Skip to content

#GSTCase-234-Taxation of Mobilisation Advance in GST Regime-Part-2-Modus Operandi of the terms and condition for Mobilisation Advance

In this part of Article, we would discuss the nature of contract in case of mobilisation advance. It is generally observed that mobilisation advance is generally prevalent in case of contractors wherein mobilisation advance is generally given by the awarders to the contractors.
Mere fact that that amount is given by the awarder to the contractor is not sufficient enough to hold the mobilisation advance as “advance”
The moot question is whether the mere fact that the amount is given by the awarder to the contractor would be sufficient enough to categorize the said amount as advance. It should not be because supposedly take an example of the situation wherein festival loan is given by the employer to the employee and is deductible from the salary of the employee. However, the fact that such amount is given by the employer to the employee and is recoverable from the salary is not sufficient enough for holding the loan as an advance salary and liable to Income Tax. The amount given as festival loan is to be categorized as a loan or advance only by the intent of the parties and real purport of the document entered into by the parties.
General conditions and drafting of the agreement associated with Mobilisation Advance- Referred in the case of Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I-2015 (12) TMI 1222 – CESTAT MUMBAI.
The relevant conditions which are generally prevalent in case of a Mobilisation Advance were reproduced in the case Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I-2015 (12) TMI 1222 – CESTAT MUMBAI. The various Terms and Conditions as generally referred as follows:
A) Condition relating to Advance Payment and Security towards the Advance Amount
11.1.1 The Contractor shall deliver to the Owner a payment security in the form of a bank guarantee for 10% i.e. Rs 80.50 Lakh (Rupees Eighty Lacs Fifty Thousand Only) of the Contract price valid until the completion of Scope of Work (“payment security”). Upon receipt of the payment security, the Owner shall pay to the Contractor 10% of the Contract Price as an advance payment (Initial Advance”) amount to Rs 80.50 Lacs (Rupees Eighty Lacs Fifty Thousand Only).
B) Mode of Payment of the Amount Received
11.1.2 The value of the Payment Security shall be reduced on a quarterly basis in proportion to the amount of advance adjusted in the invoices of the Contractor.
11.1.3 The payment Security will be reduced by the Bank Guarantee issuing Bank of such payment Security based on a letter that shall be issued by the Owner to Such Bank Guarantee issuing Bank authorizing the reduction of the value of the payment Security.
C) Balance Payment-The agreement referred to by CESTAT provided that balance payment would be released to the contractor as follows:-
Upon mobilization of Site by one of the Mechanical Erection Sub-Contractor of the main contractor, the owner shall pay to the contractor a Mile Stone Payment of Rs 80.50 Lacs (Rupees Eighty Lacs Fifty Thousand only). (Ten percent) of the Contract Price [“Mile Stone Payment”].
11.2.1 Payment of the Mile Stone Payment shall be effected directly within three days from the date of submission of following documents.
11.3.1 The balance payment of 80% (Eighty Percent) of the Contract Price including all taxes, shall be paid on a pro rata basis as set out in a mutually agreed upon billing break up, through an irrevocable, inland, without recourse letter of credit payable on demand in Pune to be opened by the owner in favour of the Contractor (“Balance Payment Letter of Credit”).
General Modus Operandi in case of a Mobilisation AdvanceThe Mobilization advance is generally given in order to enable to deploy machinery and manpower in sufficient quantity.
A) That interest is generally charged on advance amount given by the awarder to the contractor.
B) The contractor gives bank guarantee to the customer of equal amount of advance being given to him.
C) Contract contains condition of how the amount paid as mobilisation amount is to be repaid back. The mode of repayment followed generally is deduction from the bills submitted in respect of work executed.
D) The awarder can invoke bank guarantee anytime during the contract in case cancellation of work or non-execution of contract, delay in execution of a contract, etc.
E) The appellant does not have complete dominion over the amount as he has given a security of equal amount and the same can be recovered at any time by invoking the bank guarantee.
Key Observation about the general modus operandi of the mobilisation advance vis-a-vis the characteristics of Loans or deposit
It can be observed from the fact that the payment is guaranteed against the security and the conditions about the repayment are provided in the agreement and generally such amount given as mobilisation advance carries interest liability along with the same.
The fact that there are specific conditions associated for re-payment and mobilisation advance is secured by bank guarantee highlights the fact that ‘mobilization advance’ is adjusted against the payment not on account of being linked to the work but as a pledge of the contract between the contractor and the awarder. The connection to the execution of the contract is only limited to deduction from the payment to be released to the contractor and the deduction from the bill amount is more or less akin to the situation wherein rather than deducting from the bill amount, the awarder would pay the entire amount towards the bill to the contractor and the contractor would then pay the amount towards mobilisation advance separately. The deduction is nothing but an option opted by the awarder for an advance deduction from the bill amount rather than waiting for subsequent payment.
It is also subject to furnishing of prescribed ‘bank guarantee’ thus there seems to be less a connection with the performance of the contract. The payment of ‘mobilization advance’ is more like a separate financial transaction within the contract for providing of service. Thus, the nature of the mobilisation advance is more like a separate credit facility being extended by the awarder himself rather than the awarder taking from any third person.
Therefore, the mere fact that the amount is being received from the awarder by the contractor is not sufficient to hold the mobilisation advance as “advance”. There is more to it which needs to be analysed.

In the next series of article, we would discuss the various decisions from the pre and the post GST Regime as well as from direct taxes to ascertain what have the various courts held regarding the nature of mobilisation advance.