Unadjusted part of mobilization advance received prior to July 01, 2017 held as taxable under GST
The West Bengal AAAR vide its Order No. 11/WBAAAR/APPEAL/2019 dated 16.12.2019 uphold the advance ruling given by West Bengal AAR (Order No. 18/WBAAR/2019-20 dated 19.08.2019), wherein it was held that unadjusted part of mobilization advance received prior to July 01, 2017 shall be held as taxable under GST on the date of applicability of the GST Law i.e.,01.07.2017. The summary of the said judgement has been produced below for readers reference:
M/s Semens Limited (hereinafter “the appellant”) entered in a contract with M/s. Kolkata Metro Rail Corporation Limited (hereinafter KMRCL) before inception of the West Bengal Goods and Services Tax Act, 2017 / Central Goods and Service Tax Act, 2017 for “design, supply, installation, testing and commissioning” of the power supply and distribution system, third rail system and SCADA system for the entire line and depot of the Kolkata East-West Metro Rail Project for which it received Rs. 16,33,33,924/- (10% of the original contract value) on 24.06.2011 as mobilization advance, which was recoverable as adjustment towards the payment due for the tax invoices that the appellant will raise on attaining contract progress milestones. Out of the total lump-sum so received, Rs. 13,80,74,549/- was stated to be outstanding on 30.06.2017.
The appellant sought advance ruling on whether GST shall be charged on the gross amount of the invoice raised under GST regime or net amount of invoice after adjustment of lump-sum amount outstanding as on 30.06.2017.
The WBAAR vide its Order No. 18/WBAAR/2019-20 dated 19.08.2019, held that the appellant is deemed to have supplied works contract service to KMRCL on 01.07.2017 to the extent covered by the lump-sum that stood credited to its account on that date as mobilization advance and GST is leviable thereon accordingly.
The appellant applied to WBAAAR against the said order on the following grounds:
a) No tax was leviable on the mobilization advance under the erstwhile Tax regime.
b) The applicability of GST herein would be governed by the section 142(10) of the WBGST Act/CGST Act which is “Save as otherwise provided in this Chapter, the goods or services or both supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of this Act.”
Hence GST is payable on the mobilization advance, which is a deposit lying unadjusted as on 01.07.2017.
c) It is only at the time of application of such deposit as consideration, it becomes a consideration towards supply of service and is subjected to GST and accordingly the WBAAR ignored the proviso to section 2(31) of the GST Act which clearly excludes the amount received in the form of deposit from ‘consideration’. The proviso to section 2(31) of the GST Act is as under:
“Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.”
d) The appellant considered the lump-sum amount received as liability in the books of account and the Bank Guarantee provided to the customer acts as an exclusive right of recovery by the customer on the amount so paid to the appellant.
e) While the WBAAR had concurred with the view of the appellant that the mobilization advance was in the nature of earnest money deposit in the pre-GST regime, the WBAAR has conflicted its own view by treating the unadjusted amount as consideration immediately after implementation of GST on 01.07.2017.
f) The lump-sum amount was received on 24.06.2011 and the appellant had determined the applicability of taxes on the same as per the extant provision. The time of supply as per the provision of section 13 (2) of the GST Act, the applicability of GST on issuance of invoice or upon payment whichever is earlier, only applies for the considerations received post introduction of GST.
g) An amendment in the statute or a change in law shall be applicable only prospectively and not retrospectively unless specifically provided for.
Obervations and decision of WBAAAR: – The WBAAAR observed that there are distinguishable features of both advance and deposit. For instance, an advance does not earn any return on it, whereas a deposit earns interest. An advance must be utilized for the specific purpose for which the advance is made, whereas utilization of deposit depends entirely on the person with whom it is deposited. In the instant case, the appellant had not paid interest to KMRCL for holding the lump-sum amount for so long a period. They also had no liberty to utilize the lump-sum amount in any venture on their own will other than the said contract and therefore held that what appellant received was an advance and not a deposit.
The unutilized part of the lump-sum amount held by the appellant as on 01.07.2017 cannot be considered as a deposit and hence the appellant is not entitled to pay GST on the gross amount as and when they utilize the amount towards provision of goods and services.
Immediately upon introduction of GST Act, that is with effect from the 1st day of July, 2017, the erstwhile Finance Act, 1994 and the notifications issued there under ceased to exist. In the instant matter the only applicable law is the GST Act, 2017. Accordingly, the time of supply of services is to be guided by section 13(2) of the GST Act. Hence, the remaining unadjusted amount of Rs. 13,80.74,549/- as on 01.07.2017 has to be construed as if it was credited into the account of the appellant on the date of 01.07.2017 only, which will attract GST on such amount on that date itself.
In respect of the goods and services provided by the appellant to KMRCL post introduction of GST, the amount of Rs. 13,80,74,549/- can only be considered as advance paid as on 01.07.2017, and in the absence of any exemption of mobilization advance from tax under GST regime, the entire amount of Rs. 13,80,74,549/- becomes taxable on the said date.
Hence, there are no infirmity in the ruling pronounced by the WBAAR.
Disclaimer: The views, expressions, opinion is solely an interpretation of the author and does not assures of the correctness of interpretation. The author reserves the right not to be responsible for the topicality, correctness, completeness or quality of the information provided above in this article.