Safiya Malik

The Andhra Pradesh High Court quashed a tax determination order imposing GST at 18% on a solar power project, ruling that the supply constitutes a composite supply of goods and services, rather than a works contract. The court stated that the transaction should be taxed at 5%, in line with relevant GST notifications, and highlighted procedural and interpretational errors made by the appellate authority.

The petitioner, a company engaged in setting up solar power plants, sought a refund of excess input tax credit under Section 54 of the Central Goods and Services Tax Act, 2017, and Andhra Pradesh Goods and Services Tax Act, 2017, for the period January to March 2018. The refund claim stemmed from the disparity in GST rates—5% for its supplies compared to higher rates on inputs.

However, the refund claim triggered a reassessment through a show cause notice dated September 17, 2019. The assessing authority reclassified the petitioner’s activities as a works contract under Section 2(119) of the GST Act, applicable to immovable property, thereby imposing an 18% GST rate. This reclassification resulted in a total tax demand of ₹63 crore (₹31.5 crore each under CGST and SGST), along with an equivalent penalty under Section 74 of the Act.

The petitioner objected to the reclassification, arguing that its activities qualified as a composite supply under Section 2(30) of the Act, which is taxable at a concessional rate of 5%. Despite this, the assessing authority finalized the demand. On appeal, the appellate authority reduced the penalty to ₹6.3 crore under Section 73 but upheld the tax reassessment at 18%.

The petitioner filed a writ petition, contending that solar power generating systems should be classified as composite supplies of goods and services, as outlined in GST Notification Nos. 1/2017-CT(Rate) and 11/2017-CT(Rate). It argued that the project involves movable property and does not fall within the ambit of a works contract, which requires immovable property.

The respondents, represented by the Government Pleader for Commercial Taxes, countered that the solar power generating system is immovable property because it is permanently installed on a civil foundation. They asserted that the project satisfies the conditions for classification as a works contract under Section 2(119).

The High Court examined the definitions of composite supply and works contract under the GST framework. It cited Section 2(30), which defines composite supply as a combination of goods and services supplied together, and Section 2(119), which classifies works contracts as involving immovable property.

The court observed: “The distinction between a composite supply and a works contract lies in whether the resulting property is movable or immovable. A composite supply pertains to movable property, while a works contract involves immovable property.”

Evaluating the solar power project, the court noted that the system’s primary components—solar modules and trackers—are mounted on civil foundations for stability but can be removed and relocated without damage. The court stated: “The solar modules and generating system are not attached to the civil foundation for its beneficial enjoyment; rather, the civil foundation is constructed to facilitate the functioning of the solar power generating system.”

The court relied on precedents from the Supreme Court, including Solid and Correct Engineering Works and Sirpur Paper Mills Limited, to distinguish movable property from immovable property. It noted that attachment to the ground solely for operational stability does not render a property immovable.

The appellate authority’s conclusion that the system constituted immovable property was deemed erroneous. The court observed: “The description of the Solar Power Generating System does not satisfy the conditions of permanence or immovability required to classify it as immovable property. The transaction is, therefore, a composite supply taxable at 5% under the applicable notifications.”

The court quashed the appellate authority’s order dated October 20, 2020, which had upheld the 18% tax assessment. It directed that the solar power generating system be taxed at the concessional rate of 5%. The court also stated the need for a correct interpretation of statutory provisions to prevent similar errors in future.

In its final order, the court stated: “This writ petition is allowed, and the impugned order bearing No.ZH3710OD19206, dated 20.10.2020, passed by the 1st respondent, is set aside. There shall be no order as to costs.”

Case Title: Sterling and Wilson Private Limited v. The Joint Commissioner and Others
Case Number: Writ Petition No. 20096 of 2020
Bench: Justice R. Raghunandan Rao and Justice Maheswara Rao Kuncheam

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