GST on Solar Power based devices & System

AAAR, Rajasthan has pronounced Appellate Advance Ruling on 11.1.2022, in the case of Utsav Corporation (2022) 37 J.K.Jain’s GST & VR 215.

1. AAAR concluded 18% GST on;

Solar Controller Classifying under Chapter Heading 8504 ‘electrical transformers, static converters and inductors’;

Structure  of Iron & Steel Classifying under Chapter Heading 7308;

2. The AAAR categorically ruled that the above items can not be classified as solar power based devices.

3. On Solar Power Based Devices,

a) 5% GST ruled on Goods, where the value of goods is to be taken as 70% of the gross consideration uptill 30.9.2021. However, the rate of tax on goods portion stands increased from 5% to 12%, w.e.f. 1.10.2021.

b) 18% GST ruled on Services, where the value of Services is to be taken as 30% of the gross consideration.

4. The supply of solar energy based bore well water pumping systems as a whole along with installation and commissioning of such systems involves both supply of goods and services in terms of entry No.234 of notfn No.1/2017-CT(R) dated 28.6.2017 read with entry No.38 of notfn No.11/2017-CT(R) dated 28.6.2017 with rate of GST as prescribed under these entries.

5. The combination of “Solar panel, Solar Controller & Solar Pump or Structure in different possible combination without anyone of the goods being supplied as principal supply would be covered by the definition of “mixed supply” of different type of goods. As such, per S.8(b), GST Act, 2017, the highest rate of GST on such combination of supply will be applicable.

The Appellate Proceedings commencing from Discussion & Findings uptill Ruling is reproduced as under;

“………6.2 We find that the Appellant has claimed that they are engaged in supply of solar energy based products under various contracts and on the basis of purchase orders from customers they supply these products with or without installation service. The appellant has sought advance ruling as to the classification of the goods proposed to be supplied by them and the rate of GST applicable on different types of sale (supply) of such solar energy based products such as Solar Water Pumping System as a whole or sale of one of the specified products on standalone basis or sale of the products under different combinations to be undertaken by them and also supply of parts of the system along with supply of installation service relating to such system.

6.3 As can be seen from the order dated 3.9.2021 of the Authority for Advance Ruling (2022) 36 J.K.Jain’s GST & VR 338, it has been held therein that─

(i) Solar Panel has a specific entry in the 1st schedule and the same is taxable at the rate of 5% GST;

(ii) Solar Pump is a solar power based device which is covered under entry No. 234 of notfn No.1/2017-CT(R) dated 28.6.2017 and, therefore, taxable at the rate of 5%.GST;

(iii) Controller is neither a solar power based device nor a part of solar power based devices and, therefore, the same would fall under chapter heading 85 of GST Tariff which has a specific entry for Electrical Transformers, Static Converters and Inductors attracting 18% rate of GST;

(iv) Structures are neither solar power based devices nor part of solar power based devices and, therefore, the same would fall under Chapter Heading 7308 attracting 18% rate of GST;

(v) Solar Water Pumping System (Solar panel, Controller, Solar Pump, Structure) is not the whole device rather it is made of Solar Panel, Controller, Solar Pump, Structure etc. which includes procurement, development, testing, commissioning etc. and hence, it is a mixed supply for goods and services and the highest rate of GST will be applicable amongst goods supplied by the applicant;

(vi) Solar Panel + Solar Controller + Solar Pump, Solar Pump + Solar Panel, Solar Pump + Controller, Solar Panel + Controller compositions are the mixed supply of goods, hence, the highest rate of GST will be applicable amongst goods supplied by the applicant;

(vii) Supply of Solar water pumping system as a whole comprising of goods (Solar Panel + Solar Controller + Solar Pump + Structure) along with the installation of Solar water pumping system for drinking water application is a Works Contract Service which attracts 18% rate of GST as per S.No.3 (ii) (Heading 9954) of notfn No.11/2017 dated 28.6.2017.

6.4. The appellant has contested all the rulings given by the AAR, Rajasthan except for the rulings mentioned at point No. (i) and (ii) above. We have considered the submissions made by the appellant in the appeal filed by them against the ruling of the AAR, Rajasthan and gone through the relevant documents available on record.

6.5. So far as the classification of controller is concerned we observed that it has been claimed by the appellant that technical details and use of the product i.e., ‘solar controller’ have been ignored by the AAR, Rajasthan in determining the classification of the product. We find that the relevant entries in GST Tariff for controller classifiable under Chapter 85 are as under:–

The appellant has relied heavily on the guidelines of the Ministry of New and Renewable Energy for Solar Water Pumping Systems to claim that controllers to be supplied by them are essentially parts for the manufacture of solar water pumping system which is a solar power based device attracting GST rate of 5% as per entry No.201A of notfn No.1/2017-CT(R) dated 28.6.2017 . Based on these guidelines, it is their claim that an Spy Controller converts DC voltage of the SPY array into suitable DC or AC, single or multi phase power and may also include equipment for MPPT (Maximum Power Point Tracker) and remote monitoring and protection devices. The appellant has further claimed that the Solar controller converts the DC power produced by the solar array to match the voltage and current operating requirements of the system’s solar pump and it ensures that the pump operates at its maximum performance levels and the pump will operate in less-than-perfect sun conditions, when sun rays are not available at required frequency such as on night time or cloudy days.

We find that the controller as claimed by the appellant is an electrical device that can coordinate in a predetermined manner the performance of an electric motor. A controller performs variety of functions and is used with both direct current and alternating current motors. A controller includes means to connect the motor to the electrical power supply, and may also include overload protection for the motor, and over-current protection for the motor and wiring. A motor controller may also supervise the motor’s field circuit, or detect conditions such as low. supply voltage, incorrect polarity or incorrect phase sequence, or high motor temperature. Hence, a controller being an electrical item may be suitable for multiple uses in different applications including in solar power devices but the scope of its use can not be limited to a solar pump alone. There may be many items, electrical or otherwise, which may be suitable for use in a solar pump but such individual items, in standalone condition, can not be classified as solar power based devices or solar power generators. Accordingly, a controller itself, in standalone condition, being an independent electrical item suitable for multiple uses is appropriately classifiable under Chapter Heading 8504 covering ‘electrical transformers, static converters and inductors’ and the same can not be classified as a solar power based device or a solar power generator or as part of solar pumping system.

Accordingly, we find that a controller will attract GST at appropriate rate applicable to items of Chapter Heading 8504 as held by the Authority for Advance Ruling.

6.6. Another point for determination as raised by the appellant in the appeal concerns the classification of structure and resultant applicable rate of GST thereon. It is the contention of the appellant that the product in question i.e., steel structure is not a general iron structure rather the same is specifically designed as per technical specifications of solar water pumping system and, therefore, it is a part of the solar water pumping machine. Claiming that the structures in the given case are suitable for use solely with a particular kind of machine i.e., solar water pumping system, the appellant has relied upon the judgment of Hon’ble CESTAT in the case of Phenix Construction v. Commissioner of CEST, 2017-TIOL-3281-CESTAT-AHM wherein it was held that structures and parts of structures would be considered as components of the reflector, undisputedly used being required for initial setting up of a solar power generation project or facility.

We find that the judgment relied upon by the appellant was given in the context of exemption provided under notfn No.15/2010-C.X., dated 27.2.2010 issued u/s 5A(1), Central Excise Act, 1944 which was contingent upon fulfillment of certain conditions. For better appreciation of the provisions of the notfn, the relevant portion is reproduced below:–

“— the Central Government on being satisfied that it is necessary in the public interest so to do, hereby exempts all items of machinery, including prime movers, instruments, apparatus and appliances, control gear and transmission equipment and auxiliary equipment (including those required for testing and quality control) and components, required for initial setting up of a solar power generation project or facility, from the whole of the duty of excise leviable there on which is specified in the First Schedule to the Central Excise Tariff Act, 1985, subject to the following conditions, namely–

(1) before the clearance of the goods from the factory, the manufacturer produces to the Deputy Commissioner of C/E or the Assistant Commissioner of C/E, as the case may be, a certificate, from an officer not below the rank of a Dy. Secretary to the Govt. of India in the Ministry of New and Renewable Energy recommending the grant of this exemption and the said officer certifies that the goods are required for initial setting up of a solar power generation project or facility; and

(2) the manufacturer of such goods furnishes an undertaking to the Dy. Commissioner of C/E or the Assistant Commissioner of C/E, as the case may be, having jurisdiction, to the effect that–

(a) the said goods shall be used only in the said project or facility and not for any other use; and,

(b) in the event of failure to observe conditions above, the manufacturer shall pay the duty which would have been leviable at the time of clearance of goods, but for this exemption,”

Perusal of the provisions of the notfn reveals that the notfn covers a wide range of items required for setting up of a solar power generation project or facility and the exemption was available on the condition of production of a certificate issued by the specified authority to the effect that the goods in question were required for the specified use besides submission of an undertaking to the effect that the goods shall be used for the specified purpose failing which the applicable duty shall be paid by the assessee. Hence, we find that the ratio of the said judgment of Hon’ble CESTAT does not apply to the facts of the instant case as the conditions requiring production of requisite certificate and submission of undertaking are the distinguishing factors which are absent here.

The appellant has claimed that the structures in the given case are specifically designed as per technical specifications of solar water pumping system and therefore, the same me intended to be parts of solar pumping systems. We find that structures of iron and steel are specifically classified under Chapter Heading 7308 which covers a variety of structures intended to be put to different uses some of which have been illustrated in the said heading, As a matter of fact. each of the iron structures is designed according to the specification as per the intended use and no structure is manufactured in isolation without taking the specifications for intended use into consideration, But such specifications ·of the design of a structure can not take the structures out of the definition of structures to make them parts of the item to which they me attached or part of the item which they are supposed to support. If such a contention of the appellant is accepted every structure of iron and steel etc. would be called a part of the item to which it is attached or the item which it supports. In such a situation, none of structures would fall under the Chapter Heading 7308.

We further observe that the matter of classification of structures and the rate of GST applicable thereon has also been clarified by the Govt, in Dec., 2017 in response to FAQs. Reply to the relevant question number 75 applicable to the instant case is reproduced as under.–

In view of the above position which is also supported by the clarification referred to above, it is clear that a metal structure including Solar Panel Mounting Structure is correctly classifiable under Chapter Heading 7308 (if made of iron or steel) or 7610 (if made of aluminium) and the same will attract. GST at the rates specified for the goods of those headings. Structures of iron and steel etc. as claimed by the appellant, can, therefore, neither be classified as solar power based devices nor called as solar power generators and the rate of tax as applicable to such devices or systems can not apply to the iron and steel structures. Held accordingly.

6.7. The appellant has also contested the ruling given by the AAR in the matter of classification of different type of goods and the rate of GST applicable thereon in various situations when such goods are proposed to be sold in different combinations. The AAR has given ruling to the effect that when such goods are sold in various combinations the same would attract the highest rate of GST applicable to any of the goods in the combination as the supply of different type of goods in different combinations qualifies to be a mixed supply of goods. In this regard, the Appellant has referred to the provisions of the Customs Import Tariff and relied upon various case laws related to the erstwhile Act besides quoting the rulings given by AAR of other States. Based on these references, it is their contention that supply of these items in different combinations qualifies as supply of solar power generating system and, therefore, the rate of GST applicable to solar power generating system should also apply to supply of such items in different types of combinations.

We observe that there are clear provisions in the GST Act itself as regards “composite supply” as defined u/s 2(30) and “mixed supply” u/s 2(74), CGST Act, 2017 which deal with situations where supply consisting of two or more taxable goods or services or both is involved. In this regard, we agree with the appellant’s primary contention to the effect that without applying and refuting the applicability of “composite supply”, conclusion regarding mixed supply cannot be reached. Accordingly, we find it appropriate to examine the matter with reference to the concept of “composite supply” in order to reach a logical conclusion.

We find that as per S.2(30), CGST Act, 2017 “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. An illustration provided under the said definition provides that “where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

In the above illustration, it is obvious that the supply of packing material, supply of service of insurance or transport is not independent of the supply of goods. Hence, the transportation of goods, supply of packing material and insurance are covered by the definition of “composite supply” with the supply of goods which is a principal supply in the illustration. Accordingly, from the above definition and illustration, we are of the view that a “composite supply” can be determined on the basis of the following criteria:–

(i) Supply of two or more goods or services or combination of both;

(ii)The supply should be made in a natural bundle, i.e., the goods and/ or services are provided as a combination in the ordinary course of business;

(iii) The individual items (goods and/or services) cannot be supplied separately; and

(iv) One of the supplies should be a principal supply.

So far as the concept of “mixed supply” is concerned, the same is defined u/s 2(74), CGST Act to mean ‘two or more individual supplies of goods or services, or any combination thereof made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. Mixed supply has been further illustrated in the following manner:–

“A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.”

After having gone through the definitions of ‘composite supply’ and ‘mixed supply’ as discussed above we find that in the instant case the appellant has proposed to supply different type of goods in different combinations. The different type of combinations of goods as proposed by the appellant simply indicate different type of possibilities of various type of goods being sold in response to one purchase order. However, the maximum possible combinations as proposed by the appellant do not indicate that one of the supplies constitutes a principal supply or that the supplies are naturally bundled in the ordinary course of business. Further, each of these goods, as submitted by the appellant, are capable of being sold individually as standalone and such supply individually does not require simultaneous supply of other goods let alone principal supply of other goods. The instant factual position leads us to the logical conclusion that the supply of each one of the items in question as proposed by the appellant in different possible combinations is independent and each one of the items can be supplied separately in the appellant’s own case.

We, therefore, observed that from the definitions it emerges that a supply, consisting of any possible combination of more than one type of goods which are independent of each other in terms of their supply but which are sold together as a bundle simply because the buyer has ordered purchase of such combination of goods, does not constitute a composite supply as the absence of the element of principal supply and natural bundling in the ordinary course of business weighs against the definition of composite supply.

We, therefore, hold that the supply of different type of items such as Solar Panel, Controller, Solar Pump or Structure in different possible combinations, if any, without anyone of the goods being supplied as principal supply would be covered by the definition of “mixed supply” of different type of goods.

In arriving at the conclusion drawn above we may gainfully refer to the ruling given by West Bengal Authority for Advance Ruling in the case of Sarj Educational Centre (2019) 22 GSTL 315 (AAR-GST), wherein it was held in the case of the applicant, who was engaged in supplying food and other services, that they are not naturally bundled with the lodging services as all these components are independent of each other. The said ruling has been upheld by the Appellate Authority for Advance Ruling of West Bengal as (2019) 27 GSTL 131 (App, AAR-GST).

Once the question of the nature of supply, whether composite or mixed, is decided, the question that remains to be addressed is the rate of GST applicable to such supplies. The different type of goods that are proposed to be supplied by the appellant in different possible combinations may attract different rates of GST. We find that as per the provisions of S.8(b), GST Act, 2017, concerning determination of tax liability on a mixed supply, “a mixed supply comprising of two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.” Hence, we hold that the rate of GST applicable to the mixed supply of goods in different possible combinations as proposed by the appellant would be the rate which would be the highest of rates of GST applicable on standalone supply of individual items forming’ part of the proposed mix. The finding of the AAR is, accordingly, upheld in this regard.

6.8. Finally, the appellant has also challenged the ruling of the AAR in the matter of classification of the proposed simultaneous supply of Solar Water Pumping System as a whole comprising of the requisite goods namely, Solar Panel, Solar Controller, Solar Pump and Structure along with the service of installation of the entire Solar Water Pumping System for drinking water application against a single contract awarded by PHED for designing, providing, installation and commissioning of solar energy based bore well water pumping system including comprehensive operation and maintenance there of.

We observe that the Rajasthan Authority for Advance Ruling (AAR) in its Ruling No.RAJ/AAR/2021-22/10 dated 3.9.2021 has observed that the proposed supply comprising of solar panel, solar controller, solar pump and structure along with the provision of installation service for installation of the said system is a composite supply classifiable under the definition of works contract and accordingly, the supply shall attract GST @18% in terms of S.No.,3(ii) (Heading 9954) of notfn No.11/2017-CT(R) dated 28.6.2017

The appellant has mainly submitted that the entries in tariff notfn for both goods and services have been amended since 1.2.2019 itself to give effect to taxability of contracts for supplies of goods with installation services in the sector of solar devices in a ratio of 70:30 with an effective rate of 8.9%. It is their further submission that the relevant notfn has been further amended vide notfn No. 8/2021-CT(R) dated 30.9.2021 (after pronouncement of Advance Ruling in the instant case) to increase the tax rate of goods portion from 5% to 12% resulting in the effective tax of tax increasing to 13.8% on such supply.

In this regard, the appellant has also referred to the ruling given by the Rajasthan AAAR vide Order No. RAJ/AAAR/2019-20 dated 15.5.2019 in the case of Kailash Chandra (Proprietor of Mali Construction) (2019) 32 J.K.Jain’s GST & VR 200, involving similar situation and also relied upon the advance ruling given by the Authority for Advance Ruling for the State of Uttarakhand in the case of Premier Solar Systems Pvt. Ltd. as (2019)-TIOL-79-AAR-GST wherein it was held that the supply of solar irrigation water pumping system along with design, erection, commissioning and installation would constitute a composite supply attracting OST @5% on goods portion which would be 70% portion of the aggregate value and GST @18% on services portion comprising of the remaining 30% portion of the aggregate value.

We find that the Appellant has submitted copy of a sample proposal for scope of work for sub-contracting arrangement which requires the appellant to supply, to the main contractor, Solar Pumping Systems comprising of solar panels, sola pumps, solar controllers, structure and LED lights along with supply of services by way of installation and commissioning of solar energy based bore well pumping system. As submitted by the appellant, the main contractor working for PHED is also obliged to provide comprehensive operation and maintenance for a period of seven years besides the supply of goods and services sub-contracted to the instant appellant.

In the instant case the appellant is obliged to supply a complete solar water pumping system along with the service of its installation and commissioning and, therefore, it would be appropriate to analyze the relevant notfns. On careful consideration of the relevant entries of the notfns, we find that Solar Energy based bore well water pumping system as a whole as proposed to be supplied by the appellant qualifies as ‘Solar Power based devices’, mentioned under entry No.234 of notfn No.11/2017-CT(R) dated 28.6.2017. as the same is a device based on solar power used for pumping water. Further, services by way of installation and commissioning of solar power based devices are governed by entry No. 38 of notfn No. 11/2017-CT(R), dated 28.6.2017. Both these entries concerning supply of goods and services respectively are inter-connected by the respective explanations given below them. The said entry No. 38 along with its explanation reads as follows:–

The explanation given below entry No. 234 of Schedule I of notfn No.1/2017-CT(R) dated 28.6.2017 reads as follows:–

“Explanation:–If the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry No. 38 of the Table mentioned in the notfn No.11/2017-CT(R) dated 28.6.2017., the value of supply of goods for the purposes of this entry shall be deemed as seventy percent of the gross consideration charged for all such supplies, and the remaining thirty percent of the gross consideration charged shall be deemed as value of the said taxable service.”;

On careful consideration of the abovementioned entries of the said notfns and the proposed contract submitted by the appellant, we find that the benefit of the said entries is available only when the Solar power based devices is supplied along with other goods and services, one of which being a taxable service specified in the entry No.38 ibid, We find that the Appellant in the instant case is supplying solar energy based bore well water pumping system and also carrying out the activity of provision of installation and commissioning of such systems. Hence; the appellant is supplying solar energy based devices and also providing the specified services, therefore, the condition as mentioned under respective entries of both the notfns are satisfied in the instant case. Thus, we find that the condition precedent to availment of the benefit of these entries supply of solar power based devices and services by way of installation in relation to setting up pf solar power based devices are satisfied in the instant case.

In view of above, we hold that the supply of solar energy based bore well water pumping systems as a whole along with installation and commissioning of such systems involves both supply of goods and services in terms of entry No.234 of notfn No.1/2017-CT(R) dated 28.6.2017 read with entry No.38 of notfn No.11/2017-CT(R) dated 28.6.2017. with rate of GST as prescribed under these entries.

In drawing our conclusions as above, we have based our findings upon the ruling dated 15.5.2019 given by the AAAR Rajasthan in the case of Kailash Chandra (Proprietor of Mali Construction) involving similar situation. The ARA in the instant case had held that the instant supply comprising supply of goods in the form of solar energy based bore well water pumping system along with installation and commissioning of such Water pumping system is a composite supply of works contract attracting GST @ 18% in terms of entry S.No. 3 of notfn No.11/2017-CT(R) dated 28.6.2017. However, the ruling that the composite supply of goods and services in the instant case deserves to be classified as works contract service is not supported by legal position which has been correctly interpreted by the AAR for the State of Uttarakhand in the case of Premier Solar Systems Pvt. Ltd. as (2019)-TIOL-79-AAR (GST) by holding that the supply of solar irrigation water pumping system along with design, erection, commissioning and installation would constitute a composite supply attracting GST @5% on goods portion and GST @18% on services portion as prescribed in the relevant entry of the notfn.

Thus, we observed that the effective rate of GST on supply of Goods and Services in relation to the Solar Power Based Devices up to 30.9.2021 is as follows:–

(a) 5% on value of goods where the value of goods is to be taken as 70% of the gross consideration and

(b) 18% on the value of services where the value of services is to be taken as 30% of the gross consideration.

Hence, the effective rate of GST for the composite supply will work out to 8.9% [(5% x 70%) plus (18% x 30%)]. However, with the amendments effected vide notfn No.6/2021-CT(R) dated 30.9.2021 and notfn No.8/2021-CT(R) dated 30.9.2021, the rate of tax on goods portion stands increased from 5% to 12% and accordingly, the effective rate of GST for the-period post 30.9.20121 will stand increased to that extent.

7. The appellant has also placed reliance of various case laws passed by various Advance Ruling authorities. We are of the opinion that each case has to be examined individually in the backdrop of several factors. Further, the appellant has also placed reliance on various case laws passed by courts related to other acts. We have observed that there is no need to discuss the same in presence of clear provision under GST Law.

8. Accordingly, the appeal filed by appellant is disposed off in the above terms.”