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GST on Construction of Distribution Lines on request of Customers by Discom Companies

Many of times, new distribution lines of power are being constructed by the Distribution Companies on the request of the Customers like for new factory, industry, infrastructure project etc.

In this regard, cost of construction of the distribution lines is borne by the Customer on whose request lines are constructed. However, it needs to be carried out under supervision of Distribution Company of the State.

In this regards, two models of working are prevalent in the market which are as follows:

The Hon'ble appellate authority for advance Ruling in the case of M/s Purvanchal Vidyut Vitran Nigam Limited has decided the Value on which GST needs to be discharged in both the scenario (copy of order is attached in the last). Further, GST chargeability in respect of transfer of property of new lines with out consideration has also been touched upon in the ruling though not sought by the Taxpayer.

In this article, we will discuss the valuation for discharge of GST in both the scenario along with GST chargeability in respect of transfer of property of new lines without Consideration.

Scenario-1 (where complete contract including for material, labour and supervision service is given to the Distribution Company in respect of shifting of Lines)

In this case, it has been confirmed that GST will be payable on Gross Amount considering complete cost of Material, Labour and Supervision Charges of the Distribution Company as work contract service.

Scenario-2 (where contract to Distribution Company is given for Supervision Charges only and material & labour cost are directly borne by the Customer

In this case, there was confusion regarding Value of Supply to be considered by Distribution Company to the Customer regarding whether cost of material and labour directly borne by the customer also needs to be included or not as all these costs are also being borne by the customer under supervision of the Distribution Company.

In this regards, it has been held that Distribution Company needs to pay GST only on Supervision Charges due to following reasons:

a) In this case the works contract services supplied in course of construction/dislocation /shifting are neither supplied by nor the consideration for the same has been received by DISCOM hence there is no supply of works contract services by DISCOM.

b) The works contract services in this case is being supplied by an independent contractor and is covered under SAC 9954,it is distinct service which is being supplied by a person other than DISCOM.

c) Though the property subjected to works contract services belongs to DISCOM but the supply of works contract services are not made on behest of DISCOM. The contract for works contract services is executed between the concerned party and a third party works contractor hence the DISCOM is a stranger to this contract.

d) In a case where the third party works contractor remains unpaid for the services supplied by him he can sue only the concerned party and not the DISCOM, so the there is no liability to pay on the part of DISCOM.

e) As the dislocation works are not made on behest of DISCOM and there is only a consent or tolerance for such shifting hence the DISCOM is not liable to pay for the expenses incurred in such shifting,

g) Since there is no obligation to pay on part of DISCOM hence the case does not lie under section 15(2)(b) of CGST Act,

h) In this case the consideration for works contract services is fully paid by concerned party and there is no shared /part payment by the same. In such cases it is not feasible for having two considerations for a single supply.

Therefore, Discom needs to discharge the GST on the Supervision Charges only. Further, there is no attached condition for this.

Chargeability of GST on transfer of Ownership in New/Shifted Lines by Customer to the Distribution Company with out consideration (Our Opinion)

In this regard, definition of Consideration needs to be referred as defined in Section 2(31)

Consideration, means any payment made or to be made, whether in money or otherwise in respect of, in response to or for the inducement of the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given the Central Government or a State Government....

Accordingly, Consideration needs not to be in the monetary form. Accordingly, in the Ruling it has been prescribed that though for different purpose

In this case the ownership of the property being dislocated /shifted is vested with DISCOM, the DISCOM receives money in form of dislocation/shutting charges. The services supplied in such cases is related to an act of tolerance with respect to immovable property and hence covered under "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" and are classified under SAC 999794.

we are of the opinion that in this case, though ownership of new/shifted distribution lines transfer to the Distribution Companies without any monetary consideration, Getting New Distribution Lines itself is non-monetary consideration for tolerating the act of shifting the lines.

Accordingly, Distribution Company needs to discharge GST on service of "Agree to Tolerate an Act" on the value of Distribution Lines as received from the Customer.

Copy of Order

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Disclaimer: We did interpretation of Respected Authority Decision for purely academic/informational purpose. In case, there is any mistake in understanding of the order, we are apologised to the Authority.

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