GST on Outward supply of Operation & Maintenance of sewerage treatment plant

In re GDCL – EMIT JV (GST AAR Uttarakhand)

i) Outward supply of Operation & Maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh, Dehradun, State of Uttarakhand to Uttarakhand PeyJal Nigam is not exempted under notification no. 2/2018-Central Tax (Rate) dated 25.01.2018 and 2/2018 – Integrated Tax (Rate) dated 25.01.2018 and 138/2018/18(20)/XXVII(8)/2017/CTR-2, Dehradun dated 06.02.2018.

ii) Inward supplies directly received for the above supply of services are also not exempted.

FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, UTTARAKHAND

1. This is an application under Sub-Section (1) of Section 97 of the CGST/SGST Act, 2017 (herein after referred to as Act) and the rules made thereunder filed by M/s. GDCL – EMIT JV, Gali No.6, Nirmal Bagh-B, Vishthapit Colony, Pashulok, District- Dehradun, Uttarakhand there in after referred to as ‘the applicant’) is registered with the GSTN having Registration No. 05AAEAG3088P1Z9and seeking advance ruling on the following question:-

i) ” Whether the outward supply for operation and maintenance of sewage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh, Dehradun, State of Uttarakhand, India to Uttarakhand Pay Jal Nigam (an entity working under the Ministry of Drinking Water & Sanitation, Govt, of Uttarakhand as an undertaking of Uttarakhand Government) is exempt from CGST/SGST and IGST as per notification no. 2/2018-Central Tax (Rate) dated 25.01.2018, 2/2018-Integrated Tax (Rate) dated 25.01.2018 and 138/2018/18(20)/ XXVH(8)/ 2017/ CTR-2, Dehradun dated 06.02.2018? “.

ii) Whether the inward supplies directly received for above services by the applicant are also exempt from GST?

2. Advance Ruling under GST means a decision provided by the authority or the appellate authority to an applicant on matters or on questions specified in sub section (2) of section 97 or sub section (1) of section 100 in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant.

3. As per the said subsection (2) of Section 97 of the Act advance ruling can be sought by an applicant in respect of:-

(a) Classification of any goods or services or both

(b) Applicability of a notification issued under the provisions of this Act,

(c) Determination of time and value of supply of goods or services or both,

(d) Admissibility of input tax credit of tax paid or deemed to have been paid

(e) Determination of the liability to pay tax on any goods or services or both

(f) Whether the applicant is required to be registered

(g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both within the meaning of that term

4. Since applicant has sought advance ruling on applicability of notifications & determination of tax liability, therefore, in terms of said Section 97(2)(b) 8s (e) of the Act, the application filed by the applicant has been admitted. Accordingly hearing was fixed on 28,01.2021 which was attended by the Shri Rahul Bansal, Chartered Accountant on behalf of the applicant and he reiterated the submissions given with the application. Later on he has also submitted copy of complete contract of the work in question. During the course of hearing Mrs. Preeti Manral (DC), concerned officer of SGST-Uttarakhand was also present and requested the authority to decide the application on merits.

5. On perusal of records submitted by the applicant, we find that the applicant is registered in Uttarakhand having GSTIN bearing no. 05AAEAG3088P1Z9, On going through the “Letter of Acceptance” dated 04.05.2018 issued by Uttarakhand PeyJal Nigam (hereinafter referred to as UPJN) and “Contract Agreement/ Form of Contract” dated 24.05.2018 signed by UPJN and the applicant, we find that the agreement has been done for the following works:-

A) Survey, review the design, redesign where necessary and build new/replace outfall/interceptor sewer line of about 15 km length including survey, design and construction of 03 nos. new sewage pumping stations, upgradation/ rehabilitation of 02 no. existing sewage pumping station and all appurtenant structures and operation and maintenance of outfall/interceptor sewer line and pumping stations for a period of 01 year in Rishikesh, State of Uttarakhand, India.

B) Design build operate and transfer of sewage treatment plant of 26 MLD capacity including 15 years O&M at LakkarGhat, Rishikesh, Dehradun, State of Uttarakhand, India.

The total contract price for the aforesaid works is Rs. 126,37,46,020/-with design build cost of Rs.72,42,94,625/- and operation and maintenance cost of Rs.53,94,51,394.98.

6. In the present case we are restricting our conclusion to the facts and circumstances which was filed for our consideration in the application. Now we proceed to decide the issue in hand:-

i) Whether the notification no. 2/2018-Central Tax (Rate) dated 25.01.2018, 2/2018-Integrated Tax (Rate) dated 25.01.2018 and 138/2018/18(20)/XXVIl(8)/2017/CTR-2, Dehradun dated 06.02.2018 are applicable to the outward supply provided by the applicant ?

ii) Whether the inward supplies directly received for above services by the applicant are also exempt from GST?

7. In the instant case we find that the work is allotted to the applicant by UPJN is related to (i) Survey, review the design, redesign where necessary and build new /replace outfall/interceptor sewer line of about 15 km length, (ii) survey, design and construction of 03 nos. new sewage pumping stations, (iii) upgradation/rehabilitation of 02 no. existing sewage pumping station and all appurtenant structures, (iv) operation and maintenance of outfall/interceptor sewer line and pumping stations for a period of 01 year in Rishikesh, State of Uttarakhand and (v) Design build operate and transfer of sewage treatment plant of 26 MLD capacity including 15 years O&M at Lakkar Ghat, Rishikesh, Dehradun.

8. The applicant in their application dated 23.11.2020 has sought advance ruling as to whether their outward supply for operation and maintenance of sewage treatment plant of 26 MLD capacity at Lakkar Ghat, Rishikesh to UPJN is exempt from payment of GST in view of notification no. 2/2018-Central Tax (Rate) dated 25.01.2018, 2/2018-Integrated Tax (Rate) dated 25.01.2018 and 138/2018/18(20)/XXVII(8)/2017/CTR-2, Dehradun dated 06.02.2018 on. On this issue we have the same views and are discussed as under:

As per new entry 3A inserted after entry no. 3 of notification no. 2/2018-Central Tax (Rate) dated 25.01.2018, 2/2018-Integrated Tax (Rate) dated 25.01.2018 and new entry 3A inserted after entry no. 3 of notification no.9/2017- Integrated Tax (Rates) dated 28 June 2017 vide notification no. 02/2018-Integrated Tax (Rates) dated 25 January 2018, we find that following are the 3 foremost conditions to be qualified for exemption:-

i .Nature of supply- Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply;

ii. Recipient of services- Central Government, State Government, Local Authority, Union Territory, Governmental Authority or a Government entity;

iii. Category of services-any activity in relation to any function entrusted to a Panchayat under Article 243G of the constitution of India or in relation to any function entrusted to a Municipality under Article 243W of the constitution”

For any exemption, all the three conditions should be satisfied simultaneously.

Relevant portions of the said notifications arc reproduced as under:

notification no. 02/2018-Integrated Tax (Rates) dated 25 January 2018:

G.S.R….(E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India, in the Ministry of Finance (Department of Revenue), No. 12/2017- Central Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part U, Section 3, Sub-section (i), vide number G.S.R. 691(E), dated the 28th June, 2017, namely:-

In the said notification, in the Table,-

(a) against serial number 3, in the entry in column (3), after the words “a Governmental Authority” the words ‘or a Government Entity” shall be inserted;

(b) after serial number 3 and the entries relating thereto, the following serial number and entries shall be inserted, namely:-

notification no. 02/2018-Integrated Tax (Rates) dated 25 January 2018:

G.S.R….(E).- In exercise of the powers conferred by sub-section (1) of section 6 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India, in the Ministry of Finance (Department of Revenue) No.9/2017- Integrated Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 684 (E), dated the 28th June, 2017, namely:-

In the said notification, in the Table, –

(a) against serial number 3, in the entry in column (3), after the words ‘a Governmental Authority” the words ‘or a Government Entity’ shall be inserted;

(b) after serial number 3 and the entries relating thereto, the following serial number and entries shall be inserted, namely: –

“In both the above referred notifications value of supply of goods should not constitute more than 25 percent of the value of the said composite supply.”

While going through the contract details and payment schedule, we find at “para- g” of Form of Contract that, “the total contract value is INR 126,37,46,020.02 wherein Design Build Cost is INR 72,42,94,625.04 and Operation & Maintenance Cost is INR 53,94,51,394.98.”

We further find that Operation & Maintenance is a part of same supplies and qualifies as composite supply in which the principal supply is Design & Building. The operation & maintenance is supplementary supply which is secondary to design & building cost. The same view of composite supply is supported by judgement of Hon’ble Gujarat High Court in the matter of Torrent Power Ltd. R/SPECIAL CIVIL APPLICATION NO. 5343 of 2018, whereby the Hon’ble HC has defined the concept of composite supply in a clear and unambiguous manner. The facts of the case especially the contract defines it as composite supply because Operation & Maintenance is ancillary to build & design.

To answer the specific question raised by the applicant as to whether the outward supply for operation and maintenance of sewage treatment plant of 26 MLD capacity at Lakkar Ghat, Rishikesh to UPJN is exempt from CGST/SGST and IGST as per notification no. 2/2018-Central Tax (Rate) dated 25.01.2018, 2/2018-Integrated Tax (Rate) dated 25.01.2018 and as to whether the inward supplies directly received for above services by the applicant are also exempt from GST, we find on perusal of the Contract signed between the applicant and UPJN and “Letter of Acceptance” as submitted by the applicant, “The Name of Work” is given as below:-

(A) Survey, review the design, redesign where necessary and build new/replace outfall/interceptor sewer line of about 15 km length including survey, design and construction of 03 nos. new sewage pumping stations, upgradation/ rehabilitation of 02 no. existing sewage pumping station and all appurtenant structures and operation and maintenance of outfall/interceptor sewer line and pumping stations for a period of 01 year in Rishikesh, State of Uttarakhand, India.

(B) Design build operate and transfer of sewage treatment plant of 26 MLD capacity including 15 years O&M at LakkarGhat, Rishikesh, Dehradun, State of Uttarakhand, India,

We further find that operation & maintenance cost of Rs.53,94,51,394.98 is not only for the operation & maintenance of sewage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh as is claimed by the applicant but this cost includes the operation & maintenance of the total contract as mentioned at first para of the said contract comprising works shown at part (A) &part (B) whereas the applicant in their letter dated 19.11.2020 has shown this amount of Rs. 53,94,51,394.98 towards the operation & maintenance of only sewage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh which is not correct and thus the bifurcation of the cost of each item including cost of goods given in their letter dated 19.11.2020 cannot be relied upon.

Further as per contract, design build cost of Rs.72,42,94,625/- is not only for the (A) part of the said contract but it also includes the cost of design build cost of sewage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh as shown at (B) part of the said contract.

The applicant has tried to split the contract and shown the value of only Operation & Maintenance part in AR-application in order to avoid GST liability. Because, if complete value of contract is taken into consideration, the value of supply of goods turns out to be much higher than 25% of the contract value and the applicant will not get exemption. Therefore, entry no. 3A of Notification No. 2/2018-Central Tax (Rate) and 2/2018-Integrated Tax (Rate) does not apply in applicant’s case and the full amount of contract attracts GST rates as applicable for such composite supplies/works contract services.

To further support this, reliance is placed on payment schedule of the contract. The whole contract of Rs 126.37 Cr is divided into Design, Built, operate &transfer. Payment of design, built, operate & maintain is specified under a single schedule of payment (Schedule-6 of Contract) under various clauses. There is neither a separate contract nor a separate schedule for payment of Operation & Maintenance services. Hence, there is no evidence from the contract document which supports the contention of applicant as specified in Advance Ruling application.

Besides Operation & Maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh for 15 years, the applicant has also to design and build the same which is a composite supply for that particular work also and as per Contract, design build cost of Rs.72,42,94,625/- and operation & maintenance cost of Rs.53,94,51,394.98 are inclusive of design build cost and O&M cost of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh and therefore value of supply of goods in the outward supply for operation & maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh cannot be justified below 25 per cent of the value of that particular composite supply.

Now we proceed to discuss whether the outward supply of operation & maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh is being provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity 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 243W of the Constitution.

Section 3 of The U.P. Water Supply and Sewerage Act, 1975 states as follows:-

Section 3. Establishment of the Nigam.-

(1) The State Government shall, by notification in the Gazette and with effect from a date to be specified therein, constitute a corporation by the name of the Uttar Pradesh Jal Nigam.

(2) The Uttar Pradesh Jal Nigam shall be a body corporate by the said name, having perpetual succession and a common seal, and shall sue and be sued by the said name and have the power to acquire, hold or dispose of property.

(3) The Nigam shall for all purposes be deemed to be a local authority.

Later on Uttar Pradesh Jal Nigam renamed as Uttarakhand Peyjal Sansadhan Vikas Evam Nirman Nigam vide The Uttaranchal (The Uttar Pradesh Water Supply and Sewerage Act, 1975) Adaptation and Modification Order, 2002 passed by Notfn. no. 2231/9-2-(12 Adhi.)/2001 dated 07.11.2002 and vide order no. 2878/9-2-(12 Adhi.)/2001 dated 22.11.2002. Thus UPJN is a local authority in view of aforesaid notification.

Under Article 243-W of the Constitution, the following functions are entrusted to the Municipality:-

1. Urban planning including town planning.

2. Regulation of land use and construction of buildings.

3. Planning for economic and social development.

4. Roads and bridges.

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

6. Public health, sanitation conservancy and solid waste management,

7. Fire services.

8. Urban forestry, protection of the environment and promotion of ecological aspects.

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

10. Slum improvement and upgradation.

11. Urban poverty alleviation.

12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.

13. Promotion of cultural, educational and aesthetic aspects.

14. Burials and burial grounds, cremations, cremation grounds and electric crematoriums,

15. Cattle ponds; prevention of cruelty to animals.

16. Vital statistics including registration of births and deaths.

17. Public amenities including street lighting, parking lots, bus stops and public conveniences.

18. Regulation of slaughterhouses and tanneries.

As per Section 14 of The U.P. Water supply and Sewerage Act, 1975 read with The Uttaranchal (The Uttar Pradesh Water supply and Sewerage Act, 1975) Adaptation and Modification Order, 2002,the following functions are entrusted to UPJN:

Section 14. Functions of the Jal Nigam.-The functions of the Nigam shall be the following, namely:

i) the preparation, execution, promotion and financing the schemes for the supply of water and for sewerage and sewage disposal;

ii) to render all necessary services in regard to water supply and sewerage to the State Government and local bodies, on request to private institutions or individuals;

iii) to prepare State plans for water supply, sewerage and drainage on the directions of the State Government;

iv) to review and advise on the tariff, taxes and charges of water supply in the areas of Jal Sansthans and local bodies which have entered into an agreement with the Nigam under Section 46;

v) to assess the requirement for materials and arrange for their procurement and utilisation;

vi) to establish State standards for water supply and sewerage services;

vii) to perform all functions, not stated herein which were being performed by the Local Self-Government Engineering Department before the commencement of this Act;

viii) to review annually the technical, financial, economic and other aspects of water supply and sewerage system of every Jal Sansthan or local bodies which have entered into an agreement with the Nigam under Section 46;

ix) to establish and maintain a facility to review and appraise the technical, financial, economic and other pertinent aspect of every water supply and sewerage scheme in the State;

x) to operate, run and maintain any waterworks and sewerage system, if and when directed by the State Government, on such terms and conditions and for such period as may be specified by the State Government;

xi) to assess the requirements for manpower and training in relation to water supply and sewerage services in the State;

xii) to carry out applied research for efficient discharge of the functions of the Nigam or a Jal Sansthan;

xiii) any other functions entrusted to the Nigam by or under this Act; and

(xiv) such other functions as may be entrusted to the Nigam by the State Government by notification in the Gazette.

Further aforesaid Section 14 was amended vide The Uttaranchal (The Uttar Pradesh Water Supply and Sewerage Act, 1975) Adaptation and Modification Order, 2002 to the following extent:

5(i) In section 14(1) between the words “the preparation” and ‘execution’ the word ‘construction ‘ shall be inserted.

5(ii) After Section 14(1)[iii] and before 14(1)[xiv) the following subsection shall be added namely:-

“To function as Construction Agency for other Departments of State Government and also outside the state.”

Thus from the aforesaid provisions, it is evident that UPJN has been entrusted with the function of all the necessary services in regard to sewerages which is an activity in relation to any function entrusted to a Municipality under article 243W of the Constitution.

Thus from the above provisions, we come to the conclusion that though outward supply of operation & maintenance of sewerage treatment plant to UPJN is exempt under entry no.3A of the notification no. 2/2018-Central Tax (Rate) dated 25.01.2018 and 2/2018-Integrated Tax (Rate) dated 25.01.2018 yet this exemption is available only if value of supply of goods constitutes not more than 25 per cent, of the value of the said composite supply.

In the instant case, the applicant could not bifurcate the operation & maintenance cost particularly for their outward supply for operation & maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh. Operation & Maintenance cost mentioned in the contract dated 24.05.2018 (date as per stamp paper) is for the total contract mentioned at first para consisting the works mentioned at (A)& (B) and thus value of supply of goods cannot be justified below 25 per cent, of the value of the said composite supply.

Regarding second question raised by the applicant whether the in* supplies directly received for above services by the applicant are also exe: from GST, we find it obvious that when the main supply is not exe from GST then inward supplies directly received for the main su services are also not exempted.

ORDER

In view of the above discussion & findings we hold as under:

i) Outward supply of Operation & Maintenance of sewerage treatment plant of 26 MLD capacity at LakkarGhat, Rishikesh, Dehradun, State of Uttarakhand to Uttarakhand PeyJal Nigam is not exempted under notification no. 2/2018-Central Tax (Rate) dated 25.01.2018 and 2/2018 – Integrated Tax (Rate) dated 25.01.2018 and 138/2018/18(20)/XXVII(8)/2017/CTR-2, Dehradun dated 06.02.2018.

ii) Inward supplies directly received for the above supply of services are also not exempted.