Nagaur Mukangarh Highways (P.) Ltd. - 98 taxmann.com 338 (AAR- RAJASTHAN)
The applicant was awarded work contract vide agreement dated 3.3.2017 on Private Pubic Partnership (PPP) basis to construct, operate and maintain road by PWD, Government of Rajasthan. The construction was to be completed within 2 years. The applicant is also awarded the work of Operation & Maintenance of the said project for the period of 10 years.
The applicant would receive 50% of the consideration during construction period on the basis of achievement of milestones. The balance 50% would be received during the period of O & M as annuity, alongwith interest in 5 equal biannual installments (hereinafter referred as “annuity) starting from 180 days of Commercial Operation Date.
The applicant also received bi-annual payments towards O & M expenses calculated at a specified percentage of project cost during O & M period (hereinafter referred to as ‘O & M Payments’)
- Contention of the Appellant:
The annuity received is exempted under entry No. 23A of the Notification 12/2017-CT (rate) dated 28.06.2017 which provides for “Service by way of access to a road or a bridge on payment of annuity”. It was contended by the applicant that they were liable to pay tax on consideration received during construction period on the basis of achievement of milestones but the balance 50% being received annuity, alongwith interest is exempt from levy of tax being “annuity”.
The applicant contended that they are eligible to avail full ITC of taxes paid on procurement of goods and services during construction period as the consideration received during that period is leviable to GST. However, during the O & M period, they are eligible to claim ITC of taxes paid on procurement of goods and services, after reversal of input tax credit as per Section 17(2) of the CGST Act read with Rule 42 of the CGST rules since as per applicant only O & M Payments would be leviable to tax and “annuity payments” would be exempt from levy of tax.
The restriction on claim of ITC provided in clause (c) and (d) of Section 17(5) is not applicable as applicant is a supplier of works contract services for construction of an immovable property and goods and services received by them are not owned and capitalized by them.
The contention of the applicant for annuity being exempt from levy of tax is not tenable as entry No 23A ibid pertains to SAC 9967 which is for support services of transport services whereas the services provided by the applicant is classifiable under SAC 9954.
The applicant is liable to pay applicable GST on full value of project and annuity perse is not exempt from levy of tax. The annuity received by the applicant is a payment of the remaining 50% of cost of the project in biannual equal instalments on which the applicant would be paying GST.
The applicant is rendering taxable services during the construction of roads and O & M of roads, which is liable to tax; hence they are entitled to claim full ITC under the provisions of section 16(1) of the CGST Act. 2017.
a) Three Models for construction of Road: EPC, BOT and Hybrid Annuity Model:
The model under which the applicant was working was the Hybrid Annuity Model of EPC (Engineering, procumbent and Construction) and BOT (Built, Operate and Transfer). Hybrid-Annuity Model or HAM was introduced in January 2016 to revive investments in road infrastructure projects.
Under EPC Model, say NHAI/Government provide contracts for construction of roads to private player. In this model entire investment is to be done by NHAI/Government during construction period in the form of payment to the invoices raised by the EPC contractor. Under BOT model, private players takes the responsibility of construction, maintenance and toll collection for a specified period of time say 20 years (Construction period included).
In this Hybrid Annuity Model, private player construct the roads in which certain portion say 40% of the project costs will be paid by NHAI/Government during construction period and remaining 60% of the cost will be paid in annuity during the maintenance period along with the agreed interest. Separate agreement and payment to be made to maintenance of road in each year. This model is the combination of both EPC and BOT annuity. Certain Percentage say 40% of the total initial costs (BID price) are released during construction period like EPC and Rest payment is equivalent to BOT annuity. Essentially, the toll revenue risk is taken by the government, while the private player is paid a pre-fixed annuity for construction and maintenance of roads
b) Minutes of the Council Meeting It would be appropriate to refer to the minutes of 22nd GST Council meeting dated 6th October 2017 wherein Council decided to exempt from tax, service by way of access to a road or bridge on payment of annuity to get a background behind insertion of the entry. The relevant extract is as follows:
Agenda item 13(iv): Issue of Annuity being given in Place of Toll Charges to Developers of Public Infrastructure – exemption thereon
“61. Introducing this Agenda item, the Joint Secretary (TRU-Il), CBEC stated that while toll is a payment made by the users of road to concessionaires for usage of roads, annuity is an amount paid by the National Highways Authority of India (NHAI) to concessionaires for construction of roads in order that the concessionaire did not charge toll for access to a road or a bridge. In other words, annuity is a consideration for the service provided by concessionaires to NHAI. He stated that construction of roads was now subject to tax at the rate of 12% and due to this, there was free flow of input tax credit from EPC (Engineering, Procurement and Construction) contractor to the concessionaires and thereafter to NHAI. He stated that as a result, tax at the rate of 12% leviable on the service of road construction provided by concessionaire to NHAI would be paid partly from the input tax credit available with them. He stated that the Council may take a view for grant of exemption to annuity paid by NHAI/State Highways Construction Authority to concessionaires during construction of roads. He added that access to a road or bridge on payment of toll was already exempt from tax. The Hon’ble Minister from Haryana suggested to also cover under this provision annuity paid by State-owned Corporations. After discussion, the Council decided to treat annuity at par with toll and to exempt from tax, service by way of access to a road or bridge on payment of annuity.”
AAR seems to have missed out by holding that the applicant is liable to pay applicable GST on full value of project and annuity perse is not exempt from levy of tax. To help in understanding the entry, reference is made to the GST Council Meeting Minutes which provided that annuity is an amount paid by the National Highways Authority of India (NHAI)/State Government to concessionaires for construction of roads so that the concessionaire did not charge toll for access to a road or a bridge. Therefore in the instant case as well applicant was not charging any toll tax but only charged annuity in lieu of toll tax from the State Government.
Access to a road or bridge on payment of toll was already exempt from tax, therefore Council decided to treat annuity at par with toll and to exempt from tax, service by way of access to a road or bridge on payment of annuity. However AAR treated the same as construction services and seems to have missed out on the interpretation of entry in arriving at the conclusion.