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GST applicable on Mobilization advance received.

Recently AAR gave an important ruling dated 19 August 2019 regarding GST leviable on ‘mobilization advance’ as on 01.07.2017 received for works contract services in the case of Siemens Ltd.[2019] 108 taxmann.com 460 (AAR- TAMILNADU) which is discussed as below:

Facts of the case
  • Applicant has entered into a contract with Kolkata Metro Rail Corporation ( KMRCL) for 'design, supply, installation, testing and commissioning' of power supply and distribution system, third rail system and SCADA system for entire line and depot of Kolkata East-West Metro Rail Project.
  • According to Contract, applicant received mobilization advance, which was 10% of the original contract value. The lump-sum mobilization amount so received is recoverable as adjustment towards payment due for tax invoices that applicant raises on attaining contract progress milestones.
  • No service tax (Pre-GST regime) was leviable on the mobilisation advance except the portion adjusted in the service bills. As the Applicant apparently raised no service bill, the unadjusted part of the advance as on 01/07/2017 has not suffered tax under the pre-GST regime under Finance Act, 1994.
Issue Involved
  • Whether GST shall be charged on the gross amount of invoice or net amount after adjusting the lump-sum amount outstanding?
Observation / Ruling
  • After the GST comes into force, the works contract is no longer divisible into a contract for the supply of goods and a service contract. lt is a service contract and the entire unadjusted mobilisation advance as on 01/0712017.
  • 'Consideration' includes any payment for the inducement of a supply. Mobilisation advance is meant specifically for inducing the contractor to spend for provisioning the works contract service.
  • The Applicant is, therefore, deemed to have supplied works contract service to KMRCL on 01/07/2017 to the extent covered by the lump-sum that stood credited to its account on that date as mobilisation advance and tax is leviable thereon accordingly.
  • The value of the supply of works contract service in the subsequent invoices as and when raised should, therefore 'be reduced to the extent of the advance adjusted in such invoices to avoid double taxation. 
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