In this part of article, we would be discussing about various decisions in Pre and Post GST Regime on the subject of Nature and Taxation of Mobilisation Advance.
Judgements from Pre-GST Regime
Case-1-Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I, 2015 (12) TMI 1222 – CESTAT MUMBAI
The CESTAT Mumbai Bench in this given case held that
The advance is only an amount given as kind of earnest money and for which the appellant gives a bank guarantee to the customers of equal amount. It is more in the nature of a deposit. As defined in Borrows, in Words & Phrases, Vol II
“An earnest must be a tangible thing… That thing must be given at the moment at which the contract is concluded, because it is something given to bind the contract, and, therefore, it must come into existence at the making or conclusion of the contract. The thing given in that way must be given by the contracting party who gives it, as an earnest or token of goods faith, and as a guarantee that he will fulfill his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited. K, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of party payment”.
In the present case the advance is like earnest money for which a Bank Guarantee is given by the appellant. It is a fact that the customer can invoke the Bank Guarantee at any time and take back the advance. Hence the appellant does not show the advance as an income, not having complete dominion over the amount and therefore the same cannot be treated as a consideration for any service provided. Therefore, the findings lack appreciation of the complete facts and evidences.
Emphasis Supplied
The decision lays down that amount received by the contractor from the awarder is more like an earnest money rather than being an advance. The person receiving the same does not have complete dominion over the amount being received. The party who has given the mobilisation advance has bank guarantee against the same and can be invoked at any time in case of non-repayment of the same as per the term and conditions of the contract.
Case-2-:Gammon India Ltd Vs CST (CESTAT Mumbai) Appeal Number : Service Tax Appeal No. 87483 of 2016
The CESTAT Mumbai Bench held that
9. The several contracts provide for the payment to be made at different, predetermined stages of performance and are, generally, subject to evaluation of the work undertaken. It is also seen that such appraisal, as a prelude to making payments, is not undertaken until after the execution of the work in relation to the taxable service has 4/5 commenced and that all the contracts, while linking such measurable stages, provide for payment of only 90% of contracted amount for the entirety of the work. The ‘mobilization advance’ is adjusted against the final payment due and is not linked to the work but as a pledge of the contract between the appellant and principal. It is also subject to furnishing of prescribed ‘bank guarantee’; there is no connection with the performance of the contract. It is not in dispute that the ‘mobilization advance’, carrying interest, is granted to enable the contractor to prepare for undertaking the contracted work. The subsequent adjustment with the final payment due does not suffice to construe this as an advance payment for the work to be done merely because the recipient and payee happened to be the provider of service. The payment of ‘mobilization advance’ is but a separate financial transaction within the contract for providing of service..
Emphasis Supplied
The judgement details out some very important reasons about why mobilisation advance is not an advance. The key reasons why this judgement held that mobilisation advance is not in the nature of advance are as under-
a) Adjustment of amount against the bill amount is not because of linkage with contract amount but as a pledge of contract-It emphasises the fact that ‘mobilization advance’ is adjusted against the final payment due and is not linked to the work but as a pledge of the contract between the appellant and principal.
b) Mobilisation advance has not connection with the performance of the contract and is subject to furnishing of bank guarantee by the contractor to the awarder-It is also subject to furnishing of prescribed ‘bank guarantee’; there is no connection with the performance of the contract.
c) Subsequent adjustment of the mobilisation advance is not suffice to hold it as ana advance payment-It is not in dispute that the ‘mobilization advance’, carrying interest, is granted to enable the contractor to prepare for undertaking the contracted work. The subsequent adjustment with the final payment due does not suffice to construe this as an advance payment for the work to be done merely because the recipient and payee happened to be the provider of service.
d) Payment of Mobilisation advance is separate financial transaction-The payment of ‘mobilization advance’ is but a separate financial transaction within the contract for providing of service.
Judgements in Post GST Regime
Case-1- Shapoorji Pallonji & Company (P.) Ltd. [2020] 115 taxmann.com 113 (AAR – TAMILNADU)
7.4 Further ‘Supply of Works Contract’ is deemed to be a service under GST. Under the pre-GST regime, service tax was leviable on the service portion of the Works Contract, which in the case at hand being original work, was levied on 40% of the value. The applicant on receipt of advance has paid the service tax on the 40% of the value as required under the provisions of Service Tax. The like situations are more aptly covered under the transition provision at section 142(11)(b) wherein it is stated that no tax is payable on services under the GST Act to the extent the tax was leviable on the said services under Chapter V of the Finance Act. Therefore, we conclude that GST is not payable on the Mobilisation advance which has been received prior to GST implementation as per section 142(11)(b) of the Act.
The issue in this matter was regarding the taxability of mobilisation advance received prior to GST Regime but outstanding as on 1st July 2017. The AAR did not discuss about the nature of the amount and its taxability since the appellant had already paid the tax on mobilisation advance in GST Regime. Thus, this decision has only a limited applicability on the issue whether mobilisation advance is an advance for the purpose of taxability.
Case-2- Siemens Ltd.- [2019] 108 taxmann.com 460 (AAR-WEST BENGAL)
AAR West Bengal discussed about the nature of Mobilisation Advance as given below-
3.4 The Applicant has received interest-free ‘mobilisation advance’ against bank guarantee. The primary purpose of such advances is to extend financial assistance within the terms of the contract to enable the contractor to mobilise resources for a smooth take-off of the project. Such advances are invariably ring-fenced with securities like bank guarantees to prevent misuse and misappropriation. The advance shall be recovered as adjustment towards payment due for the tax invoices that the Applicant shall issue after achieving successive contract milestones. In case of delay in recovery for the slow progress of work, the contract provides KMRCL with the option to charge penal interest. If the advance is misused or diverted, KMRCL, if required, can recover the unadjusted advance with penal interest by means of invoking the bank guarantee.
AAR West BENGAL then reasoned that why the decision given in Thermax Instrumentation Ltd. (supra) and GB Engineering Enterprises (P.) Ltd. (supra) are not applicable in GST Regime.
3.5 In the pre-GST regime, the Contract was divisible for the purpose of taxation as a contract for the sale of goods and a service contract. It appears from the invoices raised in the pre-GST period that some amount of the mobilisation advance was adjusted towards payment of the RA bills raised on the milestones reached. The relevant tax invoices clearly show that the Applicant treated the entire amount as the sale of goods in the course of import in terms of section 5(2) of the Central Sales Tax Act, 1956. As no tax is leviable on the advance payment under either the West Bengal Value Added Tax Act, 2003 or the Central Sales Tax Act, 1956, the unadjusted portion of the advance as on 01-07-2019 has not suffered tax under the pre-GST regime under either of the above Acts.
3.6 The Finance Act, 1994 allowed the contractor to pay service tax on that portion of the works contract, which was attributable to the actual provisioning of service, arrived at applying Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006. Under this method, the value of the taxable service was the residual amount that remained after deducting from the gross amount charged for the works contract the actual value of the property in goods transferred in the course of executing the contract. The value of the taxable service was, therefore, not ascertainable before the contractor raised the invoice. As the value of the taxable service was not ascertainable before the invoice was raised, no payment received in advance could be included in the gross amount charged for such taxable service except the portion adjusted in the service bills. In Thermax Instrumentation Ltd. (supra) and GB Engineering Enterprises (P.) Ltd. (supra), the Tribunal has followed this principle.
AAR West Bengal then reasoned that the Mobilisation advance is taxable in GST Regime as follows:
3.8 After the GST comes into force, the works contract is no longer divisible into a contract for the supply of goods and a service contract. It is a service contract and the entire unadjusted mobilisation advance as on 01-07-2017, according to the Contract, applies towards payment of consideration for the works contract service. As discussed in para 3.3 above, ‘consideration’ includes any payment for the inducement of a supply. Mobilisation advance is meant specifically for inducing the contractor to spend for provisioning the works contract service. The contract provides a mechanism in the form of a bank guarantee that ensures that the advance is not diverted or misappropriated. Its application as payment for inducing the supply is, therefore, direct and unambiguous. It is, therefore, ‘consideration,’ whether or not in the form of a deposit, for the supply of the works contract service. The Contract makes it amply clear that the entire amount is applied as consideration for provisioning works contract service.
3.9 The Applicant’s reference to the decisions of the Tribunal in Thermax Instrumentation Ltd. (supra) and GB Engineering Enterprises (P.) Ltd. (supra) is misplaced in this context. The relevance of these decisions in the legal framework of the Finance Act, 1994 is discussed in para 3.6 and need not be repeated. They are not relevant under the GST regime, as the valuation of works contract no longer requires a rule separate from other services. The Contract, therefore, is to be valued as provided under section 15(1) of the GST Act, which does not restrict in any way the scope of time of supply, as provided under section 13(2) of the GST Act. Moreover, ‘consideration’ under the GST Act has a wider scope and includes deposits if applied as consideration. In that context, whether the mobilisation advance is earnest money or not is of little relevance.
Emphasis Supplied
In the given case the AAR West Bengal discussed about the nature of the mobilisation advance received and held that since mobilisation advance is specifically related to inducement to the contractor and the security given is only for the purpose of ensuring that the advance is not misappropriated, therefore mobilisation advance is advance and is consideration for the work being executed. However, it seems that the AAR West Bengal did not consider that amount received by the applicant came with an obligation of repayment. The advance which comes with an obligation of repayment is not an advance but in the nature of loan. Linkage of the mobilisation advance is only as a pledge towards the amount to be recovered and it is completely altogether separate transaction from the work being executed.
The above judgement of AAR West Bengal has been upheld by AAAR West Bengal by observing that in the instant matter the only applicable law is the GST Act, 2017. Accordingly, the time of supply of services is to be guided by section 13(2) of the GST Act. Hence, the remaining unadjusted amount of Rs.13.80.74,549/- as on 01.07.2017 has to be construed as if it was credited into the account of the appellant on the date of 01.07.2017 only, which will attract GST on such amount on that date itself. Hence, we find no force in the argument of the appellant that section 13(2) of the GST Act, 2017 will not be applicable in the instant case.
Relevant Decision in Income Tax about the nature of advance received i.e. whether it an advance or a loan
Although the taxable event under Income Tax is Income and taxable event in GST is supply but still decisions under the Income Tax are relevant limited to the context it requires tax to be deducted at the time of payment or credit whichever is earlier. Therefore, if the amount is in the nature of advance relating to the contract, then Income Tax is required to be deducted and if it is not so, then TDS is not required to be deducted.
Case-1- Bikramjit Ahluwalia, New Delhi vs Jcit, New Delhi on 11 May, 2017 (Income Tax Appellate Tribunal – Delhi)
6. We have heard the rival submissions and have also gone through the relevant records. We agree with the contentions of the ld. AR that the assessee’s case is covered in favour of the assessee by the order of the ITAT, Visakhapatnam in the case of ACIT vs Peddu Srinivasa Rao (supra). ITAT Visakhapatnam Bench has discussed the issues at length in paragraphs 3, 4, 6, 8 and 10 of the impugned order. The relevant portions of these paragraphs are being reproduced for a ready reference:-
“3. …….this mobilization advance is in the nature of loan, on which interest @8% is chargeable as per the terms of sub-contract agreement. The mobilization advance is a capital receipt being in the nature of a loan and therefore, there was no legal obligation to deduct tax at source. However, M/s Gammon India Limited deducted tax at source in respect of such mobilization advance also…..
Emphasis Supplied
In the given case, the Tribunal clearly held that TDS was not required to be deducted since the amount was in the nature of Loan. Therefore, the nature of the amount being received has been held to be loan rather than advance in Income Tax as well.
Case-2- ACIT Vs. M/s. Patel Engineering Ltd. (ITA No. 6605/Mum/2013 vide order dated 18.11.2015) (ITAT Mumbai)
32. We have considered rival contentions and found that in terms of the contract agreement, the assessee receives advances/loans on which the payer deducts tax at source. Such loans and advances can broadly be classified as (i) Site Mobilisation loan granted to enable the assessee to mobilise the work site i.e. create access roads, mobilise men, equipments, establish and set up site office, etc., (ii) Machinery Mobilisation loan granted to enable the assessee to purchase machineries and equipments needed to carry out the subsequent work on the site and (iii) Advance against work and material given to the assessee to help it in procuring material and against the work in progress on the site. Whereas in the first two cases, it is a capital receipt in the nature of loan not connected to any work carried out by the contractor, the third one is an advance in the revenue field.
Emphasis Supplied
It can be clearly observed form the above that the ITAT in the above case clearly held that mobilisation advance is in the nature of loan rather than advance.
Case-3- Transtonnelstroy Afcons Joint … vs Asst Cit Cir 20(3), Mumbai on 16 May, 2019 (ITAT Mumbai)
As per terms of various contract agreements under which Site Mobilisation Loan and the Machinery Mobilisation Loan I advances, mostly on interest ranging from @ 12% to 18% pa., have been granted against bank guarantee, In the balance sheet, such contractee advance mobilisation loan is reflected as loan funds under the head Contractee advances as a liability. Such loan can never be the income of the assessee, neither in present or in future; deduction of such loan advance from running bills is only a practical and convenient way to recover the loan. Such mobilisation loan being a capital receipt, there was no legal obligation on the part of the contractee to deduct tax at source u/s 1940
Emphasis Supplied
This case again spelts out very clearly that mobilisation advance is a capital receipt in the nature of loan and not an advance and further deduction of such loan advance from running bills is only a practical and convenient way to recover the loan.
In the next part, we would discuss the definition of consideration in GST Regime and also how these decisions can be interpreted in a holistic manner to arrive at the part of taxability of mobilisation advance.
