TMI Blog2020 (6) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... been restricted to contract for building construction, fabrication etc. of any immovable property only. Any such composite supply undertaken on goods say for example a fabrication or paint job done in automotive body shop will not fall within the definition of term works contract per se under GST. Such contracts would continue to remain composite supplies, but will not be treated as a Works Contract for the purposes of GST. As per Para 6 (a) of the Schedule II to the CGST Act, 2017, works contracts as defined in Section 2(119) of the CGST Act, 2017 shall be treated as a supply of services. Thus, there is a clear demarcation of a works contract as a supply of service under GST. Hence, Works contract will be treated as service and tax would be charged accordingly. The applicant s contention that the contract for supply of the AFC system to the local authority does not qualify as a Works contract under Section 2(119) of the CGST Act, 2017, since the installed AFC system cannot be said to result in the emergence of an immovable property is agreed upon - the AFC system is not an immovable property as it can be dismantled and moved to a different location without any damage. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite supply? - HELD THAT:- The supply of the maintenance and management services to be provided post implementation of the AFC system under proposed contract would also qualify as a composite supply with the AFC system, being the principle supply. Whether supply of the maintenance and management services post implementation of the AFC system would be eligible for exemption under Notification No.12/2017-Central Tax (Rate) dated 28 June 2017 in case value of supply of goods constitutes not more than 25% of the value of the said composite supply? - HELD THAT:- The Notification No. 12/2017 Central Tax (Rate), dated 28th June, 2017, as amended by the Notification No.02/2018 Central Tax (Rate) dated 25th January, 2018 provides that composite supply of goods and services in which the value of supply of goods constitutes not more than 25 percent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation No.12/2017-Central Tax (Rate) dated 28 June 2017 in case value of supply of goods constitutes not more than 25% of the value of the said composite supply? 2. The applicant in the Statement of the Facts stated that they have been awarded a comprehensive Contract by the Surat Municipal Corporation ( SMC ) (a Municipal body incorporated under the Bombay Provincial Corporation Act, 1949) and the Surat Smart City Development Limited (SSCDL) (a Company incorporated under the Companies Act, 2013) for design, development, implementation, maintenance and management of open loop solution based Automatic Fare Collection ( AFC ) System for Bus Rapid Transit System ( BRTS ) and City Bus Operation in Surat City ( the City ). 2.1 The objective of the AFC system is to provide seamless travel with single smart card/ ticket on city s BRTS and City Bus Services. The AFC system is typically implemented in the following: Bus Stations : Supply of AFC system at the Bus Stations would involve supply as well as installation and commissioning of Point of Sell ( POS ) machines, turnstiles, validators to be fitted on Turnstile Gates-Hardware component, Station Servers, Station UP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is also jointly responsible to integrate the AFC System with the Common Payment System to be developed by the Bank appointed by the local authority. Under this phase, the applicant would not be supplying any hardware. (iii) Commissioning, Management and Operation of Central Control Centre ( CCC ): The responsibility to provide the site/location and furniture and fixture to set up a CCC shall be of the local authority. For setting up of CCC, the applicant would be required to supply hardware, software and install such hardware and software of the AFC System at the given site for the purpose of carrying out central monitoring and supervision of operation and functionality of the AFC System. CCC would also be used for handling ticketing and smart card related queries of the computers. Further, the applicant would also be responsible to maintain continuity of the AFC system in bus stations as well as the Buses in case of any stoppage or failures. This activity would be carried out in second phase of the Contract i.e. post completion of the AFC System. 2.2.2 Maintenance and Management of AFC system during Contract Period: The applicant is required to maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us stations and hence, should be considered as an immovable property. Further, the flap gates are just a part of the AFC system and is not the main equipment of the AFC system. Even if, it is argued that the flap gates are permanently fastened to the earth and form part of the immovable property, it cannot be construed that the whole AFC system would form part of the immovable property. 4.3 Further, in case of city buses, hand held ETM machines with electronic payment integration are provided for AFC system. In certain cases, Pole Validators with AFC system are installed on the buses. Considering that the buses are movable properties, such equipment would not be construed as immovable property. Further, the purpose and function of the AFC system installed on the city buses and BRTS bus stations is the same i.e. fare collection and providing seamless travel with a single smart card/ticket. Hence, it can be seen that the fixation/ attachment of the hardware to bus station/ terminal is not mandatory for the whole system to operate. 4.4 In view of the above, it can be concluded that the AFC system does not qualify as an immovable property. Thus, in the absence of any immovable pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f airlines. The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example, service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business. Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use. The elements are normally advertised as a package. The different elements are not available separately. The different elements are integral to one overall supply - if one or more is removed, the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olish it. While considering whether the thing/object is permanently annexed, the question is not the loss in value of the underlying thing/object, the question is whether economically, the asset is same as it was before removal i.e. does it retain its commercial character, or the same gets lost in the process of removal. (ii) As per the test of intent/object of annexation, it needs to be determined whether the annexation is for permanent beneficial enjoyment of the immovable property or of the movable property being attached to such immovable property. If the intent of annexation is the beneficial enjoyment of the movable property, then the property still remains movable. This test may sound quite subjective, however, it is pertinent to note that here the precondition is permanent beneficial enjoyment . There are following two implications of the intent test: (a) The annexation must only be such as is required for beneficial enjoyment of the movable property. For example, a machine is cemented to earth because that is best way to use the machine. But if a storage tank, made of bricks and cement is built, one cannot say that the object of annexation is to use the stora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors have been discussed above and the same have not been reiterated here for the sake of brevity. Basis these factors, it can be concluded that where the recipient s perception is to receive all the supplies together and as per business practices all the supplies being offered by the supplier are as a bundled supply, the supplies would be considered as naturally bundled supplies. (iv) In the current case, it can be argued that the recipient has an option to avail the supply of goods from one contractor and supply of service from another contract. Hence, the recipient is under no obligation to avail both the supplies from one contractor only. (v) Further, in such cases, the recipient issued a detailed Request For Proposal ( RFP ) specifying individual goods and services and based on the RFP, the applicant would submit the proposal. Thus, it cannot be said that the said product which would be drafted, prepared and tendered by the technical department of the recipient would be a standard product which can be offered to any other clients by the contractor in local market. Every client might have different need for different goods and services. (vi) Thus, it can be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017. 6 - (vii) Construction services other than (i), (ii), (iii), (iv), (v) and (vi) above. 9 - 9.1 Further, Original works has been defined in the GST regime, vide Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, as under: (zs) original works means- all new constructions; (i) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (ii) erection, commissioning or installation of plant, machinery or equipment or structures, whether prefabricated or otherwise; 9.2 From the above definition of Original works , it appears that the original works only includes erection, commissioning and installation services for a plant, machinery or equipment and does not cover supply of such equipment. 9.3 In this case, the proposed contract is for supply of the AFC system comprising suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortation of general public will be one of the duties entrusted to a municipality under the Article 243W of the Constitution. This task has been listed under Sr. No. 17 of the Twelth Schedule as Public Amenities including Street Lighting, Parking Lots, Bus Stops and Public Conveniences. 10.3 Thus, this being obligatory duties on the part of a municipality, this will be termed as any activity for use other than for commerce, industry, or any other business or profession. 10.4 Basis the above discussion, it can be argued that supply of the AFC system would qualify as Original works . Thus, the rate of 6% as provided in entry number (vi) of the Notification No. 11/2017 Central Tax (Rate) as amended by the Notification No. 24/2017 - Central Tax (Rate) should apply in case of the AFC system. QUSETION- 3: 11. Whether the HSN classification of supply made by NEC would fall under 8470 or 9954 ? 12. Two possible views for the above question presented by the applicant are as below: VIEW-1: 12.1 The description of the HSN code 9954 as provided in the Notification No. 11/2017 Central Tax (Rate) dated 28th June, 2017 is composite supply of works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Thus, for a supply to qualify as a composite supply, the following conditions need to be satisfied: There should be more than two supplies of goods or services or both: In the current case, since management and maintenance would involve both goods and services i.e. more than two supplies, this condition appears to be satisfied. They should be naturally bundled and supplied in conjunction with each other in the ordinary course of business: Supply of goods and services for maintenance and management of the AFC system would be naturally bundled as such supplies would only be provided where maintenance is to be done by the applicant. Even the intention of the recipient is to receive maintenance services. The nature of supplies which comprise of maintenance services is the responsibility of the service provider i.e. the applicant. Hence, in case maintenance of the AFC system is not don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogistics, engineering services etc.. They are registered under GST, vide GSTN Number-24AACCN3496J1Z8. 18. As per the applicant, they have been awarded a comprehensive contract by the Surat Municipal Corporation ( SMC ) (a Municipal body incorporated under the Bombay Provincial Corporation Act, 1949) and M/s Surat Smart City Development Limited (SSCDL) (a company incorporated under the companies act, 2013) for design, development, implementation, maintenance and management of open loop solution based Automatic Fare Collection ( AFC ) System for Bus Rapid Transit System ( BRTS ) and City Bus Operation in Surat City ( the City ). 18.1 The objective of the AFC system is to provide seamless travel with single smart card/ ticket on city s BRTS and City Bus Services. The AFC system is typically to be implemented in the following: Bus Stations: Supply of AFC system at the Bus Stations would involve supply as well as installation and commissioning of Point of Sell ( POS ) machines, turnstiles, validators to be fitted on Turnstile Gates-Hardware component, Station Servers, Station UPS, Swing Gates, Network Rack etc. AFC System is to be supplied and installed to 195 BRT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk appointed by the local authority. Under this phase, the applicant would not be supplying any hardware. (c) Commissioning, Management and Operation of Central Control Centre ( CCC ): The responsibility to provide the site/location and furniture and fixture to set up a CCC shall be of the local authority. For setting up of CCC, the applicant would be required to supply hardware, software and install such hardware and software of the AFC System at the given site for the purpose of carrying out central monitoring and supervision of operation and functionality of the AFC System. CCC would also be used for handling ticketing and smart card related queries of the computers. Further, the applicant would also be responsible to maintain continuity of the AFC system in bus stations as well as the Buses in case of any stoppage or failures. This activity would be carried out in second phase of the Contract i.e. post completion of the AFC System. 18.2 Maintenance and Management of the AFC system during Contract Period : The applicant is required to maintain and manage all hardware and software forming part of the AFC system during the contract period (this would rang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Schedule II to the CGST Act, 2017, works contracts as defined in Section 2(119) of the CGST Act, 2017 shall be treated as a supply of services. Thus, there is a clear demarcation of a works contract as a supply of service under GST. Hence, Works contract will be treated as service and tax would be charged accordingly. 24. In present case, it would also be relevant to ascertain whether setting up of the AFC System (comprising of Hardware and Software) would result into an immovable property to determine whether such supply would qualify as Works Contract under Section 2(119) of the CGST Act, 2017. To qualify as an immovable property, the AFC System supplied by the applicant would need to be permanently fastened to anything attached to the earth. 25. As per the applicant, apart from the flap gates and manual swing gates, which can arguable to be said to be fixed/ annexed to immovable property, rest all hardware to be supplied under said contracts are movable property. The flap gates, POS machines and manual swing gates are attached with screws and bolts at the entry gates of the bus station. These flap gates can be easily removed without damaging such gates and re-attach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business, one of which is a principal supply . 29. Thus, for a supply to qualify as a composite supply , the following needs to be satisfied: (i) There should be more than two supplies of goods or services or both; (ii) They should be naturally bundled and supplied in conjunction with each other in the ordinary course of business; and (iii) There should be one principal supply. 30. The above conditions have been examined in the present case, as under: 30.1 There should be more than two supplies of goods or services or both : In the current case, there are more than two supplies of goods (hardware) and services (software) and commissioning and installation of hardware, software (services). Thus, there is supply of more than two goods and services. Hence, this condition is satisfied. 30.2 They should be naturally bundled and supplied in conjunction with each other in the ordinary course of business : The Flyers issued by the Central Board of Excise and Customs ( CBEC ) for composite and mixed supplies have provided guidance on how to determine whether supplies are naturally bundled in the ordinary course of business as below: Wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al hardware and software. The ownership of the AFC system would only pass on to local authority only once the same is installed, tested and commissioned. Therefore, the supplies are perceived by local authority as a naturally bundled supply. Further, it can be seen from the existing contract that the requirement of local authority is to obtain complete AFC system and not individual hardware and software which form part of the AFC system. Even if one or more of the elements are removed, the functioning of the AFC system would get affected. Further, we find that that while providing, the AFC system is the principal supply, supply of hardware and software would be incidental to the main supply of the AFC system. Hence, this test found to be satisfied. 30.3 There should be one principal supply: As discussed above, in this case, there is one principal supply of the AFC system. Supply of hardware and software would be incidental to the main supply of the AFC system. Hence, this condition also appears to be satisfied. 31. From the discussions made above, we find that in the contract submitted by the applicant, the major part of the contract is supply of goods (hardware) i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; or (f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017. 6 - (vii) Construction services other than (i), (ii), (iii), (iv), (v) and (vi) above. 9 - 34. Further, Original works has been defined in the GST regime, vide para 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, as under: (zs) original works means- all new constructions; (i) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (ii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise; 34.1 From the above definition of Original works , it appears that the original works only includes erection, commissioning and installation services for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posite supply of works contract as defined in clause 119 of section 2 of the Central Goods and Services Tax Act, 2017 . 38.1 As discussed above, the supply to be made under proposed Contract by the applicant does not qualify as a Works contract . Since, the supply by the applicant does not qualify as works contract, such supply should not get classified under 9954 . 39. Further, the description of the HSN code 8470 as provided in the Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017 is calculating machines and pocket-size data recording, reproducing and displaying machines with calculating functions; accounting machines, postage-franking machines, ticket issuing machines and similar machines, incorporating a calculating device; cash registers . 39.1 Considering that the main purpose of the AFC system is to compute the fare automatically and issue tickets along with integration of the system with the banks, the most appropriate HSN classification is to be 8470 . Considering the rate of GST prescribed for HSN 8470 is 18%, the same should be applicable in this case. 40. Now, we come to the last question raised by the applicant which is, whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensuring that the AFC system continues to function as per the agreed parameters. This would also include supply of spares etc. for undertaking repairs, in case required. Thus, the said contract would be awarded for supply of the AFC system along with maintenance and management of the all hardware and software forming part of the AFC system. The proposed contract is not for individual supply of service of maintenance and management of the AFC system. Therefore, the supplies are perceived by local authority as a naturally bundled supply. Further, it can be seen from the existing contract that the requirement of local authority is to obtain complete AFC system along with maintenance management of all hardware and software forming part of the AFC system during the contract period and not individual service (i.e. maintenance management). Even if one or more of the elements are removed, the functioning of the AFC system would get affected. Further, we find that that while providing the AFC system, which is the principal supply, supply of goods (hardware) and services (software, installation commissioning, maintenance and management) would be incidental to the main supply of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposed contract constitutes more than 25% of the value of the said composite supply. Further, the proposed contract is to be awarded by the Surat Municipal Corporation ( SMC ) and M/s Surat Smart City Development Limited (SSCDL) to the applicant. We find that M/s SSCDL is a company incorporated under the Companies Act, 2013 and, hence, does not fall under the definition of the local authority or a Governmental authority or a Government Entity. As such, supply of the maintenance and management services to be provided post implementation of the AFC system does not eligible for said exemption. 43. In light of the foregoing, we rule as under R U L I N G Question 1: Whether the supply made by the applicant under the Automatic Fare Collection (AFC) project would qualify as: (a) works contract defined under section 2(119) of the CGST Act, 2017; or (b) composite supply defined under section 2(30) of the CGST Act, 2017? Answer : The supply made by the applicant under the Automatic Fare Collection (AFC) project would qualify as composite supply defined under section 2(30) of the CGST Act, 2017. Question 2: Whether the supply made by the applicant unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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