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TMI Blog2021 (12) TMI 886X X X X Extracts X X X X X X X X Extracts X X X X ..... from M/s Raichur Power Corporation Limited (herein after referred to as 'RPCL'), on winning the tender, for setting up of Wet Limestone Flue Gas Desulphurisation (referred as FGD) and operation & maintenance of the said plant. The applicant stated that they have initiated the work for setting up of the FGD plant; received the mobilization advances from M/s RPCL & discharged GST @ 12% on the said advances. In view of this the applicant sought advance ruling in respect of the following questions. a) Whether the combined service of setting up of Wet Limestone FGD plant and operation & maintenance be considered as a composite supply? b) If answer to question (a) above is yes then, whether the supply provided by the applicant is a composite supply of works contract as per Section 2(30) and Section 2(119) of CGST Act, 2017 and what would be the principal supply? c) If the supply is considered as a composite supply of works contract services, whether the said supply to be provided by the applicant would fall under the entry no.3(iv)(e) of the Notification No.11/ 2017-Central Tax (Rate) dated 28.06.2017, as amended time to time? d) What would be the applicable GST rate and SAC/ HSN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the LOA by M/s RPCL on 14.08.2020, after the submission of the bid documents. The term of payment is given in para 5.0 of the letter dated 14.08.2020. The applicant has received ten percent of initial advance of contract price and paid the GST at 12%. 3.6 M/s RPCL is already operating the thermal power project located at Yeramarus, Raichur District, Karnataka State. They have vacant land adjacent to the thermal power plant operated by M/s RPCL. The proposed system i.e. Wet Limestone FGD plant is to be installed at land adjacent to existing plant. The drawings giving the location of the existing thermal power plant and the proposed FGD system are also furnished. 3.7 The process of setting up of the Wet Limestone FGD plant can be described in the following steps: i. Ducting system : The ducts, made of carbon steel, are used for transferring flue gas from existing chimney to the absorber. Further, to maintain the flue gas pressure, booster fans are installed to develop the required pressure for transferring flue gas. ii. Absorber : Absorber is the main equipment where the Sulphur is removed from flue gas. It is a 41.0 m height shell of 18.0 m diameter, made up of carbon steel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be further elaborated by the bidder in the O&M manual to be submitted to Owner for approval. Items though not specifically mentioned but needed for continuous operation & maintenance of entire FGD plant to meet the intent of specification, shall be deemed to be included in scope of work of Contractor. The scope shall include all supply of spares and consumables and services indicated but not limited to the following: a) Ensuring successful operation of FGD plant in three shifts for required SO2 reduction efficiency with optimum energy and limestone consumption and producing good quality of gypsum. Further, maintenance of the entire FGD plant by appointing experienced service engineers, supervisors, operators and technicians round the clock is covered in the scope of Contractor. b) Carrying out necessary Preventive maintenance and Breakdown maintenance, overhauls, furnishing technical assistance from experts & arranging visit of O&M experts to site from time to time (as & when required and to be discussed mutually by Contractor & Owner) for ensuring smooth operation and maintenance of the plant. Also carrying out maintenance during annual overhauling / capital overhaul of the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res supply of various items lime mist eliminator, pipe racks, multistage vacuum pumps, wastewater tank and pump, cable racks, nozzles etc., and services of installation and commissioning. The operation and maintenance of the plant inter-alia includes the activities like operation of plant, maintenance to keep the plant in running condition, supply of spares and consumables etc. Thus, both goods and services shall be supplied by the applicant. Hence the first criteria is satisfied. b. Supply is naturally bundled: Both the supply of setting up of plant and operation & maintenance are naturally bundled, as will be evident from notification of Ministry of Environment as given in bid document itself that the purpose of setting up of the plant is to achieve the emission norms for discharge of gas. The combined supply mainly setting up of plant and operation of plant can achieve the above objective. The operation and maintenance are mainly provided to the person setting up the plant in order to ensure that the objective of the plant is achieved. If one person set up the plant and other person operate the plant, they may blame each other if the desired result is not achieved. The person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te change had issued Notification No. S.O.3305 which laid down the emission limit of above gases for the thermal power plant. The emission limit given in the notification is reproduced in "Statement of Facts" above. ii. It is submitted that for reducing the emission of above gases, FGD techniques are used by operator of Thermal Power plants. The functioning of the FGD plant is given below. a) In order to control air pollution, FGD plants are set up in the existing system to minimize the level of pollutants present in the flue gas con-ling out of the Chimney. b) Flue gas containing above said gases will be tapped from the existing chimney and conveyed through rectangular ducts to the treatment unit i.e. Absorber. c) Lime slurry prepared from the Ball mills and agitators will be conveyed through pipelines to the absorber with high pressure through nozzles and lime slurry will be sprayed over the flue gas continuously. d) Chemical reaction takes place during the above activity and the impurities like SO2, 503, HCI and HF will be converted to Gypsum. e) Gypsum initially formed will be in liquid form, it will be processed to solid crystal form which will be used in fertilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asthan and other [(1991) 4 SCC 473], this court adverted to the meaning of process as well as manufacture. The relevant extract of judgment is reproduced below: "12. Manufacture implies a change, but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. 13. Manufacture thus involves series of processes. Process in manufacture or in relation to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e' has been defined in Section 2(72) of the CGST Act as follows: (72) "manufacture" means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" shall be construed accordingly. It is evident from the said definition that the process shall result in new product having distinct name, characteristics, and use. The process carried out for generating the electricity is as follows: A typical Thermal Power Station operates on a Cycle which is shown below: Where T' stands for Turbine 'C' stands for Condenser 'P' stands for pump B' stands for Boiler i. The working fluid is water and steam. This is called the feed water and steam cycle. The ideal Thermodynamic cycle to which the operation of a Thermal Power Station closely resembles is the ranking cycle. ii. In a steam boiler, the water is heated up by burning the coal in the air in the furnace and the function of the boiler is to give dry superheated steam at the required temperature. The steam so produced is used in driving the steam Turbines. iii. The turbine is coupled to the synchronous generator (usually a three- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... YTPS plant only. Therefore, it will be considered that FGD plant is not located as a part of the factory. 4.3 Therefore, in view of the above submissions it is submitted that the services to be provided by the applicant will fall under Sl.No.3(iv)(e) of Notification No.11/2017-CT (R) and accordingly, the rate of GST will be 12%. 5. JURISDICTIONAL OFFICER'S COMMENTS: The Assistant Commissioner of Central Tax, Division-5, Bengaluru East Commissionerate, Bengaluru, being the jurisdictional Assistant Commissioner have furnished their views/comments, question wise, on the questions raised by the applicant, vide their letter dated 06.09.2021, inter alia stating as under: 5.1 The applicant with regard to the first question "whether the combined service of setting up of Wet Limestone FGD plant and Operation & Maintenance to be considered as composite supply" contended that (i) setting up of plant requires supply of various items like mist eliminator, pipe racks, multistage vacuum pumps, waste water tank and pump, cable racks, nozzles etc., and services of installation and commissioning. The operation & maintenance of the plant includes operation of the plant and supply of spares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified O&M for 10 years however, the final contract awarded for O&M is for 3 years only. Other indicators like the different elements are not available separately is also not applicable to instant case as separate contracts for civil, structural and architectural works and O&M are separately floated by similar companies like BHEL, NTPC etc., Further, whether the different elements are integral to one overall supply i.e. if one or more are removed, the nature of the supply would be effected is also not applicable to the instant application as discussed above. The definition of mixed supply reveals that a supply can be a mixed supply only if it is not a composite supply i.e. if the transaction consists of supplies not naturally bundled in the ordinary course of business, then it would be a mixed supply. Once the amenability of the transaction as a composite supply is ruled out, it would be a mixed supply, classified in terms of supply of good or services attracting highest rate of tax. Thus, based on the documents submitted and detailed discussion above, this office is of the view that the said supply is classifiable as mixed supply in terms of Section 2(74) of the CGST Act, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not mixed supply. 6.2 In view of the above, it is submitted that the services will be classified as composite supply under clause 3 (iv)(e) of sub-heading 9954 attracting 12% tax shall be approved. Further we also rely upon ruling given by Karnataka AAR, in the case of M/s. Arvind Envisol Limited 2021 (4) TMI 143 (AAR). PERSONAL HEARING 7. Sri S.S. Gupta, Chartered Accountant and authorized representative of the applicant company, appeared for personal hearing proceedings before this authority on 07.10.2020 and requested for one more additional hearing. Accordingly additional hearing opportunity was given and the aforesaid authorized representative appeared before this authority on 26.11.2021 and submitted the written additional submissions. DISCUSSION AND FINDINGS 8. At the outset we would like to make it clear that the provisions of CGST Act 2017 and KGST Act 2017 are in pari-materia and have the same provisions in like matters and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provision in the KGST A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods or services is principal / predominant The concept of 'naturally bundled' supplies is not defined under CGST Act 2017. However Education Guide issued by CBEC (now CBIC) in the year 2012 refers 'Bundled service' to mean a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. Though this reference is given with respect to bundled service it can be extended to bundled supplies in the GST regime 13.2 The rule is - 'If various elements of a bundled supply are naturally bundled in the ordinary course of business, it shall be treated as provision of a single supply which gives such bundle its essential character'. Further, Para 9.2.4 of Education Guide mentions: "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- * * Perception of the consumer or the service receiver * Majority of service providers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - CESTAT Mumbai In para 5 of the said judgement the Tribunal observed as follows: 5. From the records it is apparent that the appellant contracted with M/s MSETCL of following due process of tendering which, admittedly, is work to be executed on turnkey basis. Accordingly, while it may comprise performance of a number of services the actual composition of the service is no means susceptible to segregation. Admittedly, turnkey contracts also include supply of goods necessary for execution of the projects. It is a normal practice in such a contract to provide a detailed breakup, with invoices raised to mirror the contents of the payments in the contract, for regular payments to be made to the contractor. Such a breakup is a necessary input for management of the finance related to the work itself especially when a work is executed over a longer period of time. It does not allow for vivisecting a contract. We, therefore, find that the original and the appellate authority have erred in attempting to classify a portion of the work as 'erection, installation and commissioning service'. Learned Counsel has drawn our attention to the decision of the Tribunal in Kedar Constructions vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of parties. In this case the tender was invited for the following: "Design, engineering, manufacture, Quality Surveillance, inspection & testing at suppliers works, supply, packing, forwarding to site, transportation, F.O. RYTPS, unloading, storage, preservation, handling at site, all mechanical, C&I Systems, electrical equipment and systems, steel structures, civil works with new chimney, insurance, erection, painting, start-up, trial operation, testing, commissioning, performance guarantee testing and warranty for wet line stone flue gas desulphurization plant for 2 * 800 MW, units-1 and 2 of Yeramarus Thermal Power Station of RPCL, Yearrnarus, Raichur District, Karnataka and handling over to the Owner an operating plant and Operation & Maintenance of FGD systems including supply of spares & consumables for ten years as per scope identified in the technical specifications of the bid document of YTPS, 2 * 800 MW project". The abstract from the tender is attached as on page 36 to 46 of application. The wording of the tender clearly specifies that all the work specified in the tender are required to be completed. The words 'handing over to the Owner an operating plant" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application. The price breakup is given in five separate heads which are as follows: a. Lumpsum Price for Supply (Ex-works) b. Lumpsum Price for Erection and Commissioning c. Lumpsum Price for Civil works d. Lumpsum Price for O&M e. Lumpsum Price for Freight In the present case FGD Project is an EPC project which includes Design, engineering, manufacture, Quality Surveillance, inspection & testing at supplier's works, supply, packing, forwarding to site, transportation, F.O.R-YTPS, unloading, storage, preservation, handling at site, of all mechanical, C&I systems, electrical equipment and systems, steel structures, civil works, insurance, erection, painting, start-up, trial operation, testing, commissioning. Civil work consists of following units emergency drainage tank, chimney stacks unit, absorber, tanks & silo works, limestone screen feeder house bldg, limestone crusher house bldg, process bldg & staircase block, reagent storage & slurry preparation bldg, gypsum dumping shed, gypsum dewatering building, mill building bldg, mcc building bldg, electrical distribution room (hvd) bldg, limestone stockpile building unit, pipe racks works, conveyor galleries works, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in different cost centres and accordingly charges GST on separate supplies. At the time of application respondent company was levying tax at 12 per cent on supply of standard gauge intermediate cars and 18 per cent on other supply of service as supplied by the respective cost centre. This practice was not objected by M/s BEML. In the present case the applicant has not paid the GST considering the activity as separate supply. The raising of separate invoice indicates the intention of the parties to treat the supply as the separate supply. 15.5. Purpose of setting up of FGD plant cannot be achieved if all items are not integrated. The purpose of setting up of FGD plant is to control the emission of Sulphur dioxide (SO2), Nitrogen Oxide (NOx) and other items. These are specified in the notification dated 07/12/2015 issued under the Environment (Protection Act 1986) copy of which is attached on page no. 47 to 51 of the application. Unless the entire plant is functions in integrated manner the propose of the plant will not be achieved. Therefore, it is submitted that each item mentioned in the annexure to the work order is not the independent but is interdependent. 15.6 Setting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 5.4. Further the scope of O&M of FGD plant at clause 7 specifies that the O&M of the said plant commences after handing over / issue of Notice to Proceed, as the case may be. These two clauses indicate that the O&M is a separate supply altogether, which will commence after handing over the operating plant by the applicant to M / s RPCL. iii. Clause 10 of the job order specifies that security deposits towards performance guarantee need to be furnished for the FGD plant and for the O&M of the said plant separately at different periods, which indicates that O&M of the FGD plant is a separate supply. iv. Clause 11.1 of the job order specifies liquidated damages for the delay in integration of the FGD plant system with the existing power plant. Further clause 11.2 specifies the performance liquidated damages for deficiency in performance of FGD plant, for increase in Limestone consumption, for increase in auxiliary power consumption. Further, if the demonstrated guarantee(s) continue to be beyond the stipulated acceptable shortfall time, even after the modification / replacements within a reasonable period allowed by the owner, after the tests have been completed, the owner will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Not only from the price break up but also from the terms and conditions of the agreement as brought out in the para 16 supra that the activities of O&M are separately identified. In fact the same can also be derived from the applicants first question 'whether the combined service of setting up of Wet Limestone FGD plant and operation & maintenance be considered as a composite supply?' wherein the applicant clubbed certain activities (a, b, c & e) as works contract and considered O&M as separate activity. 17.2 Applicant has further contended that O&M is integral to setting up of FGD plant citing that if given to a different entity, they may blame each other for any failures. Thus, it is admitted that the works are clearly divisible and can be given to two, but for the convenience of contracting parties the same have been clubbed into single contract. 17.3 The case laws quoted by the applicant pertain to EPC and turnkey projects wherein the contractor is given full responsibility to construct an operating facility and transfer to the owner. In the instant case facts are different in as much as the applicant in addition to setting up of FGD plant on turnkey basis is given an add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on being the principle supply. 20. Classification of the services & the rates applicable thereon: Now we proceed to examine the classification of the services & the rates of GST applicable thereon, as we have concluded that the applicant is involved in supply two services i.e. Setting up of FGD plat and O&M of the said plant, one at a time. 20.1 Now, we consider the service of Setting up of FGD plant, which is in the nature of turnkey project / EPC contract and examine whether setting up of the said plant qualifies to be a composite supply of works contract or not. In this regard we invite reference to Section 7(1)(d) of the CGST Act, 2017 which specifies that the activities are to be decided as supply of goods or supply of services in terms of Schedule II of the said section 7. Further entry number 6(a) of the said Schedule II specifies that 'composite supply of works contract', as defined under Section 2 (119) of CGST Act. 2017, shall be treated as supply of service. Section 2(119) defines 'works contract' to mean "a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the FGD plant is integrated to the thermal power plant and hence we proceed to examine whether the thermal power plant amounts to a factory or not. The FGD plant is meant for the purpose of reducing emission of Sulphur Dioxide gas present in the flue gas coming out at the time of generation of thermal power, which is hazardous to the environment. Thus, the said plant is a type of pollution control device, which is useful for the control of air pollution by reducing emission of Sulphur Dioxide gas generated in the thermal power station. Now we proceed to examine whether the FGD plant is not located as a part of the factory or not i.e whether the thermal power plant amounts to be a factory or not. The term "Factory" is not defined under the CGST Act, 2017 and hence we invite the reference to the Central Excise Act, 1944, wherein 'factory' is defined under Section 2(e) to mean (e) any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on; Thus, from the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intent of specification, shall be deemed to be included in scope of O&M. The scope shall include all supply of spares and consumables and services indicated. b) Ensuring successful operation of FGD plant in three shifts for required SO2 reduction efficiency with optimum energy and limestone consumption and producing good quality of gypsum. Further, maintenance of the entire FGD plant by appointing experienced service engineers, supervisors, operators and technicians round the clock is covered in the scope of O&M service. c) Carrying out necessary Preventive maintenance and Breakdown maintenance, overhauls, furnishing technical assistance from experts & arranging visit of O&M experts to site from time to time (as & when required and to be discussed mutually by Contractor i.e. applicant & Owner i.e. M/s RPCL) for ensuring smooth operation and maintenance of the plant. Also carrying out maintenance during annual overhauling / capital overhaul of the units. d) Contractor has to ensure that FGD plant is operated and maintained as per "Operation and Maintenance instruction manuals" and in accordance with Engineer in-charge for coordination with operation/ maintenance of main pl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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