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    AAR Summary - EMC Limited

     

    Sl. No

    Case Number 07 of 2018

    Name of Ruling

    EMC LTD.

    TMI Citation

    2018 (5) TMI 964 - AUTHORITY FOR ADVANCE RULINGS, WEST BENGAL

    AAR State

    WEST BENGAL

    Macro Issue

    Whether freight charged by the applicant is subjected to GST or Not?

    Facts

    1. Applicant is stated to be a supplier of materials and allied services for

     

    erection of towers, testing and commissioning of transmission lines and

     

    setting up sub-stations collectively called the Tower Package.

     

    2. Contractee awards the Applicant contracts for supply, erection and

     

    commission of Towers which was split up into two separate sets of

     

    contracts – one for supply of materials at exfactory price (hereinafter the

     

    First Contract), and the other for supply of allied services like survey and

     

    erection of towers, testing and commissioning of transmission lines etc

     

    (Second Contract), which also includes inland/local transportation, in-

     

    transit insurance, loading/unloading for delivery of materials and storage

     

    of them at the contractee’s site.

     

    3. The contractee agrees to reimburse the actual GST payable, except on the

     

    price component for inland/local transportation, in-transit insurance and

     

    loading/unloading. The applicant raises separate freight bills on the

     

    contractee as per the rate schedule annexed to the Second Contract.

    Applicant Stand

    Applicant is not a goods transport agency (hereinafter the GTA) or engaged in

     

    insurance business. He will, according to the application, arrange such

     

    services and pay the GST as applicable on the consideration paid to the

     

    suppliers of such services. His service to the contractee for inland/local

     

    transportation, the applicant argues, is exempt under the GST Act. He refers to

     

    Notification No. 9/2017 – IT (Rate) dated 28/06/2017, which, according to

     

    him, grants exemption on transportation service provided by an entity other

     

    than GTA. Since the applicant is not a GTA, he claims that his services are

     

    exempt vide the above notification.


     

    Department Stand

    1. the First Contract cannot be executed independent of the Second

     

    Contract. There cannot be any ‘supply of goods’ without a place of supply.

     

    As the goods to be supplied under the First Contract involve movement

     

    and/or installation at the site, the place of supply shall be the location of

     

    the goods at the time when movement of the goods terminates for

     

    delivery to the recipient or moved to the site for assembly or installation.

     

    2. The First Contract, however, does not include the provision and cost of

     

    such transportation and delivery. It, therefore, does not amount to a

     

    contract for ‘supply of goods’ unless tied up with the Second Contract. In

     

    other words, the First Contract has “no leg’ unless supported by the

     

    Second Contract. It is no contract at all unless tied up with the Second

     

    Contract.

    Ruling with reasons

    The  applicant  supplies  works  contract  service,  of  which  freight  and

     

    transportation is merely a component and not a separate and independent

     

    identity, and GST is to be paid at 18% on the entire value of the composite

     

    supply, including supply of materials, freight and transportation, erection,

     

    commissioning etc.

     

    Reasons

     

    1. Two contracts are linked by a cross fall breach clause that specifies that

     

    breach of one contract will be deemed to be a breach of the other

     

    contract, and thereby turn them into a single source responsibility

     

    contract. Black’s Law Dictionary defines that “a severable contract, also

     

    termed as divisible contract, is a contract that includes two or more

     

    promises each of which can be enforced separately, so that failure to

     

    perform one of the promises does not necessarily put the promises in

     

    breach of the entire contract”. In terms of this definition, the ‘cross fall

     

    breach clause’, in the present context, settles unambiguously that supply

     

    of goods, their transportation to the contractee’s site, delivery and

     

    installation,  erection  of  towers  and  testing  and  commissioning

     

    transmission lines and related services are not separate contracts, but

     

    form only parts of an indivisible composite works contract supply, as

     

    defined under Section 2(119) of the GST Act, with ‘single source

     

    responsibility’.

     

    2. Composite nature of the contract is clear from the clause that defines

     

    satisfactory performance of the First Contract (supply of goods) as the

     

    time when the goods so supplied are installed and finally commissioned in

     

    terms of the Second Contract. In other words, the First Contract cannot be

     

    performed satisfactorily unless the goods have been transported and

     

    delivered to the contractee’s site, applied for erection of towers, the

     

    transmission lines laid, tested and commissioned in terms of the Second

     

    Contract. The two promises – supply of the goods and the allied services –

     

    are not separately enforceable in the present context. The recipient has

     

    not contracted for ex-factory supply of materials, but for the composite

     

    Discussion Outcome

    1. The AAR has concluded that the contract is of indivisible nature on the

     

    basis of cross fall breach clause.

     

    2. Having said this, the Supreme Court in the case of State of Madras v.

     

    Gannon Dunkerley& Co. - IX STC 353 (SC) has held that if there is an

     

    instrument of contract which may be composite in form, unless the

     

    transaction in truth represents two distinct and separate contracts and is

     

    discernible as such, then the State would not have the power to separate

     

    the agreement to sell from the agreement to render service,and impose

     

    tax on the sale. This implies that in cases where contract is separable, each

     

    of the divisible component of the contract can be subjected to tax

     

    independently.

     

    3. Whether a contract is divisible or indivisible must be construed on the

     

    basis of the intention of parties. The fact that a single tender document

     

    issued for whole project would be of no relevance. In this regard, the

     

    following judgments of Income Tax are referred viz.

     

    a)  M/s. Caterpillar Global Mining Europe GmbH India Project Office

     

    Versus Asstt. Director of Income Tax

     

    b)  Ishikawajima-Harima Heavy Industries Ltd. versus Director of Income-

     

    Tax

     

     

     

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