How to pay GST on transportation & allied services relating to goods supply : AAR Clarified

By | May 31, 2018
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(Last Updated On: May 31, 2018)

Whether tax is payable on transportation and allied services relating to supply of goods.

WEST BENGAL AUTHORITY FOR ADVANCE RULING
GOODS AND SERVICE TAX
14 Beliaghata Road, Kolkata – 700015

Name of the applicant IAC Electricals Pvt Ltd
Address 701 Central Plaza, 2/6 Sarat Bose Road, Kolkata-20
GSTIN 19AAACI6040B1Z1
Case Number 08 of 2018
Date of application February 27, 2018
Order No. & date 05/WBAAR/2018-19 dated 28/05/2018
Applicant’s representative Sri Biplab Paul, Accountant

1. The Applicant is stated to be a manufacturer of Overhead Power Transmission Line
Hardware and Accessories. His question is related to contracts obtained from
M/s Power Grid Corporation of India (hereinafter referred to as “the Contractee”) who
has entered into two separate contracts – one for supply of materials at ex-factory
price (hereinafter referred to as “the First Contract”), and the other for supply of allied
services like transportation, insurance, loading/unloading etc for delivery of materials
at the contractee’s site (hereinafter referred to as “the Second Contract”). The
Applicant states that as per the Second Contract, since they are not a Goods Transport Agency they arrange for the supply and delivery of materials through various other suppliers of these services. The Contractee is charged for these  services at a pre-fixed rate, irrespective of the actual cost incurred. However, the  Contractee is unwilling to bear the cost of GST on such services provided to them by   the Applicant through various Service Suppliers. The Applicant, hence, wants a
Ruling regarding the taxability of these services supplied by them.  Advance Ruling is admissible on this question under section 97 (2)(a)&(e) of the CGST/ WBGST Act, 2017 (hereinafter referred to as “the GST Act”). The officer concerned, in his written response, raises no objection to admission of the  application.
The Application is, therefore, admitted.

2. As per point no. 14 in Form GST ARA 01 submitted by the Applicant, the question on
which Advance Ruling is required is the taxability of services supplied by them. The
Applicant has drawn attention and referred to Facts as stated in Point No. 15 and
Interpretation as stated in Point No. 16, of the Form.

3. According to the above submissions the Applicant is not a goods transport agency
(hereinafter referred to as “GTA”) or engaged in the business of in-transit insurance
and loading, which are naturally bundled with and dependent of the transportation
services. He, according to the Application, arranges such services and pays the
GST, as applicable, on the consideration paid to the suppliers of such services. The Applicant is of the opinion that this service to the Contractee is exempt under the
GST Act. According to the Applicant, it is a composite supply with road transportation
as the principal supply, and loading/unloading, in-transit insurance etc as ancillary
supplies to the transportation service. As the Applicant is not a GTA, his supply of
transportation service is exempt. [Reference may be made to Serial no. 18 of Notification No. 12/2017-Central Tax (Rate) dated 28/06/2017 (1136-FT dated 28/06/2017 under State Tax), hereinafter collectively referred to as the “Exemption
Notification”]. The Principal Supply being thus exempted, the Applicant should not,
according to his interpretation of GST law, be liable to pay tax on the ancillary or
incidental services.

4. Serial no. 18 of the Exemption Notification exempts services by way of transportation
of goods by road except the services of a GTA. In his written submission the
Applicant admits that he is not transporting the goods, but hiring the service of a
transport agency. Similarly, he is not providing the insurance service, but buying such
services from an insurance service provider. The Applicant is, therefore, the recipient
of such services and not a supplier thereof. The question of the Applicant providing
transportation service etc, therefore, does not arise. Hence the Exemption
Notification is not applicable to the Applicant.

5. Before deciding the issue of taxability of the consideration payable under the Second
Contract for inland/local transportation and ancillary services like in-transit insurance,
the two contracts referred to above need to be examined.

6. The Applicant has been awarded a package for supply of hardware fittings and
accessories at different projects under two separate Notifications of Award
(hereinafter referred to as “NOA”).

7. NOA No.CC-CS/651-SR1/HWF-3670/3/G2/NOA-I/7540 dated 12/12/ 2017 is the First
Contract, involving ex-works supply of all equipment and materials. The scope of the
work includes design, manufacture, testing and supply of hardware fittings and
accessories. The consideration payable includes only the ex-work price component
of the materials.

8. NOA No.CC-CS/651-SR1/HWF-3670/3/G2/NOA-II/7541 dated 12/12/2017 is the
Second Contract, which involves all other activities required to be performed for
delivery of the goods to the Contractee’s site. The consideration is a lump sum
amount payable for inland/local transportation, in-transit insurance and
loading/unloading charges.

9. It is immediately apparent that the First Contract cannot be executed independent of
the Second Contract. There cannot be any ‘supply of goods’ without a place of
supply. As the goods to be supplied under the First Contract involve movement
and/or installation at the site, the place of supply shall be the location of the goods at
the time when movement of the goods terminates for delivery to the recipient, or
moved to the site for assembly or installation [refer to Section 10(1)(a) & (d) of the IGST Act, 2017]. The First Contract, however, does not include the provision and cost of such transportation and delivery. It, therefore, does not amount to a contract for ‘supply of goods’ unless tied up with the Second Contract. In other words, the First Contract has “no leg to stand on” unless supported by the Second Contract. It is no contract at all unless tied up with the Second Contract.

10.The Contractee is aware of such interdependence of the two contracts. Although he
awards the contract under two separate NOAs, Clause 3.2 of both of the NOAs
makes it abundantly clear that “Notwithstanding the break-up of the Contract Price,
the Contract shall, at all times, be construed as a single source responsibility
Contract and any breach in any part of the Contract shall be treated as a breach of
the entire Contract.”

It is further elaborated under Clause 2.2 of both the Contracts. Second paragraph of
Clause 2.2 of the First Contract says, “Notwithstanding the award of work under two
separate Contracts in the aforesaid manner, you shall be overall responsible to
ensure the execution of both the Contracts to achieve successful completion and
taking over of the Goods under the package by the Purchaser as per the
requirements stipulated in the Bidding Documents. It is expressly understood and
agreed by you that any default or breach under the ‘Second Contract’ shall
automatically be deemed as a default or breach of this ‘First Contract’ also and viceversa,
and any such default or breach or occurrence giving us a right to terminate the
‘Second Contract’, either in full or in part, and/or recover damages there under, shall
give us an absolute right to terminate this Contract, at your risk, cost and
responsibility, either in full or in part and/or recover damages under this ‘First
Contract’ as well. However, such default or breach or occurrence in the ‘Second
Contract’, shall not automatically relieve you of any of your obligations under this
‘First Contract’. It is also expressly understood and agreed by you that the
equipment/materials supplied by you under this ‘First Contract’, when inter alia
transported to site by you under the ‘Second Contract’ shall give satisfactory
performance in accordance with the provisions of the Contract.”

Second paragraph of Clause 2.2 of the Second Contract says, “Notwithstanding the
award of work under two separate Contracts in the aforesaid manner, you shall be
overall responsible to ensure the execution of both the Contracts to achieve
successful completion and taking over of the Goods under the package by the
Purchaser as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by you that any default or breach under the ‘First
Contract’ shall automatically be deemed as a default or breach of this ‘Second
Contract’ also and vice-versa, and any such default or breach or occurrence giving
us a right to terminate the ‘First Contract’, either in full or in part, and/or recover
damages there under, shall give us an absolute right to terminate this Contract, at
your risk, cost and responsibility, either in full or in part and/or recover damages
under this ‘Second Contract’ as well. However, such default or breach or occurrence
in the ‘First Contract’, shall not automatically relieve you of any of your obligations
under this ‘Second Contract’. It is also expressly understood and agreed by you that
the equipment/materials supplied by you under the ‘First Contract’, when inter alia
transported by you under the ‘Second Contract’ shall give satisfactory performance
in accordance with the provisions of the Contract.”

11.The two contracts are, therefore, linked by a cross fall breach clause that specifies
that breach of one contract will be deemed to be a breach of the other contract, and
thereby turn them into a single source responsibility contract. Black’s Law Dictionary
defines that “a severable contract, also termed as divisible contract, is a contract that
includes two or more promises each of which can be enforced separately, so that
failure to perform one of the promises does not necessarily put the promises in
breach of the entire contract”. In terms of this definition, the ‘cross fall breach clause’,
in the present context, settles unambiguously that supply of goods and their
transportation to the Contractee’s site are not two separate contracts but forms only
parts of an indivisible composite contract with ‘single source responsibility’.
Composite nature of the contract is clear from the clause that defines satisfactory
performance of the First Contract (supply of goods) as the time when the goods have
been transported to the Contractee’s site under the Second Contract. In other words,
the First Contract cannot be performed satisfactorily unless the goods have been
delivered to the Contractee’s site in terms of the Second Contract. Moreover, the
discussion in paragraph no. 8 above settles that the First Contract is no contract at all
unless tied up with the Second Contract. The two promises – supply of the goods
and their transportation to the Contractee’s site – are, therefore, not separately
enforceable in the present context. The supplies of goods and services of
transportation etc are, therefore, naturally bundled. The recipient has not contracted
for ex-factory supply of materials, but for the composite supply involving delivery of
the goods at the contractee’s site, which includes transportation, in-transit insurance
etc. Terms of the contracts are such that all these supplies are inseparable and,
therefore, naturally bundled.

2.While defining Composite Supply under Section 2(30) of the GST Act, the legislature
provides an illustration. It is specified therein that supply of goods, packed and
transported with insurance, is a composite supply and supply of goods is the principal
supply. The illustration being part of the Section, supplies as that of the applicant’s should be construed as specifically mentioned under the GST Act as Composite
Supply with supply of goods as the principal supply and services like transportation,
in-transit insurance etc ancillary or incidental to the principal supply.

In view of the foregoing we rule as under:
RULING
Services of transportation, in-transit insurance and loading/unloading, being ancillary
to the principal supply of goods, shall be treated to taxation under Section 8 (a) of the
GST Act, and the consideration receivable on that account be taxed accordingly.

This Ruling is valid subject to the provisions under Section 103 until and unless
declared void under Section 104(1) of the GST Act.

(VISHWANATH) (PARTHASARATHI DEY)
Member Member%
West Bengal Authority for Advance Ruling West Bengal Authority for Advance Ruling

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