GST on Operation & Maintenance of Mansi Wakal dam on ESCO Model

 In re Secure Meter Limited (GST AAR Rajasthan)

ARA, Rajasthan has pronounced judgment on 12.10.2022, in the case of Secure Meter Limited, Udaipur (2022) 38 J.K. Jain’s GST & VR 371, that;

“The activity of O&M of Mansi Wakal dam Project on ESCO Model and O&M work by the applicant is to be undertaken/being undertaken for a Govt. Department, which is in relation to clean drinking water facility to the citizens & is covered under point No.5 of 12th Schedule under Art.243W, Constitution of India. It is a composite supply under Works contract service, to Govt. Authority with Nil GST rate till the value of Goods supplied is up to 25% of the total value of supply. In case the value of Goods exceeds 25% of the total value of the composite supply, the GST rate would be 12%”.

1.Background.─ applicant is in the process for bidding for tender floated by the HIED, a unit of Govt. of Rajasthan for O&M of Mansi Wakal dam Stage-I, complete system including mechanical, electrical, instrumentation installation works switchyards/GSS and maintenance of Dam, pumping machinery, pipe line & tunnel from Mansi Wakal Dam to Nandeshwar filter plant project on ESCO and O&M contract. The terms and scope of the contract combines ESCO Model and O&M contract.

Based on the scope of work as detailed in contract/Tender Document NIT No. 03/2021-22, it is understood that ESCO model requires improvement of the whole water supply system involving pump houses, pumping stations, transmission lines, switchyards, and headwork. Re-modelling of pump foundation and extension of pump house, replacement of fittings/fixtures and painting of all permanent structures like pumping station building, Dam, Tunnel etc. are involved in the contract. Further, we understood that a single tender shall be floated for Operation and Maintenance of Dam, pumping machinery, pipe line & tunnel on ESCO Cum O&M Contract where the preamble of scope specifies that the contract combines ESCO model and O&M work. Thus, the activities under ESCO model and O&M contract are closely linked.

2. Findings by ARA – On perusal of contract, the ARA were of the view that the nature of contract is such that initial activities under ESCO model is the main service and the other services under O&M contract combined with such service are in the nature of ancillary services which help in better operation of main activities under, ESCO model and make the model successful. As per contract agreement, stipulated date of start is 11.2.2022 and stipulated date of completion of project/work order is 10.2.2025.

The given activities undertaken by the applicant are culminating into works contract services. Now works contract service in itself is a composite supply. The same has been defined under Schedule-II under Entry 6 which is read under:

“Composite supply─The following composite supplies shall be treated as a supply of services, namely:

works contract as defined in clause (119) of S.2; and supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

Works Contract in itself is a composite supply in which construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning etc. are involved along with transfer or property in goods.

3. Analysis by ARA – Now whether a supply is a works contract or not is dependent on whether the plant or device or property is a movable or immovable property. To decide whether a property is movable or immovable, the given terms have not been defined under the Act and hence the reliance needs to be placed on other laws and judicial precedents.

Under the General Clauses Act 189, the term immovable property has been defined u/s 3(26) as “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth:

As per the definition the term permanently fastened or attached to earth can be treated as immovable property. Any attachment with earth which is temporary in nature or can be shifted from part of earth to another without causing substantial damage to it cannot be treated as immovable property.

On the given issue, CBEC has also clarified in its Circular No. 58/1/2002-CX dated 15.1.2002 where in para (e) it was clarified that; If items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then the items involved not be considered as moveable and will, therefore, not be excisable goods.

According to definition of works contract under GST regime, the supply of goods and services are done by the supplier simultaneously which is for immovable property. Hence in works contract supply of goods and services together is compulsory.

Apart from above, now we are discussing the legal position of the case. As per submission made by the applicant, they want to avail exemption from tax as provided in entry No.3A of notfn No.12/2017-CT(R) dated 28.6.2017 (as amended vide notfn No.22/2021-CT(R) dated 31.12.2021), is reproduced as under:–

Thus, according to said entry in the notfn, in case of composite supply of goods or services, if the value of supply of goods does not exceeds 25% of the total value of supply during the contract period and if provided to State Govt. or a local authority and the supply is by way of an activity in relation to functions entrusted to Municipality under Article 243W of the Constitution, then no GST is applicable.

The activities entrusted to the Municipality under Article 243W of the Constitution of India and listed under Twelfth Schedule are enumerated as under:–[Article 243W]

…5.Water supply for domestic, industrial and commercial purposes.

On perusal of said Schedule it is evident that under point number 5, the water supply for domestic, industrial and commercial purposes is responsibility of Municipality. The given activity of ESCO plant redevelopment is in relation to clean drinking water facility to the citizens. Thus, it is easily ascertained that the applicant is engaged in a Work Contract to a State Govt. i.e., PHED.

Applicant submitted the break-up of material cost under the Operation & Maintenance of Mansi wakal water project and stated that the value of supply of goods constitutes less than 25%, of the value of the said composite supply.

Ongoing through the facts, the ARA were not agreeing with report of jurisdictional the Dy. Commissioner, SGST, Circle-C, Udaipur, that supply made by applicant fall under mix supply. The main work entrusted to applicant is maintenance of water supply and keep it working and for execute this functioning any supply of goods for repair and maintenance will continue the composite supply. Even the supply is treated as an pure supply it will be again eligible for exemption u/entry No.3 of notfn No.12/2017-CT(R) dated 28.6.2017, which is as under;

“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 or a Govt. Entity by way of any activity in relation to any function entrusted to a Panchayat u/Art.243G, Constitution or in relation to any function entrusted to a Municipality u/Art.243W of the Constitution”

Thus, based on above facts and legal provisions, the ARA  were of the view that the activities to be undertaken by the applicant in respect of Operation & Maintenance of Mansi Wakal dam is a single supply and cannot be treated as distinct supplies. The given work is a contract for improvement of the pumping system under the Mansi Wakal project, wherein transfer of property in goods in the form of new pumping machinery and mechanical/electrical equipment shall be involved in the execution of such contract. It is understood that the properties for which improvement works has been assigned like pump houses, DAM, campus etc. cannot be moved from one site to another. All the components of the pumping system are erected at the prescribed location and permanently attached to the earth and they cannot be dismantled and reassembled as such dismantling may cause substantial damage to the system and its components. The activities to be undertaken by the applicant in respect of O&M is for an immovable property i.e., Mansi Wakal darn and thus the given work is held as works contract. Further, since all the conditions of composite supply are satisfied, therefore it is a composite supply of works contract. Further, in the present case, as per break-up of material cost under the O&M of Mansi wakal water project provided by the applicant, the value of supply of goods is 11.50% i.e., below 25% out of total value of supply. Hence, the applicant is eligible for exemption u/entry No.3A of notfn 12/2017-CT(R) dated 28.6.2017.

The activity of Operation & Maintenance of Mansi Wakal dam Stage-1, complete system including mechanical, electrical, instrumentation installation works switchyards/GSS and maintenance of Dam, pumping machinery, pipe line & tunnel from Mansi Wakal Dam to Nandeshwar filter plant project on ESCO and O&M contract by the applicant is to be undertaken for a Govt. Department i.e., PHED. In this activity of Composite supply of goods and services if supply of goods is below 25% out of total value of supply then GST will be NIL in consonance with entry No. 3A of notfn No.12/2017-CT(R) dated 28.6.2017 (as amended) and if more than 25% of the total value of supply then GST will be @12% (SGST 6% + CGST 6%) in consonance with entry No. 3(iii) of notfn No.11/2017-CT(R) dated 28.6.2017(as amended).

4. Ruling – In view of the foregoing, the ARA ruled as under:–

The activity of O&M of Mansi Wakal dam Project on ESCO Model and O&M work by the applicant is to be undertaken/being undertaken for a Govt. Department. In this activity of Composite supply of goods and services the applicability of GST will be as under:–

(a) Composite supply of goods and services where supply of goods is below 25% out of total value of supply then GST will be NIL.

(b) Composite supply of goods and services where supply of goods is more than 25% of the total value of supply then GST will be @12% (SGST 6% + CGST 6%).

CA Om Prakash Jain s/o J.K.Jain, Jaipur

Tel 9414300730