JUNE 15, 2018

By Nikhil Agarwal

DIVERGENT decisions from two separate Authority for Advance Rulings (AAR) on the GST rate applicable on installation of solar plants have thrown the solar industry into a conundrum.These rulings have added to the confusion, prompting the Solar Power Developers Association to represent before the government seeking clarification on the issues grappling the sector.

In this article, I intend to highlight the implications of divergent views of different AAR, the possible remedy and the way forward for the assessees.

The GST Advance Ruling Authority in the State of Maharashtra, in the case of Giriraj Renewables Private Limited - 2018-TIOL-12-AAR-GST, on the issue of supply under a turnkey Engineering, Procurement and Construction (‘EPC') contract for construction of solar power plant, inter alia held that supply of solar power plant qualifies to be a works contract services as the plant results in emergence of an immovable property in terms of Section 2(119) of CGST Act, 2017.The contract involved supply of various goods such as modules, structures, inverter, transformer etc. as well as supply of services such as designing, engineering, transportation, unloading, storage and site handling, installation, commissioning, construction, etc.

The Authority placed reliance on the decision of the Apex Court in the case of T.T.G Industries Ltd. v. CCE, Raipur - 2004-TIOL-49-SC-CX wherein the Supreme Court inter alia noted that the machinery was erected at the site by the assessee on a specially made concrete platform at a level of 25 feet height. Considering the weight and volume of the machine and the processes involved in its erection and installation, the Court held that the same was an immovable property which could not be shifted without being dismantled.

The Authority also placed reliance on decision of the Apex Court in the case of CCE, Ahmedabad v. Solid & Correct Engineering Works - 2010-TIOL-25-SC-CX, wherein it was held that attachment of machine without the necessary intent of making the same permanent does not constitute permanent fixing, embedding or attachment in the sense that would make the machine a part and parcel of the earth permanently.

The Authority further relied on the decision of Bombay High court in the case of Bharti Airtel Ltd. v. CCE - 2014-TIOL-1452-HC-MUM-ST wherein it was held that telecom towers were immovable structures, placing reliance on Circular No. 58/1/2002 dated 15.01.2002, wherein it was clarified that if items assembled and erected on the site and attached to the foundation on earth which cannot be dismantled without substantial damage to their components and thus, cannot be reassembled, then such items would not be considered as moveable.

Basis the above decisions, the following criteria were taken into consideration to determine whether solar power project is immovable:

++ Big project has a permanent location and such plant would, therefore, have an inherent element of permanency.

++ It would not be feasible to shift base from time to time or locate the plant elsewhere at frequent intervals.

++ Government Projects will constitute the element of permanency.

++ Obtaining approvals and permits for commissioning of plant involves element of permanency.

++ The plant was intended to be given a permanent location.

++ It involves the construction of civil structure which cannot be moved and has to be demolished.

The Authority basis the above, held that supply of solar power system qualifies to be a "works contract" under Section 2(119) of the CGST Act and therefore, discussion as to whether the impugned transaction is a 'composite supply" under Section 2(30) of the CGST Act is not required.

The applicant Giriraj Renewables Private Limited, with similar facts sought another Advance Ruling from the Authority in the State of Karnataka and the same is reported in - 2018-TIOL-43-AAR-GST .The applicant in this case made submissions similar to the one before the Authority in the State of Maharashtra, but surprisingly, the Authority in Karnataka laid down emphasis on the terms of contract rather the legal position under the erstwhile Central Excise regime.

Based on the clauses of the contract under consideration, it was held by the Authority in Karnataka that the major component (PV Module) which constitutes 70% of the whole project cannot be construed to be supplied by the applicant,as the same is imported and directly transferred on high sea sales to the customer, and they become titleholder of those goods which would be subsequently given as free issue to the applicant. PV Modules therefore cannot be construed to be supplied and hence neither can the PV Modules be considered as principal supply nor can the project be considered as a composite supply.

Though the above Ruling does not explicitly provide that supply of solar power project can be considered as composite supply, yet it gives a mirage as it observes that since the major component i.e., PV module is not supplied by the applicant, it can be considered as principal supply.

Thoughts to Ponder

The Ruling of the Authority in the State of Maharashtra (irrespective of the correctness of the decision)has once again opened Pandora's Box on the moot question of what constitutes to be an ‘immovable property'? In fact, there has been a history of disputes under the erstwhile Central Excise Law on the point as to what constitutes immovable property and the legacy seems to be continuing under the GST laws.

The decisions supra provide that if the goods are intended to be permanently attached to earth without the intention of being removed or such removal is not possible without causing substantial damage to the goods, then the same can be considered to be immovable. Basis the above Ruling few more tests to determine the immovability have emerged which includes feasibility to shift base ,enormity of the project, Government contracts, etc.

Remedies to the applicant

Being aggrieved by the decision of the Authority, the Applicant may file an appeal before the Appellate Authority of the Advance Ruling in terms of Section 100 of CGST Act, within a period of thirty days from the date on which the ruling is communicated to the applicant.

Way Forward

Considering the fact that the decision of the Advance Ruling Authority is binding in the case of one transaction only and the parties involved in respect of that transaction and for other parties, the ruling will be of persuasive nature as held by Supreme Court in the matter of Columbia Sportswear Co. v. Director of Income Tax, Bangalore - 2012-TIOL-134-SC-IT-LB, therefore, any person seeking Advance Ruling has to be extra cautious and it would accordingly, be very important to undertake a cost benefit analysis in case there is an adverse Ruling. The applicants are advised to foresee the remedy of an adverse decision so that it does not impact the ongoing business transactions.

There is also a proposal for creation of centralised Authority for Advance Ruling considering the divergent rulings on identical issues by Authorities in different States. The Government is considering setting up issue based central authority with officials from Centre as well as States to take up the appeal on same issues before different Authorities. This would hopefully resolve the issue of divergent views by the Authorities in different States.

(The author is Associate, Lakshmikumaran and Sridharan, Bangalore and the views expressed are strictly personal.)