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July 13, 2022

There is no GST rate reduction for construction related to business activities

by CA Shivam Jaiswal in Income Tax

There is no GST rate reduction for construction related to business activities

In re KPC Projects Limited GST AAR Andhra Pradesh

Facts and issues of the case

The present application has been filed u/s 97 of the Central Goods & Services Tax Act, 2017 and AP Goods & Services Tax Act, 2017 (hereinafter referred to CGST Act and APGST Act respectively) by M/s. KPC Projects Limited (hereinafter referred to as applicant), registered under the AP Goods & Services Tax Act, 2017.

The applicant, M/s. KPC Projects Limited entered into a contract with Andhra Pradesh Industrial Infrastructure Corporation Ltd., (APIIC) for supply of works contract services. APIIC, a Government of Andhra Pradesh undertaking had floated online global open e-tenders for construction of ready built factory (“RBF”) sheds 1, 2, 3 & 4 at YSR Electronic Manufacturing cluster, Kopparthy, YSR Kadapa District, Andhra Pradesh. The applicant, being the successful bidder, had entered into a contract with APIIC vide agreement No.XXXXXXX dated 03.12.2020 with the Chief Engineer of APIIC for providing the following work, “Construction of RBF 1, 2, 3 & 4 at YSR Electronic Manufacturing cluster at kopparthy, YSR Kadapa District, “Andhra Pradesh”.

Further, as per SI.No. 6(a) of Schedule II of the CGST Act, 2017, works contract services shall be treated as a supply of service. Therefore, in the present scenario, there is a supply by the applicant and it is in the form of works contract to APIIC.

The subject work of the present supply involves works contract services for the erection and installation of factory sheds, hence they are works contract services. Further, APIIC is a wholly owned company by the Government of Andhra Pradesh. In terms of SI.No.3 (vi) of Notification 11/2017-Central Tax (Rate) dated 28.06.2017 as amended, composite supply of works contract provided to the Central Government, State Government, Union Territory, Local authority, Governmental Authority or Governmental Entity is eligible for the concessional rate of 6%.

A structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or A residential complex predominantly meant for self- use or the use of their employees or other persons specified in paragraph 3 of the schedule III of the Central Goods and Services Tax Act, 2017 [ Explanation- for the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities. provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority as the case may be”Assuming without admitting that APIIC does not fall under the definition of “Governmental Authority”, it still qualifies as a “Government Entity” as APIIC is formed in 1973 by GO No.831 dated 10.09.1973 by the Government of Andhra Pradesh and the Government of Andhra Pradesh including its nominees wholly owns i.e., 1000/o of share-holding in APIIC. As per the definition of Government Entity, APIIC is established by Government with over 90% of equity and control held by the Andhra Pradesh State Government.

In view of the above, it is submitted that the activities undertaken by APIIC for the present projects are not in the form of business, rather, they are offices for development of trade and industry in Andhra Pradesh.APIIC is vested with the objective of providing industrial infrastructure through the development of industrial areas and they have developed more than 300 industrial parks spreading over an extent of about 1,21,655 acres (including allotted area). Besides, APIIC is also developing sector focussed parks like apparel park/food processing parks/leather parks, special Economic Zones in the state.

APIIC has also constructed 3500 industrial sheds, 4800 dormitory units, 466 commercial shops.The applicant states that the present contract awarded to them is not a contract to develop industrial park etc., for APIIC but for RBF Sheds for use of APIIC, which as discussed supra is a Governmental Authority, Further, as per the explanation provided in SI.No.3 (vi), this particular contract is not for the business interests or transactions of APIIC but for their own use. Further, the same cannot be treated as business since they function as a Governmental Authority and any activity or transaction entered into by them cannot be held as business. Therefore, there is no commercial activity or business or profession involved in it, but the present contract is for a governmental authority to run its offices. Therefore, the present contract must be allowed for the concessional rate of 12%.In view of the above, it is submitted that the construction services provided by the applicant to APIIC are eligible for the concessional rate of 6% GST as provided in Sl.no.3(vi) of the Notification No.11/2017 – Central Tax (Rate) dated 28.06.2017.

Observation by the court

Court had examined the issues raised in the application, in light of records submitted and submissions made by the applicant at the time of hearing.As seen from the application, the applicant, M/s. KPC Projects Limited entered into a contract with Andhra Pradesh Industrial Infrastructure Corporation Ltd., (APIIC) for “Construction of RBF 1, 2, 3 & 4 at YSR Electronic Manufacturing cluster at kopparthy, YSR Kadapa District, Andhra Pradesh.”The issue to be decided is whether the applicant is eligible to avail the concessional rate of GST at 12°/o as prescribed in SI.No.3(vi) of the Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended from time to time.

Andhra Pradesh Industrial Infrastructure Corporation Ltd. (APIIC) was formed in 1973 by GO No: 831 dated: 10.09.1973 issued by Government of Andhra Pradesh. As seen from the share holding ratios of the 41′ Annual Report for the years 2013-2014 as made available by APIIC website https://www„Apiic.in, the Government of Andhra Pradesh including its nominees have 100% of share holding and thus it is covered under the definition of ‘Government Entity’ under the above said provisions. Therefore, we conclude that M/s. APIIC is a “Government Entity” for the purpose of GST matters.

Now court will examine whether the construction work in which the applicant is engaged in is meant for any business or otherwise. As seen from the 41′ Annual Report for the year 2013-2014 as made available in their website https:J/www.apiic.in/Annualreports.html, they are engaged in land acquisition and development and allotment of plots and sheds to various industrial ventures in the State making investments in joint venture, in associate companies, in related party companies, in subsidiary companies etc., and the income they are getting is revenue from operations like sale of land, houses, interest on hire purchase and long term borrowings etc,.

When court look into the activities of APIIC they are basically business activities and even a close observation of the modus operandi of the organisation prove the same. Even though APIIC is a Government entity, the sustenance of the organisation is derived from its activities of sale of sheds, land, houses on outright sale or hire purchase etc.

It is evident from the above excerpts, that the activities of APIIC are business activities and not otherwise. The applicant claims that the works involved in the contract i.e., the RBF sheds are used by none other than the organisation (APIIC) itself. But a detailed examination of the activities of APIIC prove that the organisation runs on a business model as it would pass on any costs involved in its transactions to the end client. This would be sufficient enough to come to a conclusion that the said construction is for use of APIIC for conducting its activities, which are essentially business oriented and hence not eligible for concessional rate of 12% ( 6% CGST + 6% SGST) available under Notification No.24/2017 – CT (Rate) dated 21.09.2017.

Hence, the contract entered by the applicant is classifiable under SAC heading No. 9954 under construction services, with entry no (ii) of serial No.3 of notification no. 11/2017 Central Tax (Rate) dated 28.06.2017 i.e., Composite Supply of Works Contract as defined in clause 119 of Section 2 of Central Goods and Services Act, 2017 and the applicable rate of tax is 18% (9% under Central Tax and 9% State Tax).

Conclusion

Question: In view of the construction services provided by the applicant to APIIC, whether the applicant eligible to avail the concessional rate of GST at 12% as prescribed in of S.No.3(vi) the Notification no. 11/2017- Central Tax (Rate) dated 28.06.2017, as amended by?

Answer: Negative.

Question If not, what is the appropriate rate and classification of GST to be charged by the applicant?

Answer: Classifiable under SAC heading No. 9954 construction services,

with entry no (ii) of serial No.3 of notification no. 11/2017 Central Tax (Rate) dated 28.06.2017 as amended and the applicable rate of tax is 18% (9% Central Tax + 9% State Tax).

In-re-KPC-Projects-Limited-GST-AAR-Andhra-Pradesh

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