2025 (5) TMI 1600 - AAR - GST

Classification and rate of GST on the Contract - valuation - Nature of Supply - Composite Supply or Works Contract - Scope of work - EPC contracts for rooftop solar power plant including supply of multiple components within the said power plant - Applicability of Notification No. 24/2018-Central Tax (Rate) - HELD THAT - From a conjoint reading of Sec. 2 (30) 2 (119) and Entry no. 6 of Schedule II of the GST Act it is evident that works contract as defined under Sec. 2 (119) is a composite supply where the supply is to be treated as supply of services. So there can be two types of composite supply. One type is composite supply of the nature of works contract. The other type is composite supply other than works contract where the nature of supply (whether supply of goods or services) is to be determined in terms of principal supply. Now we must bear in mind that the activities which come under the ambit of works contract as defined under Sec. 2 (119) must be in relation to any immovable property. Since the term immovable property is not defined in the GST Act we have to refer to the General Clauses Act 1897 as well as the Transfer of Property Act 1882 and different judicial pronouncements defining immovable property. The preceding discussion clearly points out that the element of being permanently fastened to anything attached to the earth is very much present in case of rooftop solar power plant. Civil structures are created for installation of different equipments of the plant and those structures become inseparable part of the whole power plant. At the completion of the work it is the entire rooftop solar power plant with all the civil works done is transferred to the recipient. Some individual equipments/ components may be detached from the installation itself but in its entirety the grid connected rooftop solar power plant is immovable in nature. If we consider it in terms of degree of annexation grid connected rooftop solar power plant is not a kind of installation that is capable of shifting from time to time. Rather the project in its entirety can be viewed as permanent both in terms of its use and location. It is not the case that the solar power plant has been installed somewhere today and will be shifted elsewhere the next day. Thus it can be said that supply design installation testing and commissioning of Grid connected rooftop solar power plant is a composite supply of the nature of works contract as defined under section 2 (119) of the GST Act. Once it is said so the question that follows is whether the tax rate of supply of services is applicable on the whole amount of supply since works contract is treated as supply of service. To our considered opinion the supply design installation testing and commissioning of Grid connected rooftop solar power plant deserves a different treatment when it comes to the question of rate of tax. It is clear that whenever we go for deciding the tax rate applicable for the supply design installation testing and commissioning of Grid connected rooftop solar power plant (as is the case in the present application) we have to do it by interpreting Entry no. 38 of Notification No. 01/ 2017 Central Tax (Rate) Dt. 28.06.2017 as amended in conjunction with Entry No. 201A of Notification No. 11/2017 Central Tax (Rate) Dt. 28.06.2017 as amended. The two entries are interlinked in such a way that they cannot be read and interpreted separately. Two things that emerge from the above discussion are as under Firstly the value of supply in respect of the goods and services referred to in Entry No. 201A of Notification No. 11/2017 Central Tax (Rate) Dt. 28.06.2017 as amended and Entry no. 38 of Notification No. 01/2017 Central Tax (Rate) Dt. 28.06.2017 as amended is the Gross consideration charged by the supplier for the entire supply. Secondly the conjoint reading of Entry no. 38 of Notification No. 01/2017 Central Tax (Rate) Dt. 28.06.2017 as amended and Entry No. 201A of Notification No. 11/2017 Central Tax (Rate) Dt. 28.06.2017 as amended hints at bifurcation of the values of the total supply into 70 and 30 per cent. for supply of goods and supply of services respectively. The 70 per cent. portion of the supply will attract tax rate of the goods supplied i.e. solar power generator (in the present case) and the rest 30 per cent will attract the tax rate of the service under serial no. 38. Thus we rule as under The supply of components of the solar power plant along with the erection of the same would be treated as a composite supply of the nature of works contract. As per Entry no. 201 of Notification No. 01/ 2017 supra tax rate should be 12% IGST on seventy per cent. of the gross value charged by the supplier and 18% IGST on thirty per cent. of the gross value charged by the supplier. The value referred to here is the gross consideration charged by the supplier for the entire supply.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) pertain to the Goods and Services Tax (GST) treatment of contracts involving supply and erection of rooftop solar power plants. Specifically, the issues are:

(a) Whether the supply of components of the solar power plant along with erection and installation constitutes a composite supply under GST;

(b) If so, the correct classification and applicable GST rate on such composite supply;

(c) The valuation basis on which the GST rate should be applied;

(d) Applicability of Notification No. 24/2018-Central Tax (Rate) dated 31st December 2018, which provides an explanation regarding the apportionment of value between goods and services in such composite supplies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Nature of Supply - Composite Supply or Works Contract?

Relevant legal framework and precedents: Section 2(30) of the GST Act defines composite supply as a supply consisting of two or more taxable supplies naturally bundled and supplied in conjunction, with one principal supply. Section 2(119) defines works contract as a contract involving building, construction, erection, installation, or commissioning of immovable property where transfer of property in goods is involved. Entry no. 6 of Schedule II treats works contract as supply of services.

The General Clauses Act, 1897 (Section 3(26)) and Transfer of Property Act, 1882 provide the definition of immovable property, which is critical to determine whether the contract qualifies as a works contract. The Apex Court in Commissioner of Central Excise, Ahmedabad v. Solid and Correct Engineering Works laid down the test for immovability involving rootedness, embedment, or permanent attachment for beneficial enjoyment.

Court's interpretation and reasoning: The AAR examined the nature of the rooftop solar power plant installation, considering the components (monocrystalline panels, inverters, mounting structures, wiring, etc.) and the installation process. The solar panels are mounted on structures fastened to the roof with concrete foundations, nuts, bolts, and other fixtures, making the entire system integrated and inseparable from the building.

The Authority noted that although the solar panels themselves are not rooted or embedded in the earth like trees or walls, the mounting structures are permanently fastened to the roof, which is part of an immovable building. The civil works involved (e.g., concrete foundations for mounting structures) and the permanence of installation imply the solar power plant is immovable property.

The AAR distinguished the recent Andhra Pradesh High Court ruling which held that the solar power plant was not immovable property because the modules were not permanently attached for beneficial enjoyment of the building. The AAR found that in the present case, the civil foundation is embedded in the earth for the permanent beneficial enjoyment of the solar power plant, thus making the entire installation immovable.

Key evidence and findings: The contract is an Engineering Procurement Construction (EPC) contract, involving supply, design, installation, testing, and commissioning. The detailed installation process, including preparation of roof, mounting structures, electrical wiring, and grid connection, was considered. The permanence and inseparability of the installation were emphasized.

Application of law to facts: Given the permanent attachment and nature of the installation, the supply is a composite supply of the nature of works contract as defined under Section 2(119) of the GST Act.

Treatment of competing arguments: The AAR acknowledged the conflicting rulings by various Advance Ruling Authorities-some treating similar contracts as works contracts (Karnataka, Maharashtra, Rajasthan) and others as composite supplies not amounting to works contract (Haryana, Andhra Pradesh High Court). After detailed analysis, the AAR aligned with the view that the contract constitutes a works contract.

Conclusion: The supply of components along with erection and installation of the rooftop solar power plant is a composite supply of the nature of works contract.

Issue (b): Classification and Rate of GST on the Contract

Relevant legal framework and precedents: Notification No. 1/2017-Central Tax (Rate) and Notification No. 11/2017-Central Tax (Rate), both dated 28th June 2017, as amended, provide GST rates on renewable energy devices and related services. Entry no. 201A of Schedule II prescribes 6% CGST + 6% SGST (total 12%) on goods such as solar power devices. Entry no. 38 of Notification No. 11/2017 prescribes 18% GST on services related to construction, engineering, installation, or other technical services for setting up renewable energy plants.

Notification No. 24/2018-Central Tax (Rate) dated 31st December 2018 provides an explanation that when goods specified in entry no. 201A are supplied along with taxable services specified in entry no. 38, the value of goods shall be deemed as 70% of the gross consideration and the remaining 30% as value of taxable services.

Court's interpretation and reasoning: The AAR held that although the contract is a works contract (which is treated as supply of services under GST), the tax rate on the composite supply cannot be a single rate. Instead, the contract value must be bifurcated into goods and services components as per the 70:30 ratio prescribed in Notification No. 24/2018.

The goods component (solar power devices and parts) attracts GST at 12%, while the services component (installation, erection, commissioning) attracts GST at 18%. The effective GST rate on the entire contract is thus 13.8% (70% x 12% + 30% x 18%).

Key evidence and findings: The contract documents, relevant notifications, and prior rulings (including Rajasthan AAR and others) were examined. The AAR emphasized that the two entries (201A and 38) are interlinked and must be read conjointly.

Application of law to facts: The contract is classified as a works contract composite supply, but the tax rate is applied separately on goods and services components as per the prescribed ratio.

Treatment of competing arguments: The AAR considered the Revenue's submission that the entire contract should be taxed at the works contract service rate of 9% CGST + 9% SGST (18% total). However, it preferred the applicant's and other AARs' interpretation that the bifurcation and differential rates apply.

Conclusion: The GST rate applicable is 12% on 70% of the gross contract value (goods) and 18% on 30% of the gross contract value (services).

Issue (c): Valuation for GST Purposes

Relevant legal framework and precedents: The value for GST is the gross consideration charged by the supplier for the entire supply as per the GST Act and relevant notifications.

Court's interpretation and reasoning: The AAR confirmed that the valuation basis for the composite supply is the gross contract value charged by the supplier, which is then apportioned between goods and services in the 70:30 ratio.

Key evidence and findings: The contract value of Rs. 1.76 crore was considered, with Rs. 1.08 crore (70%) attributable to goods and Rs. 0.46 crore (30%) to services.

Application of law to facts: The gross consideration is the value on which GST is calculated, apportioned as per the notification.

Conclusion: GST is applicable on the gross contract value, apportioned 70% to goods and 30% to services.

Issue (d): Applicability of Notification No. 24/2018-Central Tax (Rate)

Relevant legal framework and precedents: Notification No. 24/2018-Central Tax (Rate) dated 31st December 2018 contains an explanation prescribing the 70:30 ratio of goods to services valuation for composite supplies involving renewable energy devices and related services.

Court's interpretation and reasoning: The AAR held that this notification is squarely applicable to the contract under consideration, providing clarity on valuation and tax rates.

Key evidence and findings: The notification explicitly covers solar power generating systems and related services.

Application of law to facts: The notification governs the valuation and tax rate apportionment for the contract.

Conclusion: Notification No. 24/2018 is applicable and governs the valuation and GST rate apportionment for the contract.

3. SIGNIFICANT HOLDINGS

"The supply of components of the solar power plant along with the erection of the same would be treated as a composite supply of the nature of works contract."

"As per Entry no. 201 of Notification No. 01/2017, the tax rate should be 12% IGST on seventy per cent of the gross value charged by the supplier and 18% IGST on thirty per cent of the gross value charged by the supplier."

"The value referred to here is the gross consideration charged by the supplier for the entire supply."

"Notification No. 24/2018-Central Tax (Rate) dated 31 December 2018 containing the explanation with the ratio of goods and services as 70:30 is applicable."

Core principles established include:

• Rooftop solar power plant installations, involving permanent attachment to immovable property, qualify as works contracts under GST.
• Works contracts involving renewable energy devices are composite supplies requiring bifurcation of value and tax rates between goods and services.
• Valuation for GST purposes is on the gross contract value, apportioned 70% to goods and 30% to services as per Notification No. 24/2018.
• The applicable GST rates are 12% on goods and 18% on services, resulting in an effective rate of 13.8% on the total contract value.