The Odisha Authority for Advance Ruling ( AAR ) in a recent Application before it ruled that mere handover of building and civil structure by one party to another does not indicate sale, but rather a ‘Supply of Service’ to refrain from removing the erected structure which is liable to be taxed at 18% as per Government Notification.
The present application was filed by Essel Mining Industries Limited, a public limited company registered under the Companies Act, 1956 and the CGST Act, 2017 while being engaged in the business of mining iron pellets and noble ferro alloys among other materials.
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The factual matrix began in 1988, when the Applicant entered into a lease deed with the Government of Odisha for mining Jilling Langalota Iron and Manganese Mines in Keonjhar District, Odisha, with effect from 01.10.1984 to 30.09.2004, subsequently extended up to 31.03.2020.
The Lease Deed authorized the Applicant to undertake any operations on the Mining land to aid their mining project. By virtue of the authorization, the Applicant constructed building and other civil infrastructure, including railway sidings and plant and other machinery on the leased land.
Subsequent to the Termination of the Lease on 31.03.2020, the Government of Odisha decided to transfer the mining lease to Odisha Mining Corporation Limited ( OMCL ), a Governmental Entity.
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OMCL sought to acquire the building, civil infrastructure, railway sidings and plant and machinery constructed by Essel Mining to aid their own mining operations on the same land. An amount of Rs.2,04,65,062/- was agreed upon by Essel Mining and OMCL for the transfer of the aforesaid capital assets.
Regarding the Taxability of the transfer of the capital assets, Essel Mining maintained that GST may be payable by them only on the transfer of the plant and machinery, and not on the handover of railway sidings and building.
The handover of railway sidings and building was contended as a “sale” by the Applicant referring the provisions of Clause No.5 of Schedule III of the CGST Act, 2017, providing exemptions for Activities or Transactions that are not classifiable as ‘Supply of Goods or Services’ as per GST provisions.
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Further, the Applicant opined that the absence of definition of “sale” in the GST Act is not a leeway to include the transaction with OMCL as a ‘Supply of Goods or Services’ under Schedule II of the CGST Act, 2017 as there has been ample transfer of all associated benefits/rights over the building and railway sidings.
The Coram of the Odisha Authority for Advance Ruling comprising Abhay Gupta IRS, Central GST Member and Nihar Ranjan Nayak, State GST Member assessed the material available on record and ruled that for a party to conduct sale of a structure erected on a piece of land, the party should exercise rights over the specific piece of land.
Here, the termination of the initial Lease Deed between Essel Mining and Odisha Government vitiates any and all rights priorly exercised by Essel Mining over the land by virtue of the now-defunct Lease Deed.
In light of the observations, the Odisha AAR ruled that the New Deed executed between Essel Mining and OMCL only constitutes “handing over of property” and encompasses ‘a promise made by Essel Mining to OMCL to refrain from removing the buildings/structures and railway sidings erected on the land leased out by the Odisha Government, in exchange for a monetary consideration, which in ordinary circumstances should have been dismantled by the Applicant’ upon termination of the initial Lease Deed on 31.03.2020.
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Concludingly, the Odisha AAR ruled that the agreement between Essel Mining and OMCL constitutes a ‘service’ of refraining from removing the erected structures in exchange for consideration to be rendered by Essel Mining to OMCL.
Thus, such ‘service’ categorized under Clause 5(e) of Schedule-II of the CGST Act, 2017 is liable to be taxed at 18% GST under Sl. No.35 of Notification No. 11/2017 CT ( Rate ) dated 28.06.2017.
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