Supply of Air Conditioners with Installation Services is chargeable with 28% GST
Supply under GST is defined to include all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. It also includes importation of services for a consideration whether or not in the course or furtherance of business.
But not all supplies will be simple and clearly identifiable. Some supplies are a combination of goods or a combination of services or a combination of both goods and services, where each individual component may attract different rates of tax.
The rate of tax to be applicable for such supplies may be difficult to compute. Composite supply means a supply comprising of two or more goods/services, which are naturally bundled and supplied in with each other in the ordinary course of business, one of which is a principal supply. It means that the items are generally sold as a combination and cannot be sold separately. The tax rate of the principal supply will apply on the entire supply.
Let us refer to the case of Nikhil Comforts (GST AAAR Maharashtra), where the issue under consideration is whether installation of air conditioning equipment and execution of Additional Air-conditioning work is a composite supply where tax rate of the principal supply will apply on the entire supply or the same can be classified as a works contract for construction of immovable property?
Facts of the Case
- M/s Nikhil Comforts, a Partnership Firm, entered into an agreement with Goa State Infrastructure Development Corporation Ltd (GSIDC) for execution of Additional Air-conditioning work for the New building of Director of Education.
- Nikhil Comforts agreed to do the works of supply of goods and services for agreed price.
- GSIDC is a wholly owned Government Company of the Government of Goa registered under the Companies Act, 1956, with the Registrar of Companies (ROC).
- GSIDC was floated by the Government of Goa as a Special Purpose Vehicle (SPV) for speedy implementation of all the Infrastructural Projects, envisaged by the Government like Roads, Bridges, Fly-Overs, Bus-Stands, hospitals, Tourism related Projects, etc., all over the State on the similar lines of similar Corporations in other States.
- This Corporation would act as a coordinating agency for implementing all the projects.
- Appellant would be supplying various VRF Indoor and Outdoor units, stands, cables etc which would be installed by them.
- After installation of the said equipment, testing would be conducted to see whether the Air conditioning work was done properly and after successful testing the commissioning would start.
The appellant sought advance ruling on the following questions:
- Whether the transaction would be classifiable under the definition of “works contract” liable to GST covered under Sr. No. 3 item no 3 of notification no. 20/2017(Central tax rate) dated 22/08/2017 taxable @ 6% CGST
- Whether the transaction is Composite supply liable to tax at the rate applicable to Air Conditioners which are the principal goods involved in the transaction under schedule IV, Sr. No 119 of notification No. 1/2017 (Central tax rate) dated 28/06/2017 taxable @ 14% CGST
Ruling by Authority of Advance Ruling (AAR)
- The AAR held the activity of the appellant as “Composite Supply”.
- Aggrieved by the order of the AAR, appeal was filed before the Appellate Authority of Advance Ruling (AAAR).
- Appellant prayed to modify the order suitably to cover under the definition of “works contact” under section 2(119) of the Maharashtra Goods and Service Tax Act liable to GST covered under Sr. no 3 item no 3 of notification No 20/2017 (Central tax rate) dated 22/08/2017
Observations of the AAAR on the meaning of ‘works contract’
- Section 2(119) of the CGST Act defines ‘works contract’ to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract
- The question raised by the appellant therefore had to be decided on the basis of the said definition.
- A contract shall be a works contract only if it leads to building and erection of immoveable property.
Observations of the AAAR on scope of work of the appellant
- The scope of the work was defined as Air Conditioning work for the building. It was nothing but providing air conditioners on an extensive basis and the same did not change the essential nature of the work which was that of installation of air conditioners.
- The work of providing of indoor-outdoor units of the VRF/VRV system, was nothing but installation of air conditioners in the premises with the additional requirements.
- Applicant had submitted that the selected machines differed from room to room in terms of capacity and type.
- This happens even in case of installation of a single Air conditioner unit in a room where the capacity of the AC depends on the size of the room.
- Also, emphasis was laid by the appellant on the fact that the unit was installed on the basis of shop drawings and a study of site.
- The markings were done for indoor unit locations, outdoor unit locations, copper pipes, cable trays and cabling.
- However, AAAR found that the fact that a study of the site done before the installation of the unit did not make any installation a part of the property or an immoveable property.
- This cannot be a distinguishing factor as such studies were done even before installation of an air conditioner unit which also involved a study of the size of the room, the location of the window, laying down the piping etc.
The appellant’s argument that the contract was for immoveable property
- The appellant contended that the contract was for immovable property as the Air Conditioning plant could not be taken as such to the market for sale and totality of the plant could not be shifted from one place to another, once it is installed at a particular site.
- It could be shifted only after dismantling the plant which cannot be called Air conditioning plant after it is dismantled.
Reference by AAAR on earlier judgements
AAAR referred to the Supreme Court judgement in the case of Sirpur Paper Mills Ltd vs The Collector Of Central Excise, where the main issue before the Court was to decide whether a paper making machine is an immoveable property or not. The court while deciding that it is not an immoveable property made the following observations-
- The whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety.
- The ITAT further held that the papermaking was saleable and observed that if somebody had to purchase, the whole machinery could be dismantled and sold to him in parts.
- In view of this finding of fact, it was not possible to hold that the machinery assembled and erected by the appellant at its factory site was immovable property as something attached to earth like a building or a tree.
- The ITAT pointed out that it was for the operational efficiency of the machine that it was attached to earth. If the appellant wanted to sell the paper making machine it could always remove it from its base and sell it.
- Apart from this finding made by the ITAT, the point advanced on behalf of the appellant, that whatever is embedded in earth must be treated as immovable property is basically not sound.
- For instance, a factory owner or a house-holder may purchase a water pump and fix it on a cement base for operational efficiency and also for security. That will not make the water pump an item of immovable property. Some of the components of the water pump may even be assembled on site. That too will not make any difference to the principle.
- The test is whether the paper making machine can be sold in the market. The ITAT has found as a fact that it can be sold.
- In view of that finding, SC was unable to uphold the contention of the appellant that the machine must be treated as a part of the immovable property of the company.
- Just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become an immovable property.
- A further argument was made that the entire machinery cannot be bought and sold as it is because the machinery will have to be dismantled before being sold.
- The ITAT pointed out that the appellant had himself bought several items and completed the machinery.
- It had purchased a large number of components and fabricated a few and manufactured the paper making machine at the site. If it is sold it has to be dismantled and reassembled at another site.
- SC did not find any fault with the reasoning of the ITAT on this aspect of the matter
- Lastly, it was contended that the paper making machine was not really manufactured by the appellant. Various components and parts were purchased and a few of the parts were fabricated at the factory and the assessee ultimately assembled various parts of the machine.
- SC was unable to uphold this argument also because it had to be seen whether a final product was something distinct and apart from the components that have gone into its production.
- What the appellant had erected in its factory was a paper making machine. It may have purchased various components to make the machine but nonetheless what has been produced is something quite different from the components that had been purchased. A new marketable commodity had emerged as a result of the manufacturing activity of the appellant.
- Marketability being a question of fact, SC was of the view there was no scope for interference with the order passed by the ITAT.
By the application of the above tests laid down by the Supreme Court it cannot be said that the said transaction is a contract for immoveable property.
It was seen from the arguments of the appellant that he had not denied that the system cannot be dismantled. It was only argued that the plant could be shifted only after dismantling the plant. However, in the above judgement the Court has observed that just because the system needs to be dismantled before it is re-erected does not make it an immoveable property. The system has to be dismantled but it can be re-erected at any other site. A similar view has been taken by the SC in the case of:
- CCE vs. Solid and Concrete Engg Works & Ors (2010) (SC)
- Board of Revenue, Chepauk, Madrasvs. K. Venkataswami Naidu [AIR 1955 Mad 620]
- Sri Velayuthaswamy Spinning Mills vs. The Inspector General of Registration and the Sub Registrar (2013)
In the case of Solid and Concrete Engineering (cited supra) the SC applied the following tests while holding that ‘asphalt hot mix plants ‘are not immoveable property:
- The plants in question are not per se immovable property.
- Such plants cannot be said to be “attached to the earth” within the meaning of that expression as defined in Section 3 of the Transfer of Property Act.
- The fixing of the plants to a foundation is meant only to give stability to the plant and keep its operation vibration free.
- The setting up of the plant itself is not intended to be permanent at a given place. The plant can be moved and is indeed moved after the road construction or repair project for which it is set up is completed.
Observations of AAAR on whether the contract of the applicant amounted to immovable property or not
- AAAR found that the observations of the above cases, applied to the instant case.
- The fixation of the air conditioner units along with the pipes, though is undoubtedly a fixture, is for the beneficial enjoyment of the units and in order to use them for cooling, it has to be attached to the ceiling.
- The attachment, does not make the air conditioning units a part of the land and as immovable property.
- The total contract is for Rs 55,29,555 out of which the value of equipment is Rs 28,87,782 and the value of copper piping, drain piping is around Rs 3 lakhs.
- This showed a dominance in favour of goods in the total value.
- So, this showed that installation and the entire fabrication was not a key factor in the valuation.
- Even though there might be works involved in the air conditioning system, the balance tilts considerably in favour of goods.
- From the discussion made above, AAAR came to the conclusion that the contract submitted is not immoveable property and therefore cannot be considered as a ‘works contract’ service.
Observations on whether service provided by the applicant is a Composite Supply or not
- The major part of the contract is supply of goods i.e. VRF Indoor and outdoor units, refrigerant piping, drain piping with insulation, MS parts, cabling etc.
- The appellant delivered these goods to the site of the client and using these goods the appellant provides services of installation, testing and commissioning of the system.
- Both the supply of goods and services were dependent on each other and are naturally bundled and done in the course of the business.
- The AAR had also concluded that this was a composite supply and the principal supply is of goods in the instant case and AAAR agreed with the same. The supply of goods and services were conjoint to each other and inter dependent.
- Moreover, it is an established practice to supply air conditioner units and also provide the installation and therefore it can be construed as naturally bundled and therefore a composite supply, where, needless to say the principal supply is that of goods, which is the air conditioner units.
- Air Conditioners units fall under Chapter 8415 and are taxable @ 28% and are covered under Schedule IV, Sr no 119 of notification No 1/2017 (CV.T rate) dated 28/06/2017.
- Hence the principal supply in the composite supply being goods, the appellant is liable to pay GST @ 28% on the whole contract.
In conclusion, supply of air conditioning is a composite supply. As the same is not for immovable property, it does not fall under the definition of ‘works contract’. The principal supply is of Air conditioning units and the entire contract is taxable @ 28%.