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February 28, 2022

GST AAR Rajasthan: Rule out GST on ‘Ancillary services’ provided by Builder

by Mahesh Mara in GST, Legal Court Judgement

GST AAR Rajasthan: Rule out GST on ‘Ancillary services’ provided by Builder

Fact and Issue of the case

Richwell Enterprises Private Limited is the company is engaged in the business of construction of residential complex. Currently, as per Notification No, 03/2019 – Central Tax (Rate) dated 29 March 2019, the applicant is paying outward tax liability on Construction Services at the rate of 1% or 5%, as the case maybe. Further, the applicant does not pay GST in respect of flats/units sold after the issuance of Completion Certificate or its first occupation, whichever is earlier. Furthermore, the assessee recovers charges for the following ancillary services from the residents:-

  • JDA Lease Charges
  • Electrification Charges
  • Sewage Treatment Plant Charges
  • Non-refundable IFMS (Interest Free Maintenance Security)
  • Club Membership

Cumulatively, hereinafter called as ‘the ancillary services’.

  • To provide ‘the ancillary services’, broadly the applicant makes the following inward supplies:-
  • Civil expenses related to club formation, interior furnishing, air conditioning and equipment expenses
  • Electrification Transformer, Vacuum Circuit Breaker, Ring Main Unit, Variable Renewal Energy, Main Panel, Active/Automatic Power Factor Correction/Control (Panel), Panel Distribution Channel, High Tension Low Tension Cable, CTPT Combined Metering Panel, Solar Panel, Inverter and Net Metering Expenses
  • Sewage Treatment Plant related equipment as well as civil expenses
  • It has come to notice of applicant in some conferences that some builders paying GST for that outward supply of the ancillary services at 1% / 5%.

The applicant is law abiding person and does not want to default and to pay less/ excess GST. Hence, the applicant is hereby seeking advance ruling on treatment/taxability of ‘the ancillary services’ and eligibility of Input Tax Credit thereon.

Observation of the Authority

The authority has perused the records on file and gone through the facts of the case and the submissions made by the applicant as well as the department. The issue is related to the classification of services, applicable tax rate thereon & availability of Input Tax Credit under the GST Act. The applicant, registered under GST ACT and engaged in the business of construction and sale of residential apartments, discharges GST in respect of such supply for which, consideration is received before receipt of Occupancy/Completion Certificate.

Applicant submitted that apart from consideration for the main construction activity, they also recover charges for ‘the ancillary services’ like JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Non-refundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents. To provide ‘the ancillary services’, broadly the applicant makes the following inward supplies:-

a. Civil expenses related to club formation, interior furnishing, air conditioning and equipment expenses

b. Electrification Transformer, Vacuum Circuit Breaker, Ring Main Unit. Variable Renewal Energy, Main Panel, Active/Automatic Power Factor Correction/Control (Panel), Panel Distribution Channel, High Tension Low Tension Cable, CTPT Combined Metering Panel, Solar Panel. Inverter and Net Metering Expenses.

c. Sewage Treatment Plant related equipment as well as civil expenses

Applicant feels that the charges for the ‘Ancillary Services’ are primarily for supply of construction services since they are received only from the customers to whom construction services are supplied and therefore the services underlying the ‘Ancillary’ Services’ may be treated as naturally bundled with supply of main construction services which are supplied in conjunction with each other, in the ordinary course of business. Hence, in case these services are treated as ‘Composite supply’, construction services may be treated as principal supply of such composite supply; since the same clearly constitutes predominant element of such transactions and is the primary supply giving rise to the associated or ancillary supplies. As per the applicant, in such a situation, the entire value of the charges of the ‘Ancillary Services’ should attract the effective rate of GST, as applicable on the main construction service (supplied by the Company supplied under the same Agreement). In other words, the applicant is contending that l/3rd of the value of land is available to them as rebate even on these other charges. We observe that the question before us is whether the Charges for the ‘Ancillary Services’ recovered by the applicant will be treated as consideration for ‘construction services’ and classified under SAC 9954 along with the main residential construction services or whether the same will be treated as consideration for independent service(s) under the respective head. And consequently, what would be the applicable GST rate on such Charges collected for the ‘Ancillary Services.The applicant has provided, a sample copy of the ‘Agreement for sale’ deciding the present issue. On perusal of the said ‘agreement for sale, it seen that the charges for the construction of residential property and the other charges for providing different ancillary’ services are mentioned separately.

To decide the issue, it is important to examine the concept of ‘Composite Supply’ as provided under the CGST Act, 2017. The relevant definitions in this regard, as provided under Section 2 of the CGST Act, are as under:

8.1 Composite Supply [Section 2(30)]:-“Composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both or any combination thereof which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply:

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.”

8.2 Principal Supply Section 2(90):- “Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary'”

8.3 Section 8 of the CGST Act which provides the manner of determining tax liability on a composite supply or a mixed supply, is reproduced as under:

“8. The tax liability on a composite or a mixed supply shall be determined in the following Manner, namely:-

  • a composite supply comprising two or more supplies, one of which is a supply, shall be treated as a supply of such principal supply:
  • a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax. “

8.4 In order to be held as ‘Composite supply’ as per Section 2 (30) of the CGST Act, 2017, there must be two or more taxable supplies of goods oi of services or both or any combination thereof, which are naturally bundled and are supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

In the present case, we observe from said agreement for sale that, the applicant has mentioned the value of supply of construction of residential unit and the value of other ancillary services separately. As per para no. 1.2 of page & 4 of the impugned agreement for sale, the applicant intend to collect the value of construction of residential unit supply (having saleable area of apartment No. A-704 is 1603 Sq Ft.), for an amount of Rs. 40,50,000/- + taxes extra separately from the customer on which stamp duty is payable. Para no. 1.2 of page 4 shows that certain charges are collected separately for ‘Ancillary services’ provided by the applicant viz. JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Non-refundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents etc.

A combined reading of the agreement as a whole, reveals that, there are more than two supplies in the subject transaction, which are independent supplies and so taxable separately. From the above terms and conditions of the agreement of sale, it is seen that the applicant intend to collect the basic flat sale price separately for the supply of residential unit and the other charges are to be collected separately for supply of different ancillary services which are called as ‘other charges’. Merely because the agreement is common will not make it a supply of bundled services. Therefore, in the present case, we find that there are more than two supplies which are independent supplies and so taxable separately, the supply of construction services of residential unit and the other supply of ‘ancillary services’ (as mentioned in ‘Agreement for Sale’ provided), viz. JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Non-refundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents. Ancillary Services supplied in respect of the ‘other charges’ are different from the service of construction of residential flats. Therefore, it is observed that the ‘ancillary services’ provided cannot be said to be naturally bundled and supplied in conjunction with each other in the ordinary course of business with main supply of residential flat in the subject case. We find that Heading 9954, Entry No. 3 covers ‘construction services” of Notification No.11/2017 CT (R) dated 28.6.2017. The entry no. 3 is reproduced as below:

13 ‘3 (i) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first Occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service). The above entry is specifically related to construction of a complex, building, civil structure or a part thereof, including, a complex or building intended for sale to a buyer, wholly or partly.

Ruling

For reasons as discussed in the body of the order, the questions are answered thus:

Question No.1:- Whether recovery of charges for ‘the ancillary services’ by builders would be considered as a ‘composite supply’ naturally bundled with ‘Construction Services’ under Section 8 of CGST and RGST Act, 2017?

Answer No. 1: NO, ‘the ancillary services’ would not be considered as a ‘composite supply’ naturally bundled with ‘Construction Services under Section 8 of CGST and RGST Act, 2017. The applicable rate of GST on ‘the ancillary services’ would be as per the SAC prescribed under Notification No. 11/2017 CT (R) dated 28.6.2017 and are liable to GST @ 18%. Further, the applicant has to pay GST on the entire consideration received as charges on account of ‘the ancillary services’, without any abatement.

Question No.2. If answer to Question No. 1 is YES, whether the charges for ‘the ancillary services would attract GST at the rate specified for ‘Construction Services’ (principal supply), i.e., 1% or 5% as the case maybe?

Answer No. 2: Not applicable as per Answer No. 1.

Question No.3: Further, if answer to Question No. 1 is YES, whether recovery of the charges for ‘the ancillary services’ by builders, after completion certificate would not attract GST liability considering them to be composite supply naturally bundled with Construction Services which does not attract GST once completion certificate is issued?

Answer No. 3: Not applicable as per Answer No. 1.

Question No.4: If answer to Question No. 1, 2 and 3 is NO and GST is levied on charges for ‘the ancillary services’ as individual respective service (considering 18% GST rate) then whether Input Tax Credit can be claimed in respect of GST paid on expenses incurred to provide the said ancillary services?

Answer No. 4: As per Section 16 of the CGST and RGST Act, the applicant is eligible to take Input Tax Credit (ITC) of the GST paid on goods or services used or intended to be used in the course or furtherance of providing ‘the ancillary’ services’ subject to the conditions as prescribed and the provisions of sub section 5 of the Section 17 of the CGST and RGST Act. 2017.

Read the full order from below

GST-AAR-Rajasthan-Rules-out-GST-on-Ancillary-services-provided-by-Builder

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