Whether the works contract service of construction of residential quarters provided to MPPGCL would be taxable at concessional rate of 12% or 18%?

PJ/Case Law/2018-2019/3496

Case:M/s. Shreeji Infrastructure India P. Ltd. (GST AAR Madhya Prdesh)
Citation:Advance Ruling Order No. 15/2018 dated 18.10.2018
Issue: Whether the works contract service of construction of residential quarters provided to MPPGCL would be taxable at concessional rate of 12% or 18%?
Brief facts:M/s. Shreeji Infrastructure Private Limited (herein after referred to as the ‘applicant company’), is engaged in carrying out the works contract in relation to construction of road, bridges, buildings, civil structures of government, semi government and private undertakings, secured through tenders in the case of government undertakings, and through personal negotiations in case of private undertakings. The applicant company raised Running Bills (RA bills) for the portion of work completed at a point of time to MPPGCL by charging CGST and SGST at the rate of 9% each, in view of Notification no. 11/2017Central Tax (rate) dated 28.06.2017 Chapter 99 Section 5 Heading 9954- entry 3(ii).

Whereas the service recipient MPPGCL is of the opinion that the applicable rate of GST should be 12% as per Notification no. 11/2017Central Tax (rate) dated 28.06.2017 Chapter 99 Section 5 Heading 9954- entry 3(vi)(c), by treating itself as a government entity and the work allocated to the service provider is the work which is the work supplied to it by the government.

Appellant’s contention: The applicant is of the view that, work entrusted to the government entity means the work of sovereign nature. For eg. If construction of road is directly allotted to the applicant company by the government, then the applicable rate of GST would be 12%. And in the same line, if the work is allotted through medium of government entity, then also the rate shall be 12%.However in the impugned case, MPPGCL, has allotted the work contract of construction of 599 residential quarters to the applicant company, and by any stretch of imagination, it cannot be said that this work has been entrusted to MPPGCL by the MP government which thereafter allotted the same to the applicant company.

Respondent’s Contention: MPPGCL claimed that, it has been established by the Madhya Pradesh government, and 100% shareholding and control is being carried out by the MP state government. Further, this company has been exclusively formed to carry out the work of power generation. Therefore, it is an entity unequivocally covered under the purview of “Government Entity”.
MPPGCL further claimed that, the construction of 599 residential quarters for its staff is also covered under the condition prescribed under entry 3(vi)(c) of the notification (supra). The condition prescribes that, the concessional rate of 12 (6+6)% is applicable on fulfilment of the following: “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 CG, SG or the Union Territory or local authority, as the case may be.”.

Reasoning of Judgement: As per Notification No. 31/2017 – Central Tax (Rate), Dated – October 13, 2017 issued under CGST Act, 2017 and corresponding notification under MPGST Act, 2017:
Government Entity is defined as “Government Entity means an authority or a board or any other body including a society, trust, corporation, i) set up by an Act of Parliament or State Legislature; or ii) established by any Government, with 90per cent, or more participation by way of eguity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.” MPPGCL has been established by the Government of Madhya Pradesh and the Government of Madhya Pradesh has a 100% shareholding in the company. The State Government is also exercising full control over the activities of the said company. Therefore, M/s. Madhya Pradesh Power Generation Company Limited is a Government Entity as defined under Notification No.31/2017-Central tax (Rate) for the purpose of GST law.
However, the civil construction of residential quarters is neither the primary work entrusted to MPPGCL nor it has any bearing on the work i.e. power generation by any means. Any work having direct involvement in the entrusted work i.e. power generation would merit exemption envisaged under Sr.No.3(vi)(c) of the Notification No.11/2017-CT(Rate) under CGST Act and corresponding notification under MPGST Act 2017.
Decision: The authority decided that The activity in question definitely does not have any relation to the principal work of power generation entrusted by the state government to MPPGCL, and therefore the works contract service of construction of 599 residential quarters allotted to the applicant by MPPGCL will merit classification under SAC 9954 and would attract GST @ 18% (9% CGST + 9% SGST).
Comment: The decision of the advance ruling is in alignment of conditions to avail exemption mentioned in the Notification no. 11/2017 Central Tax (rate) dated 28.06.2017issued by the government. The intention of the legislature behind the concessional rate to such work is entrusted to a government entity for public interest in general. Any work having direct involvement in the entrusted work would merit exemption envisaged under Sr.No.3(vi)(c) of the Notification No.11/2017-CT(Rate) under CGST Act but extrapolating and extending this concessional rate to any or all activities of government entity will not only be unwarranted but also defeat the very purpose of concessional rate.

Prepared by: Prateeksha Jain

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PJ/Case Law/2018-2019/3496

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