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2021 (9) TMI 1287 - AAR - GSTLevy of GST - Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for supplying “Tertiary Treated Water” to Mahagenco, by treating the Sewage Water supplied by NMC - Built Operate and Transfer basis (BOT basis) - forward charge mechanism or reverse charge mechanism - entitlement for input tax credit - HELD THAT:- Applicable GST is being, charged by the applicant and the NMC is paying the GST to the applicant. In addition, the applicant also has been given the right, by the NMC, to sell the Treated Effluent/ Tertiary Treated Water to any person for non-potable purposes. The applicant supplies such Treated Effluent/ Tertiary Treated Water to the Maharashtra State Electricity Generating Co. Ltd. (hereinafter referred as MAHAGENCO), Maharashtra. The impugned product is called as “Tertiary Treated Water” (TTW) which is generated from the Sewage Treatment Plant (STP) and such TTW is sold by the applicant to Mahagenco for consideration - Applicant has entered into tri-party contract with the NMC and Mahagenco. As per the Agreement, it is the applicant’s responsibility to set up the Tertiary Treatment Plant; NMC has granted to the applicant, a special right to sell the Treated Effluent/ TTW to any person for non-potable application subject to the payment of royalty to the NMC; the sale consideration of Treated Effluent/ TTW is to be deposited by the applicant in an ESCROW Account opened with the designated bank. The ESCROW Bank is Trustee for NMC, the lenders’ representative and the concessionaire i.e. the Applicant. Entire sale proceeds generated out of sale (supply) of TTW is deposited by applicant in the trustee bank in the ESCROW Account. Liability of GST on royalty paid /payable by the applicant to NMC - HELD THAT:- The amount deducted by NMC through ESCROW arrangement is not a consideration/royalty but it is a revenue sharing arrangement/ reduction in applicant’s consideration for service to NMC - the applicant has stated that the amounts to be paid to NMC on account of sale of treated water is not payment against royalty services received from NMC. Rather it is a revenue sharing arrangement between the applicant and NMC. In the present transaction in hand, it is observed that there is transfer of rights by NMC to sell the processed water. The supplier of services is NMC and the recipient of such service is the Applicant. It is further observed that against the transfer of such rights, NMC is getting consideration in the form of “royalty”, from the applicant. The term Royalty is defined in the agreement itself and its quantum is also to be decided as mentioned in Schedule 13 - the amounts to be paid to NMC by the applicant on account of treated water sold is nothing but amounts paid against Royalty services received from NMC. It is not a revenue sharing model because in lieu of the amounts to be received by the NMC against sale of treated water, the fact is that, NMC is reducing its payment to the applicant against such amounts receivable. The subject question raised by the applicant pertains to applicability of GST on payments made by it to NMC against licence given to them to sell the TTW which is termed as ‘Royalty’ in the impugned agreement. Even though this can be considered as ‘Pure Service’ it is seen that such services are not rendered by the applicant to a local authority. Rather the said service is rendered by the local authority to the applicant and is therefore out of the purview of the said Entry No. 3 - the consideration paid by the applicant to NMC against receipt of ‘Royalty’ service is not exempt from GST. Royalty paid or payable by the applicant to Nagpur Municipal Corporation (NMC) for purchase of license or right of supplying “Tertiary Treated Water” to Mahagenco, by treating the Sewage Water supplied by NMC is liable to tax under the GST Act. Whether tax is to be paid by NMC or by the recipient (applicant) under reverse charge basis? - HELD THAT:- As per N/N. 13/2017-Central Tax (Rate) dated 28.06.2017, it is found that Entry Serial No. 5 prescribed that “services supplied by the Central Government, State Government, Union Territory or local authority to a business entity” in that case, the liability to pay tax is on the recipient of such service on RCM basis. Hence, since NMC is a Local Authority, the liability to pay tax is cast on recipient of the supply i.e. the applicant. Hence, as per the aforesaid notification entry, applicant would be liable to pay GST on reverse charge basis under section 9(3) of CGST Act. Whether the applicant would be entitled for Input Tax Credit (ITC), if tax is to be paid under Reverse Charge Mechanism? - HELD THAT:- In the present matter, applicant has supplied the taxable goods i.e. treated water, to Mahagenco which is the applicant’s outward supply on which GST is payable by the applicant. The subject supply of Royalty services is taxable under reverse charge mechanism in the hands of the applicant. Hence, the applicant would be eligible for ITC as per the provisions of section 16 to 21 of CGST Act, subject to fulfilment of conditions as mentioned under the GST Act. ITC is available when the inputs are used in course of business or furtherance of business when supplier is making outward taxable supply - Transfer of rights to sale of processed water is provided by NMC to the applicant on the basis of which, the applicant is supplying the treated water to Mahagenco on payment of consideration. The applicant can avail the ITC as per the provisions of law on the subject transaction only if it satisfies the relevant conditions mentioned under the GST Act, relating to availment of ITC. Whether the applicant satisfies the conditions depends on facts during the relevant period and the provisions applicable during that period, for which no details or facts are provided in the present matter. Hence, ITC would be available to the applicant subject to the conditions mentioned under the provisions of section 16 to 21 of CGST/MGST ACT, 2017.
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