A decision of an Appellate Authority for Advance Ruling can have the effect of plugging the leak in GST payments in related party transactions, with or without consideration.
The issue came up when JSW Steel and JSW Energy, both of the JSW Group, proposed to enter into a job work agreement under which the former would procure coal or any other input and supply to the latter. The power generated was to be supplied back to the steel company while the energy unit would get job work charges.
During the entire process, the title to the inputs would vest with the steel company along with the power generated. In addition to power, fly ash and other products generated at the power plant using the inputs would also vest with the steel company. JSW Energy approached the Authority for Advance Ruling (AAR) to know the applicability of GST on three things: supply of coal or any other inputs on a job work basis by the steel company to the energy company, supply of power by the latter to the former, and the job work charges payable to the power outfit.
The AAR’s March 5, 2018 order said that the proposed activity of the energy company is manufacture, and does not fall within the purview of “treatment or process”, as defined by “job work”. It also said that as both the companies are related parties, any supplies made between them, even without consideration, will be subject to GST.
However, the order did not say anything about levying GST in respect of the coal and other inputs supplied by the steel company to the energy company as the transaction pertains to the GST liability of the former and not of the latter.
The energy company then moved the Appellate Authority. The authority made it clear that “the transaction between the appellant (JSW Energy) and JSL (JSW Steel Limited) does not qualify for job work.”
The ruling by the Maharashtra Appellate Authority for Advance Ruling (AAAR), probably a first by any State AAAR after the introduction of GST on July 1 last year, is binding only on the applicant and the jurisdictional officer concerned. Although, such a decision does not have precedent value like that of a High Court or Supreme Court judgment, it can be used as persuasive tool in future cases. However, this decision can be challenged, through a special dispensation, before a Division Bench of a High Court.
When contacted a JSW Group spokesperson said that the “matter is sub judice as we have gone for an appeal.”
Pratik Jain, Partner & Leader, Indirect Tax, PwC India, said that as a result of this ruling, the GST paid on coal would not be available as credit to businesses, if they are using a third party for generation of electricity (which is outside the GST net). This would have an impact on several companies (particularly in steel and cement business) which might have been claiming credit under the GST. However, if the businesses are generating electricity on their own, then there may not be any restriction on such a credit, he said.
“From a policy standpoint, credit should ideally be available for all the GST paid on inputs used for business, unless there is a specific restriction under the law. The Government should consider legislative changes to enable input credit in such a situation. Also, it underlines the importance of broadening the GST base by including electricity within its fold.”