Supply of goods and services through separate agreements will not be considered as composite supply

The AAR, Telangana in the case of M/s. PES Engineers Pvt. Ltd. [TSAAR Order No. 09/2023 dated April 13, 2023] held that where parties entered into 2 distinct and separate agreements, one for supply of goods and another for works contract services in such case both agreements will be considered as separate supplies and not a composite supply. Accordingly, if any advance is received for supply of goods, that will be taxed as per Section 12(2)(a) of the Central Goods and Services Tax Act, 2017 ("the CGST Act").

Facts

M/s. PES Engineers Pvt. Ltd. ("the Applicant") is engaged in the business of construction and maintenance of various types of power projects.

The Applicant is awarded with a contract by M/s. Singarenni Collieries Company Ltd. ("SCCL") vide bid notifications dated December 28, 2021.

Accordingly, the Applicant entered into 2 agreements with SCCL. The first agreement is related to supply of goods i.e the Flue Gas Desulphurization (FGD) system, Limestone and gypsum handling system, items related to chimney and the spares related to above parts etc. The second agreement is related to services of transportation, insurance, unloading at site, storage, erection, civil works, safety aspect to safety rules, testing, commission and conducting guarantee tests of the goods supplied under the first agreement.

The Applicant stated that it has received advance of 5% and 7.5% which is specifically for supply of goods under the first agreement and since the activities of both agreements are properly demarcated thus, each agreement has to be independently assessed for the purpose of GST and accordingly, he is liable to pay GST on goods at the time of supply which is, the date of issue of invoice and not on the date on which the Applicant received advance payments for goods under the first agreement.

Issue

Whether the Applicant is exempt from payment of tax on advances received under the first agreement, as per Notification No. 66/2017-Central Tax dated November 15, 2017?

Held

The AAR, Telangana in TSAAR Order No. 09/2023 held as under:

• Observed that, the scope of supply undertaken under the individual agreements are entirely independent and specific to that agreement and are not associated with other agreement.
• Further observed that, contract agreement document had put a condition that there are two separate agreements that need to be entered into i.e. one for sale of goods and the other for supply of service. Therefore, both the agreements are separate and cannot be clubbed together.
• Noted that, the supply undertaken under the first agreement terminates at the moment when the Applicant raises tax invoice for supply of goods and endorse the documents.
• Further noted that, since the transfer of property in the goods supplied under first agreement is not taking place during the execution of the works contract under second agreement, the value of goods cannot be included in the works contract services.
• Stated that, the mere fact that different tasks, i.e. two agreements for which separate invoices were issued by the Applicant to SCCL, have been assigned to the Applicant through a single contract would not make it a ‘composite supply’ in terms of Section 2(30) of the CGST Act.
• Ruled that, the applicant is eligible for the benefit of Notification No.66/2017-Central Tax dated November 15, 2017 and accordingly, the tax liability on sale of goods will arise as per Section 12(2)(a) of the CGST Act.

Relevant Provisions

Section 12(2) of the CGST Act

"Time of supply of goods
The time of supply of goods shall be the earlier of the following dates, namely:-

(a) the date of issue of invoice by the supplier or the last date on which he is required, under section 31, to issue the invoice with respect to the supply;"