptt., of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Govt., State Govt., or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.	Central Govt., State Govt., Union territory or a local authority	Any business entity located in the taxable territory.

S.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.

(2) The value of supply shall include (c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

Rule 33, CGST Rules, 2017.─Value of supply of services in case of pure agent.─Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,‒

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation.‒For the purposes of this rule, the expression-pure agent means a person who‒

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;

(c) does not use for his own interest such goods or services so procured, and

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

3. Analysis & Conclusion by ARA.─In the present case, as far as the question whether the service recipient i.e., Jaipur Smart City Ltd. is a “Governmental Authority” as defined in item No. ix (of paragraph 4) of an explanation to notfn No 11/2017-CT(R) dated 28.6.2017 is concerned, on gone through the facts submitted by the applicant and relevant legal provisions, we are of the view that JSCL is a SPV for development of Jaipur City.

As per List of members of JSCL provided by the applicant, we find the share holding pattern as under:

S. No.	Name of shareholders	Shareholding (No. of shares)
3	Commissioner, Municipal Corporation, Jaipur (Nominee of Urban Body)	9,99,99,998
4	Director and ex-officio Special Secy.Local Bodies, Rajasthan, Jaipur (Nominee of Govt., of Raj.)	9,99,99,997

As per data/documents provided by the applicant, we find that total authorized capital is Rs.200 crores and the paid up capital is Rs.200 crore of M/s JSCL. Further, in view of above shareholding pattern, we find that Nominee of Government of Rajasthan have only 9,99,99,997 shares in JSCL, which is almost 50% and not ninety per cent or more participation by way of equity. Further, the Commissioner, Municipal Corporation, Jaipur (Nominee of Urban Local Body) have 9,99,99,998 shares in JSCL, which is almost 50%. The Municipal Corporation, Jaipur is not Government but it is a Local Authority. Thus, shareholding of State Govt. is almost 50% only in the JSCL. Therefore, M/s JSCL is not satisfying the conditions of item No. ix (of paragraph 4) of an explanation to notfn No 11/2017-CT(R) dated 28.6.2017 in respect of Governmental Authority”.

6. With regard to applicability of item number (vi) in Column (3) of serial number 3 of notfn No 11/2017-CT(R) dated 28.6.2017 as amended by notfn No. 24/2017-CT(R) dated 21.9.2017 & 3/2019-CT(R) dated 29.3.2019, we find that when JSCL not qualified as Governmental authority then services provided to it by the applicant is also not considered as services provided to the governmental authority. Thus, Item number (vi) in Column (3) of serial number 3 of notfn No 11/2017-CT(R) dated 28.6.2017 as amended time to time is not applicable on applicant in this case. In our view services provided by the applicant will be covered under Item number (xii) in Column (3) of serial number 3 of notfn No 11/2017-CT(R) dated 28.6.2017 as amended time to time and is liable to GST @18% (i.e. 9% CGST & 9% SCGST).

Further, as far as applicability of GST under RCM in respect of road cutting charges paid by applicant to JNN on behalf of M/s. Jaipur Smart City Ltd. in relation to such contract is concerned, let’s examine the issue in the light of legal provisions and facts of the case.

We find that the Executive Engineer, JNN i.e., municipality vide demand note dated 26.3.2021 (as provided by the applicant) raised a demand to the applicant for road cutting charges in respect of Fire Fighting pipeline. Further, as per clause no. (viii) of point no. 1 of the general scope of work as mentioned under heading 5.3 of S.V- Procuring Entity’s Requirements of RFP, any approval required from any line agency should be taken by the contractor in the name of entities. No additional cost will be paid by Entity and NOC Charges shall be paid by the contractor and the same will be reimbursed to the contractor on submission of the invoice with the running bill.

In the instant case road cutting charges are to be deposited by the applicant to the JNN i.e., Local Authority and the same will be reimbursed by the JSCL on submission of running bill.

Further, as per item No. 5 of the notfn No.13/2017-CT(R) dated 28.6.2017, central tax leviable u/s 9 of the said CGST Act, shall be paid on reverse charge basis by the recipient when Services supplied by the Central Govt., State Govt., Union territory or local authority to a business entity.

Further, as per item No. 9 of the notfn No. 12/2017-CT(R) dated 28.6.2017, there is an exemption for Services provided by Central Govt., State Govt., Union territory or a local authority where the consideration for such services does not exceed five thousand rupees.

In the present case, services of permission/fees of road cutting is provided by the Local Authority i.e., Jaipur Nagar Nigam (municipality) to the business entity i.e., Lakhlan & Qureshi Construction Company (applicant) for the consideration of Rs.3,85,10,775/- (i.e., more than Five thousand rupees). Hence, the applicant is liable to pay GST as a recipient for the charges paid or to be paid to the Jaipur Nagar Nigam under reverse charge mechanism. It is pertinent to mention here that activity of giving permission for road cutting charges is not mentioned in the list of works as provided u/Article 243W of the constitution entrusted to a Municipality. Thus, S.7(2)(b), CGST Act, 2017 read with notfn no.14/2017 as amended by notfn no.16/2018 of CT(R) is not applicable in this case and the applicant is liable to pay GST as a recipient.

As far as liability of GST on recovery of such road cutting charges by the Applicant from JSCL is concerned, we are of the view that clause (c) of S.15(2), CGST Act, 2017 states that any incidental expenses charged by the supplier to the recipient and any other amount charged for anything done during the supply until the time of delivery of the goods or supply of the services shall be included in the value of the supply. Hence, any goods or services provided by the supplier, for which a consideration is charged from the recipient, shall be included in the transaction value and chargeable to tax.

With regard to reimbursement of expenses incurred as a pure agent, Rule 33, CGST rules, 2017 provides that any expenditure incurred as a pure agent will be excluded from the value of supply, and hence, from the aggregate turnover as well. However, the supplier will need to satisfy the following conditions for the exclusion from the value of supply:

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation.‒For the purposes of this rule, the expression pure agent means a person who‒

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;

(c) does not use for his own interest such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

In the instant case, as M/s JSCL is not a governmental authority therefore, serial No.3 of notfn No. 12/2017-CT(R) dated 28.6.2017 as amended by notfn No.2/2018 of CT(R) dated 25.1.2018 is not applicable on applicant. Further, as per demand note dated 26.3.2021 issued by the Executive Engineer, JNN (Kishanpol Zone), Jaipur, it is found that applicant (by name) was demanded Rs. 3,85,10,775/- for road cut approval by the JNN and nowhere the name of M/S JSCL mentioned in the said letter dated 26.3.2021. This shows that applicant i.e., LQCC hold the title to the services of road cut approval so procured from the JNN. Hence, the applicant does not satisfy the condition of pure agent and does not fall under the ambit of Pure Agent as per Rule 33, CGST rules, 2017.As per clause (c) of S.15(2), CGST Act, 2017, recovery of such road cutting charges by the Applicant from Jaipur Smart City Ltd. will be included in the value of supply under GST. Thus, the applicant is liable to pay GST @18% on recovery of such road cutting charges.

4. Ruling.‒In view of the foregoing, the ARA ruled as follows:‒

Question 1. Whether the service recipient i.e., Jaipur Smart City Ltd. is a Governmental Authority as defined in the explanation to clause (16) of S.2, IGST Act, 2017.

Answer 1: No, M/s Jaipur Smart City Ltd. is not a “Governmental Authority”.

Question 2. Whether Item number (vi) in Column (3) of serial number 3 of notfn No 11/2017-CT(R) dated 28.6.2017 as amended by notfn No. 24/2017-CT(R) dated 21.9.2017 is applicable in respect of all payments related to work order for Fire Fighting System installation at contracted area between applicant and JSCL?

Answer 2: No.

Question 3. What will be the GST rate for the work undertaken by applicant for M/s Jaipur Smart City Ltd. under Bid Reference no. JSCL/ Works/2/2020-21?

Answer 3: The services provided by the applicant will be covered under Item number (xii) in Column (3) of serial number 3 of notfn No 11/2017-CT(R) dated 28.6.2017 as amended time to time and attracts GST @18% (i.e., 9% CGST & 9% SGST).

Question 4. Whether the Applicant is liable to pay GST under RCM in respect of road cutting charges paid by them to JNN on behalf of M/s. JSCL in relation to such contract?

If the answer to the same is in affirmative, what will be the GST rate for such payment under RCM?

Answer 4:Yes, the Applicant is liable to pay GST under RCM in respect of road cutting charges paid by them to JNN on behalf of JSCL u/s 9, CGST Act, 2017 read with No. 5 of the notfn No. 13/2017-CT(R) dated 28.6.2017 & No.9 of the notfn No. 12/2017-CT(R) dated 28.6.2017. The rate of GST would be @18% (i.e., 9% CGST+ 9% SGST).

Question 5. Whether recovery of such road cutting charges by the Applicant from JSCL liable to GST? If the answer is in affirmative, what will be the GST rate?

Answer 5 Yes. As M/s JSCL is not a governmental authority therefore, serial No. 3 of notfn No. 12/2017-CT(R) dated 28.6.2017 as amended by notfn No.02/2018-CT(R) dated 25.1.2018 is not applicable on applicant. Further, as per S.15(2)(c), CGST Act, 2017, recovery of such road cutting charges by the Applicant from JSCL will be included in the value of supply under GST as the applicant is not qualified as a pure agent in the instant case. Thus, the applicant is liable to pay GST @18% i.e., (9% CGST+9% SGST).