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By: Jayaprakash Gopinathan
August 18, 2021
All Articles by: Jayaprakash Gopinathan       View Profile
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A learned consultant on Indirect Taxation forwarded a senior experts opinion on the Advance Ruling in Re- Good will Auto on the question of applicability of GST on the value of diesel collected for running the DG set supplied to different entities by the party and sought my comment. The messages read as “Diesel not under GST but taxable @18% as part of composite service”  “ 18% GST payable on Diesel as a part of composite service”.  “Absurd” I thought for a moment and decided to read the full text of the order. On reading the order of the authority I felt apologetically for the ‘absurd’ thought and felt that always the cover may not be signifying the content.

Always criticism of existing patterns and beliefs force changes and bring new thoughts which again will be subjected for change over the period. The criticism of Ancient Greek thinker and philosopher Aristotle of the then philosophical tradition paved way for the concept of possibility and actuality with regard to the questions on origin and motion which continued to  rule the roost  till the 17th Century when the theory of probability was introduced by Hobson. That which has already come into being and exists is termed as Actuality and that which has already come into being and exists under given conditions and may become actuality is termed as Possibility by Aristotle. It appears that the above principle applied equally in the process of evolution of law and interpretation of taxation statutes.

Be as it may, the above principle can aptly explain the conundrum of ‘allegation of GST on Diesel’ order of AAR Karnataka. There is no dispute on the applicability of GST on the hire charges for supply of Diesel Generating Set. The dispute is in respect of charges collected towards supply (use) of diesel for running the DG set which is collected on an hourly basis. Whether it is mere supply of goods (Diesel), which is yet to be brought within the ambit of GST, or composite supply of goods and services is the subject brought for advance rulings. In understanding the levy on services, relationship between the service provider and the service recipient is crucial and the factual matrix of the case brings out the relationship between them.

In this case, As per the facts of the case stated in the AAR ruling, M/s. Goodwill Auto’s,  the  Applicant is a partnership firm and  is engaged in the business of leasing of DG Sets to customers like LIC of India, Syndicate Bank, and SBI in various districts of Karnataka.  The applicant has entered into agreement with Life Insurance Corporation of India (LIC), Branch Office at Koppa, Udupi to install Diesel Generator on hire basis for rent of ₹ 10,520-00 per month along with reimbursement of diesel cost at ₹ 305-00 per hour on usage of the DG Set.

The applicant discharged tax liability @ 18% (CGST @ 9% and KGST @ 9%) on the total receipt of hire charges and on the claim of diesel charges. M/s Life Insurance Corporation of India opposed to the collection of GST on the reimbursement of diesel charges for running the Diesel Generator due to non inclusion of Diesel within the ambit of Goods and Services Tax  Act, 2017. The Applicant’s contention before the authority was that the amount it received as reimbursement towards the cost of diesel is includible in the taxable value since consideration includes any amount that is payable for the taxable services provided or to be provided……

 In its findings and discussion  the AAR, inter alia , noted that the Applicant  is discharging tax @ 18%  on leasing charges of DG Set provided to the customers and also discharging tax @ 18% on the reimbursement of diesel cost incurred for running DG Set by the recipient of the service.  When  the recipient of the service is objecting to discharge taxes on reimbursement of diesel cost incurred for running DG Set, the ruling is sought for.

After examining the relevant statutory provisions of Section(s) 2(31) and 15(1) of CGST Act , the AAR observed that  “ The contract entered between the applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having a fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge is the charge for the diesel used. Both are part of the same consideration and is for the contract of supplying DG Set on hire. Though it appears that the applicant is receiving the reimbursement of diesel cost, the recipient is not paying for the diesel but for the services of DG Set, which is an integral part of the supply of DG Set rental service. There is no separate contract for supply of diesel and the invoice issued for the reimbursement of diesel cost is nothing but a supplementary invoice issued for the supply of rental service of DG Set.”

The actuality of the contract is explained above without giving any room for any possibility for a different interpretation but with a slight distortion of the term reimbursement..

The observation “consideration for reimbursement of expenses as cost of the diesel for running of the DG Set…and the ruling  .” The cost of the diesel incurred for running DG Set in the course of providing DG Rental Service”  Created the conundrum of GST to be paid on diesel.

 As per details provided above there was no reimbursement of cost of diesel by the service recipient to the service provider. What is collected as additional consideration is the running cost of the DG set on an hourly basis. Diesel cost cannot be reimbursed on an hourly basis. As per P. Ramanatha Iyer’s The Law Lexicon, “Reimbursement, in ordinary parlance means repayment of which has been spent. To reimburse is to repay what is expended.- DEEPAK FERTILISER & PETROLEUM CHEMICALS CORPN LTD VERSUS UNION OF INDIA [1996 (7) TMI 595 - DELHI HIGH COURT]. Since in actuality , the  amount of ₹ 305/- paid as cost of running for an hour is not a reimbursement of Diesel cost but the operational cost for generating electricity for the use of the service recipients. There appears to be no possibility to term the ruling as “ 18% GST on Diesel cost reimbursed”. The experts too should respect the wisdom of ordinary readers and does not force them for absurd conclusions.

In this case, if the contract would have been drafted to supply diesel as a pure agent by M/s Good will Auto, then it appears, the same would have been outside the taxable value itself and LIC would have saved ₹ 54.90/- per hour of the use of DG set!


G.Jayaprakash, Advocate


By: Jayaprakash Gopinathan - August 18, 2021



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