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 |
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erection of towers, testing and commissioning of transmission lines and |
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setting up sub-stations collectively called the Tower Package. |
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2. Contractee awards the Applicant contracts for supply, erection and |
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commission of Towers which was split up into two separate sets of |
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contracts – one for supply of materials at exfactory price (hereinafter the |
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First Contract), and the other for supply of allied services like survey and |
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erection of towers, testing and commissioning of transmission lines etc |
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(Second Contract), which also includes inland/local transportation, in- |
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transit insurance, loading/unloading for delivery of materials and storage |
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of them at the contractee’s site. |
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3. The contractee agrees to reimburse the actual GST payable, except on the |
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price component for inland/local transportation, in-transit insurance and |
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loading/unloading. The applicant raises separate freight bills on the |
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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 |
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insurance business. He will, according to the application, arrange such |
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services and pay the GST as applicable on the consideration paid to the |
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suppliers of such services. His service to the contractee for inland/local |
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transportation, the applicant argues, is exempt under the GST Act. He refers to |
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Notification No. 9/2017 – IT (Rate) dated 28/06/2017, which, according to |
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him, grants exemption on transportation service provided by an entity other |
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than GTA. Since the applicant is not a GTA, he claims that his services are |
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exempt vide the above notification. |
Department Stand |
1. the First Contract cannot be executed independent of the Second |
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Contract. There cannot be any ‘supply of goods’ without a place of supply. |
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As the goods to be supplied under the First Contract involve movement |
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and/or installation at the site, the place of supply shall be the location of |
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the goods at the time when movement of the goods terminates for |
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delivery to the recipient or moved to the site for assembly or installation. |
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2. The First Contract, however, does not include the provision and cost of |
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such transportation and delivery. It, therefore, does not amount to a |
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contract for ‘supply of goods’ unless tied up with the Second Contract. In |
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other words, the First Contract has “no leg’ unless supported by the |
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Second Contract. It is no contract at all unless tied up with the Second |
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Contract. |
Ruling with reasons |
The applicant supplies works contract service, of which freight and |
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transportation is merely a component and not a separate and independent |
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identity, and GST is to be paid at 18% on the entire value of the composite |
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supply, including supply of materials, freight and transportation, erection, |
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commissioning etc. |
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Reasons |
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1. Two contracts are linked by a cross fall breach clause that specifies that |
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breach of one contract will be deemed to be a breach of the other |
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contract, and thereby turn them into a single source responsibility |
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contract. Black’s Law Dictionary defines that “a severable contract, also |
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termed as divisible contract, is a contract that includes two or more |
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promises each of which can be enforced separately, so that failure to |
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perform one of the promises does not necessarily put the promises in |
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breach of the entire contract”. In terms of this definition, the ‘cross fall |
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breach clause’, in the present context, settles unambiguously that supply |
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of goods, their transportation to the contractee’s site, delivery and |
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installation, erection of towers and testing and commissioning |
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transmission lines and related services are not separate contracts, but |
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form only parts of an indivisible composite works contract supply, as |
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defined under Section 2(119) of the GST Act, with ‘single source |
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responsibility’. |
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2. Composite nature of the contract is clear from the clause that defines |
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satisfactory performance of the First Contract (supply of goods) as the |
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time when the goods so supplied are installed and finally commissioned in |
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terms of the Second Contract. In other words, the First Contract cannot be |
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performed satisfactorily unless the goods have been transported and |
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delivered to the contractee’s site, applied for erection of towers, the |
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transmission lines laid, tested and commissioned in terms of the Second |
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Contract. The two promises – supply of the goods and the allied services – |
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are not separately enforceable in the present context. The recipient has |
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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 |
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basis of cross fall breach clause. |
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2. Having said this, the Supreme Court in the case of State of Madras v. |
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Gannon Dunkerley& Co. - IX STC 353 (SC) has held that if there is an |
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instrument of contract which may be composite in form, unless the |
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transaction in truth represents two distinct and separate contracts and is |
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discernible as such, then the State would not have the power to separate |
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the agreement to sell from the agreement to render service,and impose |
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tax on the sale. This implies that in cases where contract is separable, each |
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of the divisible component of the contract can be subjected to tax |
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independently. |
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3. Whether a contract is divisible or indivisible must be construed on the |
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basis of the intention of parties. The fact that a single tender document |
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issued for whole project would be of no relevance. In this regard, the |
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following judgments of Income Tax are referred viz. |
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a) M/s. Caterpillar Global Mining Europe GmbH India Project Office |
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Versus Asstt. Director of Income Tax |
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b) Ishikawajima-Harima Heavy Industries Ltd. versus Director of Income- |
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Tax |