GST Caselaw

#GSTCase-37-Tax Rate on works contract services provided to Government Entity:-A word of caution

#GSTCase-37-Tax Rate on works contract services provided to Government Entity:-A word of caution

ITD Cementation India Ltd [2019] 101 taxmann.com 137 (AAR-WEST BENGAL)

  1. Query

The appellant seeks to enquire that whether the work awarded for construction of multi-modal IWT terminal at Haldia on EPC basis to the applicant from IWAI would fall under Serial No. 3(vi) of Notification No. 11/2017 as amended time to time

“Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Service Tax Act, 2017, provided to …a Government Entity by way of construction,….of

 

  • a civil structure or any other original work meant predominantly for use other than for commerce, industry, or any other business or profession..”

 The only issue involved in the Query raised by the applicant is whether the project satisfies the condition as provided in Entry 3(vi)(a) above i.e. “original work meant predominantly for use other than for commerce, industry, or any other business or profession”.

 

  1. Facts

IWAI is a Government Entity, being a statutory body established under the Inland Waterways Authority of India Act, 1985 (hereinafter the IWAI Act, 1985), and functions under the administrative control of the Ministry of Shipping, Government of India. Applicant entered into an agreement with Inland Waterways Authority of India (hereinafter the IWAI) for construction of a multi-modal IWT terminal at Haldia on EPC basis. IWAI would levy and collect fees and charges from the users of the infrastructural facilities being created.

 

  1. Contention of the Applicant

All fees and charges levied by IWAI are credited to Consolidated Fund of India. The Applicant’s argument, therefore, implies that the user fees collected by IWAI are not proceeds from business but revenues collected by the Government of India.

 

  1. Observation of AAR

 

  • Inland Water Authority of India (IWAI) is a Governmental Entity

Both ‘Governmental Authority’ and ‘Government Entity’ refer inter alia to an authority set up by an Act of Parliament or a State Legislature with 90% or more participation by way of equity or control. Governmental Authority, however, is established to carry out functions entrusted to a Municipality or Panchayat under Art 243 W or 243 G of the Constitution respectively: whereas, a Government Entity is set up to carry out any function entrusted by the Central Government, State Government, Union Territory or local authority.

According to the objects and reasons of the IWAI Act, 1985, the IWAI is an Authority set up for “the regulation and development of inland waterways for the purpose of shipping and navigation and for matters connected therewith or incidental thereto.” IWAI is a statutory authority under direct control of the Central Government. It is, therefore, a ‘Government Entity’ in terms of para 4(x) of Notification No. 31/2017 – CT (Rate) dated 13/10/2017.

 

  • Whether predominant use of the Terminal would be for Business or Commerce

By virtue of this project, IWAI has created infrastructure for commercial utilization of the national waterway. IWAI would levy and collect fees and charges from the users of the infrastructural facilities being created. Therefore, unless proceeds from such activities, including user fees and charges, are credited to the Consolidated Fund of India, they must be construed as proceeds from commerce and business.

Section 17(1) of the IWAI Act, 1985 empowers IWAI to collect user fees with previous approval of the Central Government. All such fees and charges are credited to the Inland Waterways Authority of India Fund, constituted under section 19(1) of the IWAI Act, 1985 and not to the Consolidated Fund of India. The user fees that IWAI collects is not credited to the Consolidated Fund of India and is, therefore, not revenue but proceeds from business as defined under section 2(17) of the GST Act.

Construction of multi-modal IWT Terminal is a project undertaken within functional authority entrusted to IWAI and with Government sanction would have fallen under Serial No. 3(vi) of the Rate Notification, had it not been meant for commerce or business and taxable @ 12%. However since the predominant use of the structure would be for commerce and business, therefore it would be falling under the residual entry 3(xii) and Taxable at the rate of 18%.

  1. Held

The Applicant’s supply of works contract service for construction of the Multi-modal IWT Terminal at Haldia, attracts GST at 18% rate under Serial No. 3(xii) of the Rate Notification.

  

  1. Comment

 The judgement is a significant in terms of understanding of Government Entity and their working whether it falls under commerce or business or not. AAR held that multi-modal IWT terminal at Haldia would be predominantly used by IWAI for commerce and business since the fees collected from the users would not be forming part of the consolidated fund of India. On a broader basis, by AAR held that the impugned activity of IWAI was for commerce and business.

 

One significant observation which might help us in understanding the nature and working of of governmental entity is the observation made by Hon’ble Apex Court in the matter of Municipal Commissioner Of Dum … vs Indian Tourism Development … on 1 August, 1995 Equivalent citations: 1995 SCC (5) 251, JT 1995 (5) 610

 

“Even before the advent of the constitution, the State had been carrying on several activities which were in the nature of commercial/trading/manufacturing activity but with the advent of the constitution introducing the concept of a welfare State – or a socialist State, as the case may be – both the State and Central Governments embarked upon an extensive and systematic course of activity where under several business ventures were commenced and in many cases taken over. Within a few years, however, it was realised that a business is to be carried on as a business and not in the manner of governmental activity. Accordingly, the Central and State Governments started creating corporations for carrying on these activities. In the case of major public utilities, statutory corporations were created under different enactments. For example, Road Transport Corporations under Road Transport Corporations Act, Electricity Boards under the Electricity Supply Act, 1948, Air India and Indian Airlines under the Airlines Corporation Act, Life Insurance Corporation under the Life Insurance Corporation Act and so on. In respect of several undertakings, companies were registered under the Companies Act. With a view to anable these statutory corporations and companies to carry on the activity which was hitharto carried on by the governments, the relevant properties assets and liabilities were transferred to such new corporations They were supposed to operate on business lines, pay taxes and justify their creation and constitution. These corporations, whether created under the statute or registered under the Companies Act are distinct juristic entities owning their own properties having their own fund, capable of borrowing and lending monies and entering into contracts like any other corporation. In many cases the entire share capital of these corporations is owned by the Government whether Central or State. In some cases, the major share holding is of the Government with some private share holding as well. In case of some statutory corporations, the enactment creating them did not provide for any share capital, though it was made a body corporate with all the necessary and incidental powers that go with such concept. The International Airports Authority is one such corporation created under the Act with no share capital but which has its own properties, its own fund, accounts, employees and capable of lending and borrowing and entering into contracts.

 

Therefore, judgement of AAR points towards a caution before deciding for levy of tax rate on works contracts awarded by Government Entity. Further, in my view similar caution needs to be exercised before analyzing the tax rate on works contract awarded by Governmental Authority.

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