Facts

• The Applicant is registered under GST in the State of Gujarat and engaged in undertaking engineering, procurement, and construction (‘EPC’) contracts
• The Applicant entered into a turnkey contract (‘the Contract’) with Indian Oil Corporation Ltd (‘IOCL’) for executing EPC work
• Under the Contract, all imported materials required to be supplied will be sold by the Applicant to IOCL on a High Seas Sales (‘HSS’) basis. The Applicant will endorse the bill of lading in favor of IOCL, who will file the bill of entry for warehousing and subsequently for home consumption, paying the applicable Customs duty and IGST
• The Applicant contended that the Contract is divisible and identifies two separate supplies i.e., one is supply of imported goods on HSS and other is a works contract for EPC

Issues before the Authority for Advance Ruling (‘the AAR’)

• Whether the transaction entailing sale of goods by the Applicant to IOCL on HSS would be covered under Entry No. 8(b) of Schedule III of the CGST Act and thereby excluded from the value of work contract service for charging GST?
• Whether the transaction entailing sale of goods on HSS by the Applicant to IOCL would be treated as works contract and whether the Applicant is liable to charge GST on such supply? If yes, what will be the applicable rate of tax on such supply of goods?

Discussion and Ruling
 

• The Contract is a lumpsum turnkey EPC contract and to divide EPC contract into two parts is legally not tenable. As per the Minutes of the Meeting (‘the MoM’) held with IOCL, it is specifically mentioned that HSS transaction is being undertaken primarily to avail benefit under the Manufacture and other Operations in Warehouse Regulation, 2019 [MOOWR] and EPCG
• As per the terms and conditions of the Contract, it cannot be treated as a separate contract for supply of imported goods and supply of works contract service. Even as per the MoM, the Applicant is liable to procure the imported goods as per the terms of the Contract which are to be transferred to IOCL on HSS. Further, the Applicant has to undertake and perform all services and formalities necessary for clearance of the imported goods from Customs
• The Contract is a composite works contract in term of Section 2(119) and such contract shall be treated as supply of services as per entry No. 6 of Schedule II of the CGST Act
• The Applicant has affirmed that domestically procured goods would form part of the works contract services. Treating domestically procured goods and imported goods differently is legally incorrect, as both types of goods would be used for executing the works contract
• In terms of Schedule III, read with section 7(2) of the CGST Act, supply of goods on HSS basis is treated as neither a supply of goods nor a supply of services.
• Under Section 15(2) of the CGST Act, the value of supply shall include any amount that the supplier is liable to pay in relation to such supply which has been incurred by the recipient  and not included in the price actually paid or payable for the goods or services Contention of not including value of such goods in transaction value for works contract service is legally not tenable since the Applicant is contractually liable to supply both the goods and services under the Contract. Therefore, in terms of Section 15, value of such imported goods would form a part of the transaction value for payment of GST
• Basis the above discussions, the AAR held that:
  • Transaction entailing sale of goods on HSS is covered under entry 8(b) of Schedule III of the CGST Act, and therefore the HSS supply is neither a supply of goods nor a supply of services
  • However, the value of such HSS supply would form a part of the transaction value under Section 15 for computing the value of works contract service for charging GST.