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TMI Blog2020 (10) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... s Development Corporation Limited, 2nd Floor, TTMC A Block, BMTC Complex, K H Road, Shanthinagar, Bengaluru - 560 027(herein after referred to as Appellant) against the advance Ruling No. KAR/ADRG 07/2020 dated: 10th March 2020 = 2020 (3) TMI 1041 - AUTHORITY FOR ADVANCE RULING, KARNATAKA. Brief Facts of the case: 1. The Appellant, a Karnataka State Government Entity, is engaged into providing street lighting services, under the Energy Performance Contract (ESCO contract) to the Thane Municipal Corporation (TMC), Thane for a period of 7 years. The ESCO contract is on shared saving model and is to reduce the overall consumption of electricity in street lighting. The Appellant has to operate and maintain 12,000 street lighting fixtures & respective feeder panels i.e. installation of LED fixtures, smart electric panels for automation, metering & comprehensive maintenance. The role of the Appellant is as under: a) Removal of the existing street lights and handing over the same to TMC. b) Installation of LED street lights on existing street light poles c) Installation of new smart feeder electrical panels compatible with LED fixtures at its own cost. d) Operation and maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amended, as the impugned supply is not that of pure services. iii. The instant transaction amounts to a composite supply, with supply of goods being principal supply and hence the impugned question is redundant. iv. The time of supply is the date of invoice and the consideration is equal to the value of the invoice, the GST rate being 12%. 4. Aggrieved by the said ruling, the appellant has filed this appeal on the following grounds. * The activity of the Appellant as per the contract is dependent on the quality and duration of lighting and not on the installation of the streetlight fittings. Therefore, the supply is a supply of service and not supply of goods as held by the AAR. * The Appellant is eligible for the exemption in terms of Entry 3 or 3A of Notf No 12/2017 CT (R) dt 28.06.2017. * The time of supply will not be at the time of raising the invoice as held by the AAR but it will be at the time of termination of the contract as the title in goods is vested to the client only at that time. PERSONAL HEARING 5. The appellant was called for a virtual hearing on 25th Sept 2020 but they sought an adjournment. Accordingly, the Appellants were called for another virtua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uming, but not admitting that it is a supply of goods as held by the AAR, then the time of supply has been held as the time when the invoice is raised. However, the Authority has failed to address the issue as to when the invoice should be raised when there is a continuous supply. He submitted that in their case, the supply happens only at the end of the contract period and anything received before that has to be in the form an advance receipt. 5.6. In view of the above submissions he pleaded that the appeal be allowed. The Authorised representative also craved leave to file written additional submissions in the matter. 5.7. In the additional written submissions, the Appellant submitted that the ESCO contract is a contract for supply of pure services to the Contractee and hence assessable as a supply of services entitling it to the Exemption under 12/2017-CT; that the essence of the contract is `energy savings' and not supply of street lights; that ownership and possession of street lights continue to be with the Contractor for the entire contract period in its own account and vests only at the expiry of contract period; that material component is not at all supplied to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o extra payment would be made for repair, replacement and installation of any faulty lights, wires, cables, etc during the tenure of the project. Contractor would not be entitled to any revenue if there are no energy savings despite installation of the street lights. In case of deficiency in promised energy savings, the contractor would be penalized. There is no assured fee to the contractor even after installation of the street lights. Operation, maintenance and replacement of the street lights for the entire contract period is the responsibility of the contractor. The contractor would be having access to the entire lighting infrastructure and would be operating the control room of street lighting including switching on switching off of the street lights. They submitted that 'Pure services' should not be mean no material at all, it would also include cases where there is no independent price being charged for the goods. Pure services CANNOT be performed in vacuum without use of any materials. There would always involve usage of materials Pure services should be understood from the perspective of whether there is a value being assigned/charged for goods. For eg. A Doctor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion of the installation, operation / maintenance activity. The appellant clearly expects that the material component would be significantly lesser than 25% mark. They submitted that the subject contract is a single indivisible contract for street lighting for a period 7 years. The said contract would probably be covered as a continuous supply of services. In terms of section 31 (5), the payment obligations on a monthly basis would be the time within which the invoices would be raised. It is submitted that the 25% calculation should be viewed from the contract revenue as whole and not with reference to the individual monthly payment obligations which trigger the requirement of raising an invoice in terms of section 31 (5). Each invoice cannot be termed as an independent supply rather it merely represents a stage of collection of payment in terms of section 31(5) under a long duration contract. It is also submitted that a Composite supply u/s 2(30) implies a bundle of two or more supplies. If one views all the possible contracts which fall within this exemption entry (such as Roads and bridges, water supply for domestic, industrial and commercial purposes, public amenities includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y legal provision under which such attribution can take place; that in the absence of a legal provision for attribution of a value in composite supply, the Ld AAR has incorrectly concluded that monthly consideration under the contract includes amounts attributable towards value of supply of goods; that the Ld AAR erred in concluding that the time of supply of such activity would be at the time of raising the invoice despite acknowledging that the title in goods is vested only on termination of the contract; that the Ld AAR erred in not applying its very own ruling in Yashwani Enterprises KAR ADG 51/2019 = 2019 (11) TMI 161 - AUTHORITY FOR ADVANCE RULING, KARNATAKA where the benefit of exemption was granted under 3A without any quantification or alteration of the 25% criteria. They also argued that the Ld AAR erred in deeming a supply in terms of section 12(2) when the supply of goods (if any) under the contract takes place only when the contract expires and is not renewed in the future. 5.12. In view of the above submissions, the Appellant prayed that the ruling of the lower Authority may be set aside and that supply in their case be held as a supply of pure services which is exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e smart feeder panels will be implemented, and the central control room will be established. After the LED installation work is completed, feeder panel-wise street lighting system will be handed over to ESCO for maintenance. Completion certificate of ESCO project on all roads under the project will be issued. * Phase III -Operation and maintenance upto the end of the contract period. 8. The ownership of the assets under this contract is as follows: * TMC shall be the owner of the land and the existing lighting infrastructure facilities (excluding smart feeder panel and LED light fixtures installed by the Appellant) * The Appellant shall hand over to TMC street lighting fixtures/fittings and any other equipment that has been replaced with proper documentation for TMC's verification. The replaced equipment shall be free of lien * The Appellant shall remain the owner of the equipment and systems installed by them during the term of the contract. * The Appellant shall undertake all the procurement of equipment and services necessary for the project. * At the expiry of the term of the contract, all rights and titles to, and interests in, all improvements and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. During the contract period, the Appellant is required to operate and maintain the street lighting system and ensure that there is a reduction in the energy consumption. The performance of the Appellant is measured in terms of the quantum of energy saved which is the difference between the energy consumption before the LED lights were fitted (Energy Baseline) and the actual energy consumed after the energy conservation measures were implemented. In consideration for the performance of this activity, TMC will pay the Appellant a fee called the Energy Saving Fee which is determined based on a formula. The payment of fee to the Appellant will be made only if there is an energy saving which is equal to or greater than 60% of the Energy Baseline. In the event the energy saving is less than 60% of the Energy Baseline the Appellant will have to pay a penalty. From the aforesaid, we find that the activity performed by the Appellant in respect of the ESCO contract is a service-oriented activity. Although for the purpose of rendering this service, the Appellant uses goods like LED light fixtures, smart feeder panels which are procured by them, it is not for the goods that the payment is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority 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 Municipality under article 243W of the Constitution. NIL NIL For the applicability of the above-mentioned entry, the following requirements need to be fulfilled: a) The supply must be a case of supply of pure service. The contract should not include any supply of goods either by way of works contract or composite supply. b) Supply must be made either to Central Govt or State Govt or Union Territory or a Local Authority or a Governmental Authority. c) The service so supplied must be in relation to any function entrusted to a Panchayat under Article 243G or entrusted to a Municipality under Article 243W. In this case, there is no doubt on the fact that the supply is made to a local authority (Thane Municipal Corporation) and the service supplied i.e the operation and maintenance of street lighting is in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be eligible for the above entry, there are three requirements to be fulfilled viz. a) The supply must be a composite supply of goods and services and the value of the goods supplied should not exceed 25% of the value of the entire composite supply. b) The composite supply must be made either to Central Govt or State Govt or Union Territory or a Local Authority or a Governmental Authority or a Government Entity. c) The composite supply must be in relation to any function entrusted to a Panchayat under Article 243G or entrusted to a Municipality under Article 243W. As regards the conditions at (b) and (c) above, we have already agreed that the Appellant fulfills the same. However, with respect to the first condition, we find that the Appellant has not been able to establish that the value of the goods component supplied as per the ESCO contract will be less than 25% of the value of the entire contract. The Appellant has relied on the Karnataka Authority for Advance Ruling decision in the case of Yashwani Enterprises KAR ADG 51/2019 = 2019 (11) TMI 161 - AUTHORITY FOR ADVANCE RULING, KARNATAKA and the Rajasthan AAR ruling in the case of Kailash Chandra = 2018 (11) TMI 1349 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption Notification is unambiguous in laying down the condition that the value of the supply of goods should not exceed 25% of the total value of the supply. The burden of proving the eligibility to the exemption is on the Appellant to show that his case comes within the parameters of the exemption notification. We rely on the decision of the Constitution Bench of the Supreme Court in the case of Commissioner of Customs (Import) Mumbai Vs. Dilip Kumar & Co & Ors. = 2018 (7) TMI 1826 - SUPREME COURT in this regard. We find that this onus has not been adequately discharged by the Appellant. Therefore, we hold that the Appellants are not eligible for the benefit of exemption under entry 3A of the Notf No 12/2017 CT (R) as amended by Notf No 02/2018 CT (R). 14. Having held that the Appellant is not eligible for exemption either under entry 3 or 3A of the Notf No 12/2017 CT (R), we now examine the question as to the applicable rate of tax in respect of the supply of service to TMC. For this we first have to determine the classification of the service. As mentioned earlier, the scope of the work under the ESCO contract is undertaken in three phases. Phase I involves the preparatory w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character of immovable property just by the act of affixing them to an immovable property. Further, we also find that there is no transfer in property of goods during the execution of the ESCO contract. Therefore, the impugned contract does not qualify to be classifiable as a "works contract". 16. In the Explanatory Notes to the scheme of classification of services, which is a guiding tool for classification of services, service code 999112 is extracted below: 999112 - Public administrative services related to the provision of educational, health care, cultural and other social services, excluding social security service. This service code includes: i. public administrative services related to different educational institutions ii. public administrative services related to the management, operation, inspection and support of all types of schools and other educational institutions iii. public information services concerning the educational system in general, provided by government departments or special programme units iv. public administrative services related to all kinds of health and social services v. public administrative services related to the management, oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other services provided to the community as a whole; compulsory social security services. 9 - 18. We now address the question regarding the time of supply. Since we have held that the supply in this case is a composite supply involving the supply of both goods and services with the supply of service being the predominant supply, the provisions of Section 13 of the CGST Act relating to time of supply of services will apply. The said Section is reproduced here below: 13. Time of supply of services:- (1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section. (2) The time of supply of services shall be the earliest of the following dates, namely:- (a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or (b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or (c) the date on which the recipient shows the receipt of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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