AAR Summary – EMC Limited

Sl. No

Case Number 07 of 2018

Name of Ruling

EMC LTD.

TMI Citation

2018 (5) TMI 964 – AUTHORITY FOR ADVANCE RULINGS, WEST BENGAL

AAR State

WEST BENGAL

Macro Issue

Whether freight charged by the applicant is subjected to GST or Not?

Facts

1. Applicant is stated to be a supplier of materials and allied services for

erection of towers, testing and commissioning of transmission lines and

setting up sub-stations collectively called the Tower Package.

2. Contractee awards the Applicant contracts for supply, erection and

commission of Towers which was split up into two separate sets of

contracts – one for supply of materials at exfactory price (hereinafter the

First Contract), and the other for supply of allied services like survey and

erection of towers, testing and commissioning of transmission lines etc

(Second Contract), which also includes inland/local transportation, in-

transit insurance, loading/unloading for delivery of materials and storage

of them at the contractee’s site.

3. The contractee agrees to reimburse the actual GST payable, except on the

price component for inland/local transportation, in-transit insurance and

loading/unloading. The applicant raises separate freight bills on the

contractee as per the rate schedule annexed to the Second Contract.

Applicant Stand

Applicant is not a goods transport agency (hereinafter the GTA) or engaged in

insurance business. He will, according to the application, arrange such

services and pay the GST as applicable on the consideration paid to the

suppliers of such services. His service to the contractee for inland/local

transportation, the applicant argues, is exempt under the GST Act. He refers to

Notification No. 9/2017 – IT (Rate) dated 28/06/2017, which, according to

him, grants exemption on transportation service provided by an entity other

than GTA. Since the applicant is not a GTA, he claims that his services are

exempt vide the above notification.

Department Stand

1. the First Contract cannot be executed independent of the Second

Contract. There cannot be any ‘supply of goods’ without a place of supply.

As the goods to be supplied under the First Contract involve movement

and/or installation at the site, the place of supply shall be the location of

the goods at the time when movement of the goods terminates for

delivery to the recipient or moved to the site for assembly or installation.

2. The First Contract, however, does not include the provision and cost of

such transportation and delivery. It, therefore, does not amount to a

contract for ‘supply of goods’ unless tied up with the Second Contract. In

other words, the First Contract has “no leg’ unless supported by the

Second Contract. It is no contract at all unless tied up with the Second

Contract.

Ruling with reasons

The  applicant  supplies  works  contract  service,  of  which  freight  and

transportation is merely a component and not a separate and independent

identity, and GST is to be paid at 18% on the entire value of the composite

supply, including supply of materials, freight and transportation, erection,

commissioning etc.

Reasons

1. Two contracts are linked by a cross fall breach clause that specifies that

breach of one contract will be deemed to be a breach of the other

contract, and thereby turn them into a single source responsibility

contract. Black’s Law Dictionary defines that “a severable contract, also

termed as divisible contract, is a contract that includes two or more

promises each of which can be enforced separately, so that failure to

perform one of the promises does not necessarily put the promises in

breach of the entire contract”. In terms of this definition, the ‘cross fall

breach clause’, in the present context, settles unambiguously that supply

of goods, their transportation to the contractee’s site, delivery and

installation,  erection  of  towers  and  testing  and  commissioning

transmission lines and related services are not separate contracts, but

form only parts of an indivisible composite works contract supply, as

defined under Section 2(119) of the GST Act, with ‘single source

responsibility’.

2. Composite nature of the contract is clear from the clause that defines

satisfactory performance of the First Contract (supply of goods) as the

time when the goods so supplied are installed and finally commissioned in

terms of the Second Contract. In other words, the First Contract cannot be

performed satisfactorily unless the goods have been transported and

delivered to the contractee’s site, applied for erection of towers, the

transmission lines laid, tested and commissioned in terms of the Second

Contract. The two promises – supply of the goods and the allied services –

are not separately enforceable in the present context. The recipient has

not contracted for ex-factory supply of materials, but for the composite

Discussion Outcome

1. The AAR has concluded that the contract is of indivisible nature on the

basis of cross fall breach clause.

2. Having said this, the Supreme Court in the case of State of Madras v.

Gannon Dunkerley& Co. – IX STC 353 (SC) has held that if there is an

instrument of contract which may be composite in form, unless the

transaction in truth represents two distinct and separate contracts and is

discernible as such, then the State would not have the power to separate

the agreement to sell from the agreement to render service,and impose

tax on the sale. This implies that in cases where contract is separable, each

of the divisible component of the contract can be subjected to tax

independently.

3. Whether a contract is divisible or indivisible must be construed on the

basis of the intention of parties. The fact that a single tender document

issued for whole project would be of no relevance. In this regard, the

following judgments of Income Tax are referred viz.

a)  M/s. Caterpillar Global Mining Europe GmbH India Project Office

Versus Asstt. Director of Income Tax

b)  Ishikawajima-Harima Heavy Industries Ltd. versus Director of Income-

Tax