In re Nagpur Waste Water Management Pvt Ltd (GST AAR Maharashtra)
Question 1: – Whether the Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for supplying ‘Tertiary Treated Water’ to Mahagenco, by treating the Sewage Water supplied by NMC is liable to tax under the GST Law?
Answer: – Answered in the affirmative.
Question 2:- If yes, whether the tax is to be paid by NMC under forward charge or same is to be paid by the applicant under reverse charge?
Answer: – The taxes are to be paid by the applicant under reverse charge basis (RCM). NMC is not liable to pay taxes on the subject transaction as discussed in present order.
Question 3:- If tax is to be paid, then whether the applicant would be entitled for Input Tax Credit?
Answer:- ITC would be available to the applicant subject to fulfillment of the conditions mentioned under sections 16 to 21 of CGST/MGST ACT, 2017 .
FULL TEXT OF THE ORDER OF AUTHORITY OF ADVANCE RULING, MAHARASHTRA
PROCEEDINGS
(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under Section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act” respectively] by M/s. Nagpur Waste Water Management Private Limited, the applicant, seeking an advance ruling in respect of the following questions.
1) Whether the Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for supplying “Tertiary Treated Water” to Mahagenco, by treating the Sewage Water supplied by NMC is liable to tax under the GST Law?
2) If yes, whether the tax is to be paid by NMC under forward charge or same is to be paid by the applicant under reverse charge?
3) If tax is to be paid, then whether the applicant would be entitled for Input Tax Credit?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would mean CGST Act and MGST Act.
2. FACTS AND CONTENTION – AS PER THE APPLICANT:
The submissions made by M/s. Nagpur Waste Water Management Private Limited, the applicant, are as under:-
A. Statement of relevant facts having a bearing on the question(s) raised
2.1 M/s. Nagpur Waste Water Management Private Limited, the Applicant is registered under the Companies Act as well as the GST Act, 2017.
2.2 Nagpur Municipal Corporation (NMC) is constituted under the city of Nagpur Corporation Act, 1948. Therefore, NMC is “Local Authority”. The NMC, under Article 243W of the Constitution of India, read with 12th Schedule to the Constitution, is required to provide the services of management of sewage system for the city of Nagpur for which, it has set up and is operating the Sewage Treatment Plant (STP) located at Bhandewadi, Nagpur for reuse of Sewage Effluent/Water. NMC thereafter decided to augment and expand capacity of existing SWP and for that has appointed the applicant, under PPP contract basis, for Implementing, Designing, Engineering, Developing in Financing, Procurement, Supply, Install, Construction, Augmentation, Testing and Commissioning of all Civil, Electrical, Mechanical and Instrumentation works consisting of Intake works and Raw Sewage Pumping station, Transmission pipelines from Intake works to existing STP, Augmentation of existing STP, Treated Sewage Pumping station and Tertiary Treated facility (if any) along with operation and maintenance of the entire plant for treatment of sewage water for a period of 30 years, under a contract, to set up and operate the Sewage Treatment Plant (STP) located at Bhandewadi, Nagpur on Build Operate and Transfer basis (BOT basis). As a consideration for setting up and operating of STP, the applicant is being paid by NMC on the basis of agreed capital expenditure (CAPEX) and operating expenses (OPEX). In addition, the applicant also got special right to sell Tertiary Treated Water (TTW) to users of Nagpur. The applicant is raising its bills in respect of CAPEX (for capital investment) on quarterly basis and bills of OPEX (for operating expenses) on monthly basis at the pre decided rates between the NMC and Applicant. GST is applicable on this bill which is being charged by applicant and NMC is paying the GST to the applicant.
2.3 The recital Clause (A) of the agreement states that, optionally it is responsibility of the Applicant to setup Tertiary Treatment Plant. The scope of the work is stated in Article- 2 of the Agreement Clause 2.2(b) gives an option for sale of Treated Effluent/ sale of TTW for reuse by users of Nagpur, if applicant is setting up Tertiary Treatment Plant. Article-3 of the Agreement provides for the concession granted by NMC to the applicant. Under Clause 3.1(i), NMC has granted, to the applicant, a special right to sell the Treated Effluent/ TTW to any person for non-potable application subject to the payment of royalty to the NMC as agreed under Schedule-13 of the Agreement. The right of applicant to sell the TTW/ Treated Effluent to users of Nagpur has been further clarified in Clause 10.12 of the Agreement. If there is no sale of TTW no royalty is to be paid by the applicant to NMC. The sale consideration of Treated Effluent/ TTW is required to be deposited by the applicant in an ESCROW Account opened with designated bank (see Para 3.1.1 of Schedule 7). The ESCROW Bank is Trustee for NMC, the lenders representative and the concessionaire. All sale proceeds for sale of TTW is received by trustee bank in the ESCROW Account. Under the Agreement NMC is supplying only Sewage Water, the applicant is providing services of treating sewage water to NMC. The applicant is entitled for consideration in the form of CAPEX and OPEX and right to sale TTW. If there is no sale of TTW/ Effluent then NMC will pay “Net monthly operational support grant (NMOSG)” calculated as per Para 3 of the Schedule-6. However, if there is sale of treated water/effluent then the applicant will be paid “net payable monthly amount (NPMA)” only. NPMA will be calculated as per Para 4 of the Schedule-6 of Agreement which is equal to NMOSG less amount calculated as per Schedule 13 of the agreement based upon quantity of water sold. This amount to be deducted as per Schedule-13 is termed as royalty payable by the applicant to NMC (see Clause 4 of Schedule 8 of the Agreement). Therefore, royalty payment is nothing but reduction in total consideration payable by NMC to applicants. It may be noted that the responsibility of continuous supply of Sewage Water to the applicant is of NMC. There is no new supply by NMC to applicant for sale of treated water/effluent.
2.4 Maharashtra State Electricity Generating Company Ltd (Mahagenco) is a Limited Company registered under the Companies Act. NMC, Mahagenco and the applicant have entered into tripartite agreement dtd.29.12.2017 for supply of TTW by the applicant to Mahagenco on daily basis. Under the agreement, the applicant is required to set up a Tertiary sewage treatment plant (TTP) to further treat water from STP at Bhandewadi and supply the TTW to Mahagenco through pipeline set up by the applicant from its Bhandewadi TTP to Mahagenco’s Koradi and Khaperkheda Thermal Power Plant. As per agreement the applicant in exchange of supply of treated water to Mahagenco will raise bill at pre-decided rates on per CUM basis. This pre-decided rate is inclusive of Royalty to be paid by applicant to NMC Para 5.9 of Tripartite Agreement dtd.29.12.2017 acknowledges this payment. Thus, bill raised by applicant consists up of two parts, one amount of royalty and second amount of its charges. The applicant is not permitted to sell the TTW to any person other than Mahagenco. The water supplied is not a potable drinking water but is suitable for Industrial use. The applicant is informed that the Mahagenco may further treat the TTW for its various uses by adding chemicals and applying other process. The taxes payable on such supply of the Tertiary Treated Water, if any, will be responsibility of the applicant.
2.5 The applicant is not paying any consideration to NMC for allowing to use sewage water for treatment. Under the Constitution of India and other appropriate laws of country it is responsibility of NMC to manage Sewage and discharge them after proper process. This responsibility is delegated by the NMC to the applicant. The NMC, is therefore paying consideration for the same to applicant. However, if Treated Water is sold by applicant to outsiders, the consideration is reduced and this reduction is termed under agreement as royalty. The royalty amount is required to be reduced by NMC only if treated water is sold. No royalty is paid if treated water is discharged in rivers or not sold.
2.6 The applicant has supplied/sold “TTW” to Mahagenco and raised its first invoice for this supply bearing No. NW/MHGN/2021/001 dtd.01.12.2020. Therefore, with reference to this sale of TTW to Mahagenco, the applicant is required to pay royalty to NMC. The NMC is not issuing any bill/document for this royalty but is required to adjust the same from amount payable by NMC to applicant. In order to facilitate the deduction, the applicant, for the amount payable to NMC as per Schedule-13 has issued Credit Note No. NWW/NMC/CN/01 dtd.07.12.2020. Accordingly, in relation to supply of TTW by applicant to Mahagenco vide invoice No.NW/MHGN/2021/001 dtd.01.12.2020, the applicant has calculated an amount of Rs.15, 22, 57,210/- which is to be deducted by NMC as royalty from the consideration under the contract.
2.7 The applicant is advised that no GST is payable by the applicant on this amount deducted by NMC from consideration determined as CAPEX/OPEX either under forward charge basis on or under Reverse charge basis because of the following grounds.
(i) The applicant is providing services to NMC of Treating Sewage Water which is primary responsibility of the NMC under Article 243W of Constitution and therefore, on consideration received by applicant tax is exempt under Notification No. 12/2017 dtd.28.06.2017. The applicant is of the view that for supply of this services of Treating Sewage Water consideration is received by two ways (a) by way of direct consideration from NMC (b) by way of right to sale Treated Water.
(ii) The NMC has basically given a right to process Natural Sewage Water. Water is goods and its processing by applicant is service. Since the service is to process the goods i.e. Natural Sewage Water, the service provided by applicant is tax free under Notification No. 12/2017 dtd.28.06.2017 as goods processed are tax free.
(iii) No consideration is payable by the applicant to NMC for acquiring right to sale TTW. Under the contract primary arrangement is to provide service by the applicant to NMC and for that NMC will pay consideration to the applicant. However, if treated water is sold then the consideration payable by NMC will reduce. The amount though termed as royalty in fact is reduction in consideration payable by NMC to applicant as the applicant would be getting some revenue from sale of Treated Water. Thus, the arrangement between NMC and the applicant is of a revenue sharing model for sale of TTW /reduction in consideration. Therefore, the amount deducted by NMC through ESCROW arrangement is not a consideration/royalty but it is a revenue sharing arrangement/reduction in applicant’s consideration for service to NMC.
B. APPLICANT’S INTERPRETATION OF LAW APPLICANT’S INTERPRETATION
(A) For Question No-1.
1. Notification No. 1/2017-C.T.(Rate) dt.28 06.2017 was issued to prescribe rate of tax under the CGSTAct. Similar notifications are also issued under the SGST and IGST Acts for prescribing rate of tax on supply of goods and services under relevant Acts. Entry relating to water was notified in Schedule III of the Notification at Serial No. 24. The entry in notification is reproduced below:
