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TMI Blog2020 (6) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... y attracting GST rate of 12% provided in the Notification 24/2017-Central Tax (Rate) dated 21 September 2017? (C) Whether the HSN classification of supply made by NEC would fall under '8470' or '9954'? (D) Whether the maintenance and management services post implementation would qualify as composite supply as defined under section 2(30) of the CGST Act, 2017? Further, whether such supply 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? 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The local authority will appoint a bank for implementation of a common payment system for multiple municipal and retail services. The applicant would be required to provide the Application Platform Interface ('API'), Accessory Development Kit ('ADK') and interfacing protocols for the Bank to develop their own system for integration with the AFC System. Further, the applicant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy as an immovable property, the AFC System supplied by the applicant would need to be permanently fastened to anything attached to the earth. These gates can be easily removed without damaging such gates and re-attached to some other locations. Hence, it cannot be said that such gates are permanently embedded to the bus 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 sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be treated as naturally bundled in the ordinary course of business. * Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of 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 matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tests in the present case as below: (i) The extent of annexation means by annexing a particular thing to an immovable property, such particular thing ceases to be detachable. To remove such thing, one would need to demolish 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBIC under the GST law for composite and mixed supply have discussed the conditions and factors relevant to determine whether a supply is naturally bundled supply. Such conditions and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) an art or cultural establishment; or (c) 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 supply of multiple hardware and software and commissioning, insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43W 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 contract as defined in clause 119 of section 2 of the Central Goods and Services Tax Act, 2017" 12.2 As discussed above, the supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 done by the applicant, such supplies comprising of maintenance services would never be made. Hence, this condition also appears to be satisfied. * There should be one principal supply: In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 Bus Stations. * City Buses: Supply of AFC system at the City Buses would involve supply as well as installation and commissioning of handheld Electronic Ticketing Machines ('ETMs') or ETM with printer for bar-coded ticket issuance and reader fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 range from 7-10 years). This would typically include repair and maintenance of hardware and software and 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. 19. In the subject case, we, thus, find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent 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-attached to some other locations. Hence, it cannot be said that such gates are permanently embedded to the bus 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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: "Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below: - * The perception of the consumer or the service receiver. If large number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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.e. POS machines, ETMs, Flap gates, Validators, Station servers, Communication components, Control centre hardware, Manual swing gates for disabled etc.. All these goods are integral part of the AFC system. These goods are being delivered to the client by the applicant and such goods that are supplied are used by the applicant to provide services of installation, testing and commissioning of the AFC System. Without th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime, 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 a plant, machinery or equipment and does not cover supply of such equipment. 35. In this case, the proposed contract is for supply of the AFC system comprising supply of multiple hardware and software and commissioning, installation and integration of the same. All the supplies i.e. hardware, software, installation and integration etc. are integral part of the AFC system and any of such individual supply is not the principal supply. The principal supply would be the goods i.e. the AFC system as a whole. Thus, the services of commissioning and installation cannot be said to be a principal or main supply under the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anking 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 maintenance and management services post implementation would qualify as composite supply as defined under section 2(30) of the CGST Act, 2017? Further, whether such supply 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? 41. Apart from installation of the AFC system, the applicant would also be responsible to maintain and manage the AFC system for a period agreed in the contract. Such maintenance activity would also involve replacement of defective parts with spare parts to ensure smooth functioning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement 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 the AFC system. Hence, this test found to be satisfied. * There should be one principal supply: In the current case, the objective/intention of the recipient is to receive the AFC system. Hence, the principle supply would be of the AFC System. Supply of service (maintenance and management) would be incidental to the main supply of the AFC system. Hence, this condition is also satisfied. 41.2 In view of the above, we find 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. 42. Now, we come to the question whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 under the AFC project would qualify as an original works meant predominantly for use other than for commerce, industry, or any other business or profession, thereby attracting GST rate of 12% provided in the Notification No. 24/2017-Central Tax (Rate) dated 21st September, 2017? Answer: The supply made by the applicant under the AFC project does not qualify as an original works meant predominantly for use other than for commerce, industry, or any other business or profession, thereby GST rate of 12% provided in the Notification No. 24/2017-Central Tax (Rate) dated 21st September, 2017 would not be applicable. Question-3 Whether the HSN classification of supply made by the applicant would fall under '8470' or '9954'? Answer: The HSN class ..... X X X X Extracts X X X X X X X X Extracts X X X X
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