Hyundai Rotem Company ., In re

M/s. Hyundai Rotem Company (herein after referred to as ‘Applicant’ or ‘HRC’), # 277, II Floor, 4th Main, 5th D Cross, HAL 3rd Stage, New Thippasandra Road, Bengaluru – 560 075, having GSTIN 29AABCK6367L1ZY, have filed an application for Advance Ruling under Section 97 of CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of KGST Act, 2017 read with Rule 104 of KGST Rules, 2017, in form GST ARA-01 discharging the fee of Rs.5,000/- each under the CGST Act, KGST Act.

2. The applicant is a foreign company incorporated in South Korea and is predominantly engaged in manufacture, supply, testing, commissioning and training in respect of rolling stock. The applicant was a successful bidder to the tender invited by Delhi Metro Rail Corporation Limited (‘DMRC’J for design, manufacture, supply, testing, commissioning and training of 504 Standard Gauge Cars (passenger rolling stock) including training of operation & maintenance personnel and supply of spares & manuals. The applicant entered into a contract with DMRC, vide contract No.RS-10 dated 24.05.2013, for the purpose of execution of the contract awarded.

The applicant, to undertake the scope of work as agreed in the contract, is required to supply various goods and services to DMRC in a phased manner. The detailed instructions with respect to obligations of the applicant under the contract are specified through various Cost Centres under tender documents which form part of the Contract. The nature of supply undertaken by the applicant under each of the cost centres is tabulated here under:

Cost Centre

3. In view of the above, the applicant has sought advance ruling in respect of the following questions:

a. Whether the supplies made under Cost Centres D, G and H (to the extent of training services) of Contract ‘RS-10’ to DMRC are to be considered as independent supplies of goods and services and GST rate applicable depending upon the nature of activity performed under such cost centres?

b. Whether the supplies made by all the Cost Centres of RS-10 contract of DMRC are to be considered as ‘composite supply’ as defined under Section 2(30) of the Central Goods and Services Tax Act 2017 (‘CGST Act) read with Section 8(1) of the CGST Act, thereby considering the supply of rolling stock undertaken under Cost Centre B and C as the principal supply and levying GST at 5% (upto 30 Sep 2019), 12% (from 1 oct 2019 till 30 Sep 2021) and 18% (with effect from 1 Oct 2021) of the entire contract value.

4. BRIEF FACTS OF THE CASE:-

The applicant furnishes the following facts relevant to the issue:

4.1 The applicant, furnishing the summary of activities undertaken by them under each of the Cost Centres submitted that as per the pricing document (‘Annexure ITT-2B to instructions to Tenderers’) as amended vide DMRC letter No. DMRC/134/18/RS10/2200A/4130 dated 16.05.2018, the lump sum contract price that is chargeable for the whole of works has been apportioned among various cost centres. The apportioned amount for each cost centre has been further distributed among various milestones included in that cost centre. The applicant also furnished the breakup of the contract price relatable to each of the cost centres.

4.2 The pricing document also categorically prescribes milestone payment schedule for each of the cost centres, specifying when and how much consideration would become due to the applicant upon fulfillment of prescribed activities. DMRC, vide its Circular No.19/2017 dated 11.12.2017, with regard to the tax payment on supplies under the contract, agreed, due to the promulgation of Goods and Services Tax w.e.f. 01.07.2017, that the GST as applicable will also be paid to the applicant based on the tax invoices issued by the applicant.

4.3 The supply by the applicant to the DMRC is an inter-state supply of the goods and services and liable for the tax under the provisions of IGST Act 2017. The rate of tax on these supplies are at present levied based on the nature of respective transaction for which the invoice is issued. The applicant furnished the present status and treatment of different supplies under the cost centres.

4.4 The DMRC vide its letter no. DMRC/134/2 l/RS10/GST/Reimb/Part-1/7004 dated 04 June 2021 has disputed the nature of supply and applicable rate of GST to be charged by applicant, on the following understanding of DMRC:-

– Supply made by applicant under the contract is a ‘composite supply’ as defined under clause (30) of section 2 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) with the principal supply being the supply of rolling stock

– It is the understanding of DMRC that the supplies under the cost centre D to G are incidental I ancillary to the principal supply of rolling stock and supplied in conjunction with each other.

– In view of above understanding, DMRC has advised the applicant to revise the tax invoices for all the Cost Centres under the Contract as per the GST rate applicable to rolling stock i.e. 5% for supplies upto 30 Sept 2019, 12% for supplies from 1 Oct 2019 till 30 Sept 2021 and 18% for supplies made thereafter

4.5 The adoption of above change as advised by DMRC would affect the nature of supply and tax rate adopted by the applicant. DMRC, on account of disagreement on the nature of supply and applicable rate thereon, withheld the differential GST payment relatable to cost centres D, G and H. However the applicant has borne the cost of differential GST on its own and paid the said tax to the Government in a timely manner. Thus the applicant has filed the instant application for advance ruling.

5. Applicant’s Interpretation of Law:

The applicant furnished their understanding and interpretation of law as under:

5.1 The applicant, quoting various provisions of the law submits that the supplies made under Cost Centres D, G and H (Hl to H5) are not composite to the supplies under Cost Centres B & C and are as such independent supplies; that the Applicant is limiting their submissions to Cost Centres D, G and H (Hl to H5). It is undisputed that the supplies relatable to Cost Centre A and Cost Centre H (to the extent of manuals i.e. H6 to Hll) are incidental to supplies made under Cost Centre B and C and therefore taxed at same GST rate as applicable to Cost Centre B and C.

5.2 Cost Centres B and C pertain to the offshore and indigenous manufacture of train cars,-

5.3 Cost Centre D covers the independent activity of “installation service”

998739 Installation services of other goods n.e.c.

This service code includes installation of home theatre systems and other consumer electronics, household goods, and goods not elsewhere classified

5.4 Cost Centre G covers an independent supply of goods i.e. the “supplies of spares”

“Employer at his sole discretion may exercise the option to increase/ decrease the quantities (to any extent) of spares indicated under milestone Gl, G2, G3, G4, G5 and G6. For increased quantities, payment to the contractor shall be on the basis of actual supplies made and quoted unit rates and no escalation or any other additional sums shall be payable”

5.5 Cost Centre H pertains to the independent service of training of operation and maintenance personnel

596

999294 Other education and training services n.e.c.

This service code includes:-

i. training for car, bus, lorry and motorcycle driving licences

ii. training for flying certificates and ship licences

iii. computer training services

iv. management training services

v. services provided by music camps, science camps, computer camps and other instructional camps, except for sports

vi. education services not definable by level

5.6 The supplies made under Cost Centre D, G and H are independent supplies in view of the following which run a common thread amongst the aforementioned Cost Centres:

“…The Contractor shall be entitled to submit to the Engineer requests for interim payments only upon the achievement of one or more of the Milestones described in the Cost Centre….

…If any Milestone is not achieved by the end of the month in which it is scheduled to be achieved, the Engineer shall suspend the payment relating to the Cost Centre in which the Milestone is included. “

“8.2.1 The Contractor shall supply the Unit Exchange Spares as listed in the Appendix 6 of this Employer’s Requirements – General Specification. The Unit Exchange Spares shall be supplied in the Depot nominated by the Employer. The delivery requirements of different lots are mentioned in the Appendix-6. These shall be delivered as per the key dates defined. “

5.7 In this regard, reliance is placed on the decision of the Honble Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006 (2) STR 161 (SC)] wherein, the Honble Apex Court laid down the dominant nature test for a transaction to qualify as composite transaction. The key observation was as follows:-

“43. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be – did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test. “

“The test whether a transaction is a ‘composite transaction’ is that did the parties intend or have in mind that separate rights arise out of the constituent contract of sale and contract of service. If no then such transaction is a composite transaction even if the contracts could be disintegrated. “

“It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment. “

“The taxable event under GST is supply of goods or services or both. GST will be payable on every supply of goods or services or both unless otherwise exempted. The rates at which GST is payable for individual goods or services or both is also separately notified. Classification of supply (whether as goods or services, the category of goods and services) is essential to charge applicable rate of GST on the particular supply. The application of rates will pose no problem if the supply is of individual goods or services which is clearly identifiable and the goods or services are subject to a particular rate of tax.

But not all supplies will be such simple and clearly identifiable supplies. Some of the supplies will be a combination of goods or combination of services or combination of goods and services both. Each individual component in a given supply may attract different rate of tax. The rate of tax to be levied on such supplies may pose a problem in respect of classification of such supp lies. It is for this reason, that the GST Law identifies composite supplies and mixed supplies and provides certainty in respect of tax treatment under GST for such supplies.”

(Emphasis supplied)

Relevant extract from the said Circular is reproduced below for ease of reference:

2.2 Where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.

In said ruling, the Hon hie Delhi Tribunal relied on the decision of Hon’ble Supreme Court, in the case of State of Tamil Nadu v. Anandam Vishwanathan reported in (1989) 1 SCC 613 wherein it was held that nature of a contract is to be found out on the basis of the intention of the parties. The intention has to be ascertained from the terms of the contract. For example, when a person, who wants to get a house constructed on a plot of land owned by him, negotiates with a building contractor-cum-Architect after telling him about his requirement – plinth area, number of bedrooms, size of drawing room etc. and enters into contract with him for construction of house for a specified sum, even though the job may include preparation of detailed design of the house before starting the construction, the contract will be a contract for – construction service. But if as per his contract with the building contractor, first detailed design of the house is to be prepared by the contractor as per his requirement and satisfaction and only after finalization of the drawing, the construction work is to be started and based on the charges for preparation of drawing and charges for construction, including material used for construction, a lump sum price is fixed after negotiation, this will be a composite contract for architect’s service as well as construction service.

“4.5.2 In view of the above facts, we are of the view that there is clear intention in the contract for providing the services of designing & other technical assistance, erection, installation, commissioning, for consideration as mentioned in the contract -the consideration for designing and other technical assistance in cost centres A & B of each section and for erection, installation & testing & commissioning in cost centre D & E of each section. Similarly, the supply of equipment and parts thereof and other materials like cables, optic fibre, etc., for specified amounts, as mentioned in cost centre C of each section is also evident. Therefore, this is a contract for sale as well as services and not an indivisible works contract as contended by the appellant. In fact there is nothing in this contract from which such a conclusion can be drawn. “

Basis above, a view can be taken that the RS-10 Contract is not an indivisible contract and supplies made under cost centres D, G and H (training service) of RS-10 Contract to DMRC may be considered as independent supplies of goods and services and applicable GST depending upon the nature of activity performed under different cost centres may be applied.

5.8 Advance rulings where supplies under contracts with different Cost Centres, considerations and milestones have been considered to be separate supplies

In this ruling, the contract entered between M/s BEML Limited (“BEML”) and M/s Bangalore Metro Rail Corporation Limited (“BMRCL”) for supply of Standard Gauge Intermediate Cars also contained various cost centres such as preliminaries and general requirement for rolling stock including design, delivery and receipt of offshore manufacturing, delivery and receipt of indigenous manufacturing, commissioning and acceptance of cars in depot etc. for which separate and distinct consideration was stipulated in the contract in the similar manner as is mentioned in the RS 10 contract.

As per the facts provided in the ruling, BEML was raising separate invoices based on the nature of the transaction mentioned in the cost center and accordingly was charging GST on individual supplies. On the other hand, it was the understanding of BMRCL that supplies under the contract are essentially composite supply taxable at the rate of 5%/ 12% i.e., the rate applicable to principal supply of Rolling stock and that other supplies in the cost center D to G are incidental.

While Karnataka AAR took a view that supplies under multiple cost centers would be treated as composite supply, but the Karnataka AAAR has set aside the ruling passed by lower authority and the appeal filed by the Assistant Commissioner of Central Tax, Bangalore is allowed by concluding that supplies made under cost centers C, D, E and G are to be considered as independent supplies of goods and services. Some of the key observations of authority are reproduced below –

> For a supply to be considered as a composite supply, its constituent supplies should be so integrated with each other that one cannot be supplied in the ordinary course of business without or independent of the other.

> In this case, although there is only one contract, the scope of work under each cost center are clearly specified and identifiable and is not associated with any other cost center.

> The form of the agreement is not important, instead it the nature/ substance has to be seen to arrive at the correct conclusions. The clear-cut demarcation of activities to each cost center demonstrates the intention of the contracting parties that each cost center is independent supply center undertaking either the supply of goods or supply of services.

Hence, above ruling has clarified that each cost center of such contracts has to be seen separately to decide on GST applicability on supply of goods or services.

It is relevant to note that the Hon hie AAAR passed the above ruling after accepting the contentions of the State of Karnataka through the Assistant Commissioner of Central Tax in the said appeal. Thus, the GST department itself is contending that each of the cost centres amount to independent contracts and will be construed separately.

5.9.1 Other relevant factors

After the enactment of Goods and Services Tax with effect from 1 July 2017, the GST treatment on supplies under various contracts by informed by DMRC vide its Circular no. 19/2017 dated 11 December 2017 (enclosed as Appendix 3), but there was no indication in that Circular that such supplies may be treated as composite supply under GST regime.

PERSONAL HEARING PROCEEDINGS HELD ON 08.09.2021

6. Sri Sujit Ghosh, Advocate & Authorised Representative of the applicant appeared for personal hearing proceedings and reiterated the facts narrated in their application.

FINDINGS & DISCUSSION

7. At the outset we would like to make it clear that the provisions of CGST Act, 2017 and the KGST Act, 2017 are in pari-materia and have the same provisions in like matters and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act.

8. We have considered the submissions made by the applicant in their application for advance ruling. We also considered the issues involved on which advance ruling is sought by the applicant and relevant facts along with the arguments made by the applicant & the submissions made by their learned representative during the time of hearing.

9. The applicant, being a successful bidder to the tender invited by Delhi Metro Rail Corporation Limited (‘DMRC’) for design, manufacture, supply, testing, commissioning and training of 504 Standard Gauge Cars (passenger rolling stock) including training of operation & maintenance personnel and supply of spares & manuals, entered into a contract No.RS-10 dated 24.05.2013 with DMRC for the purpose of execution of the contract awarded.

The applicant, to undertake the scope of work as agreed in the contract, is required to supply various goods and services to DMRC in a phased manner. The detailed instructions with respect to obligations of the applicant under the contract are specified through various Cost Centres (A to H) under tender documents which form part of the Contract.

The nature of supply undertaken by the applicant under each of the cost centre is tabulated here under:

In view of the above, the applicant has sought advance ruling in respect of the questions mentioned at para 3 supra.

10. We find that the facts and circumstances brought out in the application are similar to those on which advance ruling was sought by M/s BEML, (AAR ruling KAR/ADRG 20/2020 dated 6-4-2021) Bengaluru. M/s BEML had a similar contract with M/s BMRCL. It is observed that the contracts in both the cases are for supply of rolling stock, its installation/integration and testing, training the staff etc., and the cost centres in both the cases have similar schedule of activities. The Advance Ruling Authority, Karnataka had ruled that the supplies made by the applicant under cost centres form a composite supply, wherein the principal supply is the supply of intermediate cars.

11. Aggrieved by the said ruling the Asst. Commissioner of Central Tax filed appeal against the said order of the Authority for Advance Ruling, Karnataka before the Appellate Authority for Advance Ruling, Karnataka. The Appellate Authority vide order No. KAR/AAAR-08/2021 dated 03.09.2021 has set aside the ruling passed by lower authority and allowed the appeal by concluding that supplies made under cost centres C, D, E and G are to be considered as independent supplies of goods and services. Some of the Key observations of the AAAR, Karnataka are as under:-

> For a supply to be considered as a composite supply, its constituent supplies should be so integrated with each other that one cannot be supplied in the ordinary course of business without or independent of the other.

> In this case, although there is only one contract, the scope of work under each cost center is clearly specified and identifiable and is not associated with any other cost center.

> The concept of “Naturally Bundled”, as used in Section 2(30) of the CGST Act’2017, lays emphasis on the fact that the different elements in a composite supply are integral to the overall supply and if one of the elements is removed the nature of supply will be affected. In the instant case, supplies in the corresponding cost centers are not naturally bundled.

> The form of the agreement is not important, but its nature/ substance has to be seen to arrive at the correct conclusions. The clear-cut demarcation of activities to each cost center demonstrates the intention of the contracting parties that each cost center is independent supply center undertaking either the supply of goods or supply of services.

12. It is learnt that M/s BMRCL, being the aggrieved party, filed an appeal against the ruling of AAAR, Karnataka, before the Hon’ble High Court of Karnataka and no Stay has not been granted. Since stay has not been granted in the said case, we are inclined to follow the observations drawn by the AAAR, Karnataka as the facts and circumstances are similar.

13. The Applicant has also relied on the said ruling of the Appellate Authority in the case of M/s BEML, also requested for the ruling in terms of the aforesaid ruling of the AAAR, Karnataka, stating that their case is also very much similar and the cost centers in both the cases have similar schedule of activities.

14. In view of the foregoing, we pass the following

RULING

1) The supplies made under Cost Centres D, G and H (to the extent of training services) of Contract ‘RS-10’ to DMRC are to be considered as independent supplies of goods and services and GST rate applicable depending upon the nature of activity performed under such cost centres. This ruling is subject to the outcome of the judgment of the Hon hie High Court of Karnataka in the appeal filed by M/s BMRCL.

2) The supplies made by all the Cost Centres of RS-10 contract of DMRC are not to be considered as ‘composite supply’, in view of the ruling at para 1 and hence the instant question is redundant.