GST Caselaw

#GSTCase-68-Repairing Service does not tantamount to Job Work and difference between Repairing Service and Job Work explained-AAR West Bengal

#GSTCase-68-Repairing Service does not tantamount to Job Work and difference between Repairing Service and Job Work explained-AAR West Bengal   

 By CA Arpit Haldia 

Alok Bhanuka [2019] 103 taxmann.com 433 (AAR-WEST BENGAL)

 

  1. Query

Query 1: Whether repairing/servicing of Transformers is job work as defined under section 2(68) of the GST Act?

Query 2: Whether repairing/servicing of Transformers is composite or mixed supply and If it is composite supply, what should be the principal supply and the rate of tax thereon.

Query 3: Whether the repaired transformers can be delivered to WBSEDCL against challans without raising tax invoices.

 

  1. Facts

Applicant transports defective and damaged transformers from WBSEDCL, dismantles them, and removes burnt coil and other damaged parts and accessories that require replacement/repair. The repaired transformers are tested and delivered to WBSEDCL. Being the principal insurer, WBSEDCL reimburses the expense on account of transport, fire and burglary insurance.

 

  1. Contention of the Applicant 

Repair/servicing of transformers is job-work as defined under section 2(68) of the GST Act, and should to be treated as supply of service in terms of para 3 of Schedule II to the GST Act. Applicant argues that repair/servicing of transformers is a composite supply, where the pre-dominant nature of the contract remains that of ‘service’, classifiable as under SAC 9987, and taxable under Sl No. 25(ii) of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (corresponding State Notification No. 1135 – FT dated 28/06/2017), as amended from time to time, and hereinafter collectively called the Rate Notification.

 

  1. Observation by AAR

 

  • Definition of Job Work

Job work is a processing or working upon raw materials or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the afore-mentioned process.

 

  • Repair and Servicing is a contract to remove defects and work on goods already in existence, therefore its not a Job Work

Repairing and servicing of defective transformers signify working on something which is already in existence. The goods, namely spare parts that have replaced the defective ones, are embedded or fixed to the transformer already in existence so that the defects get removed. The contract is not for the supply of the spare parts, but for the treatment or process for maintenance and removal of the defects from the transformers that belong to WBSEDCL

 

  • Repairing being a composite Supply with dominant element constituting the principal Supply unless goods or services billed separately

Para 6(a) of Schedule II of the GST Act read with Section 2(119) of CGST Act treats repairing as a composite supply in the nature of words contract albeit only for immovable property. In fact, repairing was treated as works contract under both Service Tax and Value Added Tax, and the treatment under the GST Act differs only so far as the movable properties are excluded from the domain of works contract.

Therefore, composite nature of activity of repairing remains unaltered when applied to movable properties. It is a supply of goods and services in conjunction and as naturally bundled in the ordinary course of business. Unless the contract specifies that the goods and the services supplied are to be separately charged, the nature of the supply remains a composite supply. The principal supply, however, depends upon the dominant element of the composite supply.

 

  • Reliance placed on order Cummins India Ltd [2019] 103 taxmann.com 126 (AAR – MAHARASHTRA)

AAR Maharashtra has held that maintenance service of machines belonging to the clients is the dominant intention of Annual Maintenance Contracts and can be considered as ‘principal supply’.

 

  • Predominant Nature in case of Supply for Repair and Maintenance of Goods is of Service, therefore classifiable under 998719

Repair and Maintenance of Transformers involves supply of goods, but not as chattels. The predominant element of the supply, therefore, is not transfer of title to the goods, but service in terms of para 3 of Schedule II to the GST Act, and supply of spare parts is ancillary to such supply. The service so supplied is classifiable under SAC 998719, being repair of transformers, and taxable under Sl No. 25(ii) of the Rate Notification, as amended from time to time.

 

  1. Held:

Query 1: Repairing and servicing of transformers owned by another person is not job work as defined under section 2(68) of the GST Act.

Query 2: Repairing and servicing of transformers is a composite supply unless the contract specifies that the goods and services are to be separately charged.

Query 3: Principal supply is the service of repair of transformers classifiable under SAC 998719 and taxable under Sl No. 25(ii) of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (corresponding State Notification No. 1135 FT dated 28/06/2017), as amended from time to time.

 

  1. Comments:

 

a) Difference between a Job Work and Repairing Service

The judgement tries to distinguish the fine line between “Job Work” and “Repairing Service”. The implications of the Judgement are huge since once a supply is categorized as “Job Work”, then all compliances under Section 143 of CGST Act, 2017 read with Rule 45 of CGST Rules, 2017 would have to be complied with. Notification No. 11/2017-Central Tax (Rate) also classifies repairing service under 9987 and Job Work under 9988.

The difference between the two hinges on a very thin line. Job Work is processing or working upon goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the afore-mentioned process but repairing service signifies working on something which is already in existence and is a contract for treatment or process for maintenance and removal of the defects.

 

b) Repairing Service being a Composite Supply: What’s the Principal Supply and Can the terms of contract override provisions of Section 8 of CGST Act, 2017

The judgement classifies repair service as a composite supply unless the contract specifies that the goods and services are to be separately charged. The moot question here is that if a transaction involves supply of goods or services or both being in the nature of composite supply, whether by a contract tax can be levied separately on the goods and services at their respective rates rather than at the tax rate of principal supply.

The principal issue is if it’s allowed in case of repairing service contracts then it should be allowed in all transactions whereby terms of contract between the supplier and recipient may allow them to levy tax rate of respective rates of taxes of goods or services or both rather than on the tax rate of principal supply.

Imagine in a contract of Supply of goods taxable at the rate of 28% Tax and 160% Cess at inclusive freight basis. Value of Goods is 100000 and Freight is Rs 25000. Ideally tax rate on Rs 125000 should be @ 28%+160% but the judgement allows that a contract between the buyer and supply may provide that tax on goods and freight would be levied at respective rates and that would override provisions of Section 8 of CGST Act which provide that in case of composite supply contracts, tax would be levied at the tax rate of principal supply.

It would be apt to mention here that CBEC Circular No. 47/21/2018-GST Dated 8th June 2018 which also clarified on the same lines of the Judgement but different from the provisions of the Statue:

Question: – How is servicing of cars involving both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately, to be treated under GST?

Answer:

2.1. The taxability of supply would have to be determined on a case to case basis looking at the facts and circumstances of each case.

2.2 Where a supply involves supply of both goods and services and value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.

The intention of the Act is pretty clear that if a transaction is in the nature of composite supply, tax would have to be levied at the rate of principal supply. However, judgement and the Circular provides a completely different view and allows the parties to override the provisions of CGST Act by mutual contract which is legally incorrect.

 

c) Judgement of AAR-Maharashtra in Cummins India relied upon

There is nothing wrong in relying upon the judgement of another authority but then it cannot adopt an approach where if the Judgement suits then applicable and if does not suits then not applicable.

Just to highlight the fact; AAR Gujarat in the matter of National Dairy Development Board, [2019] 103 taxmann.com 404 (AAR – GUJARAT) holds that judgement of Hon’ble Patna High Court is having a referential value while deciding the similar issue in Gujarat but AAR West Bengal relies upon the judgement of AAR Maharashtra for affirming its view point.

Article 141 declares that law declared by the Supreme Court shall be binding on all courts within the territory of India. Therefore, barring certain exceptions like Judgement of Jurisdictional High Court or otherwise, rest all the decisions only have a referential value.  The only point being raised here is that whatever decision is followed or rejected, then it cannot be summarily followed or rejected and there has to be a reason for following or rejecting a decision and that speaking reason should be clearly narrated in the order.

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