Introduction

The case of Surya Roshni LED Lighting Projects Limited vs. Authority for Advance Rulings adjudicated on January 20, 2021, by the Authority for Advance Rulings under the Goods and Services Tax (GST) regime, marks a significant precedent in the classification and taxation of subsidies and composite supplies. The Applicant, Surya Roshni LED Lighting Projects Limited, sought clarity on the GST liability pertaining to capital subsidies and annuity fees received under their contract for executing the Green Field Public Street Lighting System in Odisha.

The primary issues revolved around whether the capital subsidy received constituted taxable consideration under GST, the applicable rate of GST on different components of the project expenditure, the timing of GST invoice issuance, and the GST rate applicable to supplies by sub-contractors involved in the project.

Summary of the Judgment

The Authority for Advance Rulings (AAR) meticulously analyzed the submissions of the Applicant concerning the GST implications of capital subsidies and annuity fees in their contract under the SIOM Agreement and Escrow Agreement with the Odisha Government and Urban Local Bodies (ULBs). The AAR concluded that:

• Capital Subsidy (90% of Project Capital Expenditure): This is considered a taxable supply under GST and is liable to be taxed at the appropriate rate after proper classification.
• Balance 10% of Project Capital Expenditure and O&M Fees: These are part of a composite supply, with the principal supply being goods. Therefore, the concessional GST rates proposed under the relevant notifications do not apply, and the GST should be levied based on the classification of goods.
• Timing of GST Invoices: Invoices for both capital subsidy and annuity fees should be raised as per Section 31 of the CGST Act, considering the composite nature of the supply.
• GST Rate on Sub-Contractor Supplies: The applicable 12% GST rate is not applicable as the primary supply is classified under goods, not services.

Ultimately, the AAR determined that the capital subsidy should be included in the transaction value and taxed accordingly, while the composite nature of the supply necessitates adherence to the standard GST rates based on the principal supply classification.

Analysis

Precedents Cited

The Applicant referenced the decision in Super Wealth Financial Enterprises (P) Ltd., reported in (2019) 20 GSTL 505 (AAR-GST), where the Authority had previously considered similar supply as a works contract. However, the AAR distinguished this case based on the specific nature of the supply and the contractual obligations involved, emphasizing that precedents must align closely with the facts at hand to be applicable.

Legal Reasoning

The AAR undertook a detailed analysis of the definitions and provisions under the Central Goods and Services Tax Act, 2017. Key points in their reasoning include:

• Composite Supply: According to Section 2(30) of the CGST Act, a composite supply consists of two or more supplies naturally bundled and supplied in conjunction, with one being the principal supply. In this case, the principal supply was identified as goods (equipment for street lighting), making the overall supply a composite one.
• Value of Supply: Under Section 15(2)(e), only subsidies provided by central and state governments are excluded from the value of supply. The capital subsidy received by the Applicant was deemed a consideration, not a qualifying subsidy, thus included in the transaction value.
• Works Contract: While the Applicant contended that the supply was a works contract service (as per Section 2(119) of the CGST Act), the AAR found that the absence of activities related to immovable property construction, such as building or fabrication, did not satisfy the works contract definition.
• GST Rate Determination: Since the principal supply was goods, the concessional rates applicable to services under Notification No. 11/2017-Central Tax Rate did not apply. GST was to be levied based on the classification of the goods involved.

Impact

This judgment has profound implications for businesses engaged in contracts involving multiple components, such as subsidies and service fees. It clarifies that:

• Subsidies as Taxable Consideration: Capital subsidies provided by government bodies may be classified as taxable supply and included in the transaction value, altering tax liabilities.
• Composite Supply Classification: Accurate classification as composite supply with a principal supply of goods determines the applicable GST rates, potentially affecting the overall tax burden.
• Invoice Timing: Businesses must adhere to standard GST invoicing timelines based on the nature of composite supplies, ensuring compliance and avoiding penalties.
• Sub-Contractor Tax Rates: The classification of principal supply affects the taxation rates applicable to sub-contractors, which could influence contractual negotiations and cost structures.

Future cases involving government contracts with similar structures will reference this judgment to determine GST liabilities, promoting consistency and clarity in tax administration.

Complex Concepts Simplified

Composite Supply

A composite supply under GST is a combination of two or more supplies—goods, services, or both—that are naturally bundled together and supplied in the ordinary course of business, where one is the principal supply. For instance, supplying hardware (goods) along with installation services (service) is considered a composite supply with goods being the principal supply.

Works Contract

A works contract is defined as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property, involving the transfer of ownership in goods used in the execution of the contract. An example would be constructing a building where materials are supplied, and the construction work is carried out.

Transaction Value

The transaction value is the price actually paid or payable for the supply of goods or services, as stipulated under Section 15 of the CGST Act. It includes the consideration given or to be given, but excludes certain types of subsidies provided by the government as per specific clauses.

GST Invoicing Timeline

Under GST law, the timing for issuing GST invoices depends on whether it is goods or services. For goods, the invoice should be issued at the time of removal or supply, while for services, it is the earlier of the date of issue of invoice or the date of receipt of payment.

Conclusion

The ruling in the Surya Roshni LED Lighting Projects Limited vs. Authority for Advance Rulings case serves as a pivotal reference point in understanding the nuances of GST applicability on complex supplies involving subsidies and multiple components. It underlines the importance of accurate supply classification—whether as composite or works contract—and the resulting tax implications. Businesses engaged in similar contracts must meticulously assess the nature of their supplies and subsidies to ensure compliance with GST regulations.

Moreover, the decision reinforces the principle that subsidies provided as part of contractual obligations may constitute taxable consideration, thus impacting the overall tax liability. It also clarifies that the principal supply's nature dictates the applicable GST rates, especially in composite supply scenarios.

Overall, this judgment enhances clarity in the interpretation of GST laws, providing a framework for businesses and tax authorities to address similar issues with greater precision and consistency.