GST Caselaw

#GSTCase-16- Sub-Contractor exempted from levy of tax if main contractor exempted from levy of Tax and conditions to be satisfied for being a Government Entity

#GSTCase-16-NHPC Ltd [2018] 100 taxmann.com 16 (AAR- UTTARAKHAND)

  1. Query:

Query 1:- Whether NHPC Limited required to pay GST under reverse charge of Notification No. 13/2017 while making payment to PWD, Uttrakhand for construction of road?

 

Query 2:- What is the time of supply when advance payment is released to PWD Uttarakhand

 

  1. Facts:

A MOU has been signed between TPS, NHPC and PWD Govt, of Uttarakhand for construction of road from Tanakpur Barrege to Brahmdev (Nepal). M/s NHPC is the implementing agency, which will in consultation with State Government of Uttarakhand submit road alignment and project report. The said work has been entrusted by MEA to NHPC and PWD, Uttarakhand and the funding for the said project will be done by MEA from its own budget under the head “Aid to Nepal”.

 

The promoter of M/s NHPC Limited is Hon’ble President of India through Ministry of Power, Govt, of India. M/s NHPC Limited is a Govt. of India Enterprise, incorporated in the year 1975. At present, NHPC Ltd is a Mini Ratna Category-I Enterprise of the Govt, of India.

 

Entry 9C was inserted in Notification No. 12/2017 dated 28th June 2017 w.e.f. 13th October 2017 which reads as follows:

 

“Supply of service by a Government Entity to Central Government, State Government, Union territory, local authority or any person specified by Central Government, State Government, Union territory or local authority against consideration received from Central Government, State Government, Union territory or local authority, in the form of grants.”

 

The definition of Government Entity provides that “Government Entity” means an authority or a board or any other body including a society, trust, corporation,-

 

(i) set up by an Act of Parliament or State Legislature; or

(ii) established by any Government,

with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority

 

  1. Observation:

Query 1: AAR observed relying upon decision of Hon’ble High Court of Patna in the matter of Shapoorji Paloonji & Company Pvt. vs CCE that an authority established by Government should have 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution to be eligible for exemption. The Authority set up by an Act of Parliament or State Legislature is not and cannot be made subject to the condition of 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article,243W of the Constitution.

 

AAR further observed that definition of ‘governmental entity’ merely contemplates that an entity is required to be ‘established’ by the Government by way of 90% or more equity or control and continuous fulfillment of the condition is not contemplated by the definition post ‘establishment’ of the entity. Therefore, if the criterion is fulfilled, at the time of ‘establishment’ by way of 90% or more Government participation in the equity or by way of control, the entity would be considered as ‘governmental entity’, within the meaning assigned under the said amended notification. Accordingly M/s NHPC Ltd was held to falling under definition of “Government entity” in as much as at the time of establishment of the company; Hon’ble President of India and its nominees held 100% equity shares of the company.

 

Therefore, supply of services by NHPC to MEA was held to be covered under Entry 9C of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 (as amended time to time) as NHPC is a government Entity, service receiver is Central Government i.e. Ministry of External Affairs, Govt. of India, funds provide by MEA from its head “Aid to Nepal” or consideration received by NHPC Ltd from MEA is in the form of grants.

 

AAR read into the minutes of 22nd GST Council Meeting which provided that since GST rate on the work contract is 12% or 5% then sub-contractor is also liable to discharge his GST liability @ 12% or 5% as the case may be. Therefore, AAR was also of the view that if GST rate on the main work contractor is exempted or 0%, then supply of service in the form of work contract by the sub-contractor will also come in the purview of exempted or 0%. Thus AAR observed that if the principal contractor is providing an exempt works contract service to Government and in such case if works contract is partially or wholly sub-contracted then the sub-contractor would also be exempt from payment of GST.

 

In support of their view, AAR placed reliance on entry No. 29 sub-clause (h) of the mega exemption Notification 25/2012-ST dated 20.06.2012, and Circular No. 147/16/2011 – Service Tax dated 21.10.2011.

 

Query 2: Since their activity is a exempted service, issues of time of supply and applicability of GST on reimbursement lost its relevancy.

  1. Held:

 

In view of the above discussions & findings we order as under:

 

Query 1: In the instant case, M/s NHPC is providing services to Central Government i.e. Ministry of External Affairs and will attract GST @ 12% but by virtue of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 (as amended time to time), the, supply of service in question as discussed above, is exempted, thus sub-contracting of the said work-contract to PWD, Govt, of Uttarakhand is also exempted and no tax under reverse charge is payable by NHPC on the amount paid to PWD.

 

Query 2: On the issues of time of supply and applicability of GST on reimbursement , no provisions of GST is applicable on said issues as supply of service in question falls under exempted services.

 

  1. Comments:

The judgement covers three important issues and needs individual deliberation:

a) The condition regarding 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority is not applicable to an entity set up by an Act or Parliament. AAR relied upon judgment of Hon’ble Patna High Court under service tax regime and held that clause (i) is followed by “;” and the word “or”. Therefore each of the sub-clauses is independent provision. The condition of 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution is relatable to only sub-clause (ii).

 

b) The condition regarding 90% or more participation by way of equity or control would have to be checked at the time of establishment of the Entity. The judgement loses its way when in the succeeding paragraph AAR after holding that the condition needs to be satisfied at the time of establishment observes as follows:

 

“There can be no “government entity” if the very essential ingredients for being recognized as a “government entity” gets lost over a period of time and the control or equity by way of 90% or more does not vest with the Government. We observe that a Company or a Society or a trust in addition to a authority or a board may continue to be in existence as they get incorporated and brought into existence under different Acts and law, for example a Company gets incorporated under the Companies Act, a society gets incorporated under Societies Registration Act etc, however such a incorporated legal entity/person cannot claim the benefits or rights which are extended in favour of such incorporated bodies recognizing them as “Government Entity’ until and continue to fulfill the requirements for being recognized as Government Entity, as per law.”

 

In this regard, there has been a news report in Financial Express on 24th October 2018 under “Are GST norms posing hurdle in listing of RVNL, other PSUs?” which read was under:

 

“As per the conditions, an entity in which the government stake is above 90% is liable to pay 12% GST for work contracts executed on behalf of the Central government, state government or any local authority. However, if the government holding goes below 90%, the applicable GST rate is 18%.

 

So, in the case of RVNL, a company which executes only Indian Railway contracts, while 10% equity shares will be offered to the public under its proposed IPO. An additional around 0.5% will be offered to employees, as has been done in the case of another railway PSU Ircon International, effectively bringing the government holding in the firm to less than 90%.

 

So, when RVNL gets listed, since it raises bills to the railways, the cash-starved transporter’s cost of projects will go up by 6 percentage points. This will add to the operational cost of the railways which reported its worst operating ratio since 2000-2001 last fiscal at 98.5.

 

According to sources, even if no shares are offered to employees and the government holding is kept at 90% for now, the percentage of public holding has to be increased to 25% within three years once a company is listed, as per the Securities and Exchange Board of India (Sebi) norms, eventually increasing the cost of projects.

 

“The ministry of railways has written to DIPAM (department of investment and public asset management) to request the finance ministry to sort the issue,” a source said.”

 

However, in the larger context and going as per the final finding, AAR has observed that the condition needs to be fulfilled at the time of establishment since the word “established” has been used and subsequently even though condition is not being fulfilled, entity would still remain a government entity. There would be an eternal immunity in this regard. The observation might need reconsideration.

 

c) AAR held that if the main contractor is exempt from levy of Tax, sub-contractor would automatically be exempted from levy of tax. AAR based its decision upon circular under service tax regime. In the Negative List Era i.e. Mega Exemption Notification there was a specific entry to that effect which is not present in the GST Regime. Further AAR has also referred to the minutes of 22nd Meeting of GST Council, wherein it was decided to reduce GST rate (from 18% to 12%) on the Works Contract Services (WCS) provided by sub-contractor to the main contractor providing WCS to Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity, which attract GST of 12%. Likewise, WCS attracting 5% GST, their sub-contractor would also be liable @ 5%. However, a notification was issued to this effect and Notification No. 11/2017-Central Tax (Rate) was accordingly amended. There is no such notification issued in GST Regime to amend Notification No. 12/2017-Central Tax (Rate), that if main contractor is exempted then sub-contractor too would be exempted from levy of tax.

 

Therefore, the conclusion that since main contractor is exempted from the levy of tax, hence sub-contractor too would be exempted from levy of tax might need reconsideration.

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