Taxability of Mobilisation Advance -Pandoras Box for the Contractors –Siemens Ltd.  108 taxmann.com 460 (AAR-WEST BENGAL)
Whether GST shall be charged on gross amount of invoice or net amount after adjusting lump-sum mobilisation amount received prior to 1st July 2017 and outstanding to be adjusted against the bills issued after 30th June 2017.
Applicant received Rs 16,33,33,924/- on 24/06/2011 as mobilisation advance, which was 10% of the original contract value. The lump-sum mobilisation amount so received was recoverable as adjustment towards payment due for tax invoices that applicant raises on attaining contract progress milestones. Of the total lump-sum amount Rs 13,80,74,549/- is stated to be outstanding on 30/06/2017.
- Contention by the Applicant:
The Applicant has received interest-free ‘mobilisation advance’ against bank guarantee. Lump-sum mobilisation advance is provided at the rate of 10% of the contract value. The Contract stipulates that recovery of the advance shall commence when 20% of the original contract value has been paid and will be completed by the time 85% of the contract value has been paid or the original completion date, whichever is earlier.
Applicant relied on decisions of CESTAT in the matter of Thermax Instrumentation Ltd [2016(42) STR19(Tri — Mumbai)] and GB Engineering Pvt Ltd [2017(52) STR 313(Tri —Chennai)]. In Thermax Instrumentation, it was held that advance received for mobilisation is like a deposit and levy of service tax on advance is premature until the time of the actual provisioning of service. In GB Engineering Enterprises Pvt Ltd (supra) the Tribunal (Chennai Bench) has held a similar view that the incidence and levy of the service tax arise when there is the provision of a taxable service.
- Observation by Authority
a) How Mobilisation advance falls under the purview of consideration-Section 2(31) of CGST Act, 2017
‘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.
b) No Tax Levied under the Pre-GST Regime as Point of Taxation under VAT/Service Tax did not arise
In pre-GST regime, Contract was divisible for the purpose of taxation as a contract for the sale of goods and a service contract. 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 01/07/2017 has not suffered tax under the pre-GST regime under either of the above Acts. As the Applicant apparently raised no service bill, the unadjusted part of the advance as on 01/07/2017 has not suffered tax under the pre-GST regime under Finance Act, 1994.
c) Post-GST Regime, it is a supply of Works Contract service and unadjusted amount as on 1st July 2017 is an advance and falls under the provision of Time of Supply by virtue of Section 13 and therefor liable to tax as on 1st July 2017
After GST has come into force, Work of the Appellant is classifiable as works contract and 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. If the supplier receives any advance payment as consideration, the supply shall be deemed to have been made to the extent covered by the payment [Explanation (i) to section 13(2)]. The Applicant is, therefore, deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by the lump-sum that stood credited to its account on 01/07/2017 as advance, provided no tax was levied thereon under the VAT or Service Tax Laws in the pre-GST regime, and the advance payment is applied as consideration for the said supply.
Applicant is deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by lump-sum that stood credited to its account on that date as mobilisation advance and GST is leviable thereon accordingly. The value of the supply of works contract service in the subsequent invoices as and when raised should, therefore, be reduced to the extent of the advance adjusted in such invoices. The GST should, therefore, be charged on the net amount that remains after such adjustment.
There is a very thin line which differentiates an advance and a deposit. Mobilisation amount is not an Advance but a deposit recoverable in the future bills and given to the contractor against Bank Guarantee. The decision holds the key not only for taxation of unadjusted mobilisation advance as on 1st July 2017 but also in mobilisation amount received in GST Regime wherein if the decision holds good, contractors would have to shell out tax treating mobilisation amount as “advance”.
Exact nature and difference between advance and a mobilisation amount was explained in the matter of Thermax Instrumentation Ltd. Vs Commissioner of Central Excise, Pune – I (CESTAT Mumbai) which provided that advance is like earnest money for which a Bank Guarantee is given by the Appellant. It is a fact that the customer can invoke Bank Guarantee at any time and take back the advance. Hence, 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.
Section 2(31) of CGST Act which defines consideration also differentiates deposit and advance by providing that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply. Therefore, mobilisation advance becomes a consideration only when it is applied as consideration for the supply and until that time the recipient does not have complete right over the amount.
Views of AAR might need reconsideration as the thin line of difference between Deposit and Advance holds the key for very basis of decision.