GST on Construction of Solar Power System / Plant: Recently Authority of Advance Ruling (AAR) in the state of Maharashtra has given an order confirming that construction of solar power system is a works contract and GST Rate would be 18%.
GST on Construction of Solar Power System / PlantThey have passed two orders pertaining to M/s Giriraj Renewables Private Limited and M/s Fermi Solar Farms Private Limited. The orders have been passed after detailed evalution of all the relevant documents, different case laws of Apex Court and High Courts also. I have tried to make an analysis of one order out of the two orders passed by AAR - Maharashtra.
- Whether supply of turnkey Engineering, Procurement and Construction (EPC) Contract for construction of a solar power plant wherein both goods and services are supplied can be constructed to be a composite supply in terms of section 2(30) of CGST Act, 2017.
Submission of the Applicant -1. The applicant has submitted that the main intent of the contract is provision of the solar power generating system which consists of various components such as solar modules, MS structures, inverter transformers, cables, SCADA, transmission line etc. Services like civil foundation are merely incidental to supply of such goods and ancillary part of the contract. Out of the total contract value, service portion is only 10 to 15% and balance is supply of goods. This also substantiates the fact that provision of service is incidental to supply of goods and hence supply of goods is the principal supply and entire contract would be supply of goods. The entire contract is one turnkey EPC contract and qualifies as a composite contract. The principle supply is solar power generating system and should be taxable @5%.
- a. The essence of the contract and intention of the parties. Whether the parties intend to undertake works contract or supply of solar power plant/ generating system; and
- b. Whether the activity amounting to immovable property to qualify as works contract.
- It can be conferred from the various pronouncements of the judicial authorities that where the object is installed/ fastened to the land for better running of the object, and not for the benefit of the land, the object will not be considered as immovable property. Further, it has been held that if fixing of plant to a foundation is only mean to give stability to the plant and where there is no intention to make such plant permanent, the foundation would not change the nature of the plant and make it an immovable property.
- i. Sirpur Paper Mills vs. Collector of Central Excise, Hyderabad (1998) 1 SCC 400 (SC)
- ii. Commissioner of Central Excise vs. Solid and Correct Engg. Works & Others (2010) 175 ECR 8 (SC)
Observation of the Authority and order thereofIt is not in a dispute that the contract as a whole is a single contract. The moot question is whether the subject contract will fall under the preview of “composite contract” or “works contract”. Applicant has been contenting that the contract is not a works contract but to be treated as a composite supply.
- a) rooted in the earth, as in the case of trees and shrubs;
- b) imbedded in the earth, as in the case of walls and buildings;
- c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
- i. The plants in question are not per se immovable property.
- ii. Such plants cannot be said to be "attached to the earth" within the meaning of that expression as defined in Section 3 of the Transfer of Property Act.
- iii. The fixing of the plants to a foundation is meant only to give stability to the plant and keep its operation vibration free.
- iv. The setting up of the plant itself is not intended to be permanent at a given place. The plant can be moved and is indeed moved after the road construction or repair project for which it is set up is completed.”
- i) The contract would be to develop 60MWAC/ 81MWDC solar power plant for onward sale of power to its customers. It is a big project and has a permanent location. Such plant would therefore have an inherent element of permanency.
- ii) Output of the project i.e. power would be available to an identified segment of customers. Thus the output element involves the nature of permanency and it would not be possible and prudent to shift base from time to time or locate the plant elsewhere at frequent intervals.
- iii) Such renewable energy project would have an essential element of permanency. The project would be established under Government Rules and Regulations. It would not be moved frequently after obtaining the essential permits and licenses.
- iv) The owner has to obtain necessary approvals and permits required for commissioning and operation of the plant. Such permission has an essential element of permanency.