Introduction
The Andhra Pradesh High Court has, in Sterling and Wilson (P.) Ltd. v. Joint Commissioner[i] held that activities of setting up a solar power plant do not amount to a works contract since the power generating system is not an immovable property. Consequently, such activity could only be taxed as a composite supply at 5% GST, not @ 18%, as erroneously classified as a works contract.
Brief Facts
The Petitioner was engaged in the business of setting up solar power plants and had been paying GST @ 5% of its turnover. However, given that the rate of GST on inputs received by the Petitioner was higher than the rate of GST on output, the Petitioner, as per s. 54 of the A.P. Goods and Services Tax Act (‘APGST Act’) claimed a refund of around Rs. 8.65 crores.
The Petitioner’s application for a GST refund was not only rejected by the GST department, but it also became the starting point for the initiation of fresh assessment enquiry under the GST tax regime.
The Assessing Authority (AA’) issued a show cause notice dated 17.09.2019, proposing to assess the turnover of the Petitioner @ 18% on the grounds that transactions undertaken by the Petitioner fell within the ambit of ‘works contract’ as enunciated s. 2(119) of the APGST Act. The Petitioner, however, contended that activity undertaken by them could only be assessed @ 5%, as the same was composite supply, defined under s. 2(30) of the APGST Act.
The AA rejected the Petitioner's contention, and subsequently, the Petitioner's turnover was assessed at 18% by the department. Additionally, a penalty was also levied qua the Petitioner under s. 74 of the Central Goods and Services Tax Act, 2007 (‘CGST’), approximately amounting to Rs. 63 cores.
Aggrieved by such assessment and levy of penalty thereof, the Petitioner approached the first Appellate Authority, which rejected the appeal to the extent of assessment of tax and interest payable. However, the penalty was reclassified under s. 73 of the CGST Act instead of s. 74. Subsequently, against the order of the first appellate authority, the Petitioner approached the High Court, wherein the writ petition filed by the Petitioner was initially disposed of on the basis of circular[ii] by stating that the tax payable by the Petitioner could be ascertained through the same. Consequently, the matter was remanded back to the Appellate Authority
The Petitioner had to re-approach the High Court as the circular had not been notified. On this basis, the second writ petition was allowed.
Held
While relying on the definition of ‘works contract’ under s. 2(119) of the APGST Act, the High Court observed that composite supply, which results in the construction of an immovable property, etc., amounts to a works contract. Thus, the test to ascertain whether something is a works contract or not would depend upon whether its end product is ‘movable’ or ‘immovable’ property.
Further, to ascertain if the solar power generating system supplied by the Petitioner would constitute ‘movable’ or immovable’ property, the High Court analysed the jurisprudence pertaining to the identification and recognition of property as movable or immovable and relied upon s. 3 of the Transfer of Property Act, 1882 (‘TOPA’) provides meaning to the expression ‘attached to earth’. On this reasoning, the High Court held that attachment of the plant with the help of nuts and bolts to a foundation not more than 11/2 ft deep intended to provide stability to the working of the plant and prevent vibration/wobble-free operation would not qualify as ‘attached to the earth’.
On the basis of the aforementioned reasoning, the High Court held that solar power plants are not trees or shrubs which are rooted in the earth or structures embedded in the earth. Furthermore, the property attached to a structure embedded in the earth qualifies as immovable only if its attachment serves the permanent beneficial enjoyment of that structure. However, in this case, the solar power systems were not attached to the civil structure for the purpose of better enjoyment of the civil foundation but have been embedded together for better enjoyment of the solar power generation system. Thus, solar power generation systems would not answer the question of immovable property. As a result, the transaction would not fall within the meaning of a ‘works contract’ defined under s. 2(119) of the APGST Act.
Consequently, the High Court held that the solar-generating power station is a composite supply and would not qualify as a works contract.
Our Analysis
The High Court has analysed the concept of classification of property as ‘movable’ or ‘immovable’ as enunciated in the General Clauses Act, 1897 and the TOPA and aligned it with the APGST Act. Further, the High Court has clarified that merely accounting for attachment to a structure embedded into the earth would not make it immovable property unless it is for the beneficial enjoyment of the structure embedded in the earth. Accordingly, the High Court concluded that such solar power generation systems are not immovable property and thus not taxable as a works contract but as a ‘composite supply.’
End Note
[i] 2025 SCC OnLine AP 63 dated 10.01.2025.
[ii] Circular No.163/19/2021-GST dated 06.01.2021.
Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.