Blog No. 31: Exemption on Design Build Operate and Transfer Contracts with Operation & Maintanance clause [DBOT Model with O&M]

The Government/ local authorities invite bids for certain type of works which are in relation to functions entrusted to Panchayat or Municipality under article 243G or 243W of the Constitution of India. The Govt. has issued exemption for taxability of these contracts but it appears that these exemption entries have not been appreciated properly by AARs. 

𝐀 𝐜𝐨𝐧𝐬𝐢𝐬𝐭𝐞𝐧𝐭 𝐯𝐢𝐞𝐰 𝐛𝐲 𝐀𝐀𝐑𝐬

1. Various AARs have pronounced their rulings on subject matter which essentially relates to the question asked before them.
2.  If the applicant seeks ruling for exemption on O&M part of the contract as a pure services under entry 3 of Not. No. 12/2017 CT (Rate), then the rulings are seen to be disposed off classifying the entire contract as indivisible and hence a composite one; not eligible for exemption.
3. If the applicant seeks ruling for exemption on entire contract under entry 3A of the said notification, then authority do upheld the same as composite contract with a direction to apply formula of 25% on RA bills. Usually the vivisection of goods and services is not possible from the contract.
4.  Sometimes the contract relates to water projects or other concessional rate projects, then the applicant’s are getting ruling for taxability at 12% on entire contract.

𝐓𝐡𝐞 𝐩𝐚𝐫𝐚𝐝𝐨𝐱

5. The paradox lies behind classifying these contracts as a composite contracts.
6. DBOT, and its O&M does not have any principle supply. Further, it is generally seen that in these contracts, the value is always splitted into (i) DBOT, and (ii) O&M.

𝐎𝐮𝐫 𝐑𝐞𝐦𝐚𝐫𝐤𝐬

7. The assesses should contest their eligibility to seek exemption of O&M part of the contract under S.No. 3A of the said exemption notification i.e., where the value of supply of goods is not more than 25%.
8. If electricity consumption has also been covered within the contract value, then the cost for electricity consumption shall be excluded from the value of supply of goods for the purposes of computing 25%.

  If O&M part is a pure service, then exemption should be sought under entry 3.

Refer: 2022(1) TMI 303; 2022(1) TMI 304, both dated 31.12.2021