Setting-Up Naval Communication Network By Subcontractor For BSNL, Attracts 12% GST: Maharashtra AAAR

The Maharashtra Appellate Authority of Advance Ruling (AAAR) has ruled that 12% GST is applicable on setting up the Naval Communication Network as a subcontractor for the Indian Navy on behalf of Bharat Sanchar Nigam Limited (BSNL).

The two-member bench of Dr. D. K. Srinivas and Rajeev Kumar Mital, while allowing the appeal, observed that the Navy (under the Ministry of Defense, a central government ministry) has entrusted the BSNL by agreement and work contract to supply, install, and commission the next generation network, along with all materials, civil structure, equipment, satellite connectivity, routers, switches, and services to make the entire setup to establish the network for the Indian Navy. BSNL has procured the services in relation to work entrusted by the Indian Navy (central government).

The Appellant is in the business of manufacturing telecom products such as fiber optic cable and providing services in relation to the laying of these fibre optic cables (either underground or overhead) to create a network, the setting up of control centers, the installation of equipment, the commissioning of the network, and other ancillary activities that may be necessary for the creation of network infrastructure for its customers in the telecom industry.

The Indian Navy, governed by the Ministry of Defense (Navy), intended to establish a countrywide IP/MPLS-based multiprotocol converged network/Naval Communication Network as the core infrastructure for supporting the strategic and operational needs of the Navy. The setting up of these networks has been awarded by the Navy to Bharat Sanchar Nigam Limited (BSNL), which in turn has floated a tender inviting detailed bids.

The purchase order was placed by BSNL with the appellant with the subject "Procurement, Supply, Installation, Implementation, Commissioning, and Maintenance Support of a Countrywide Next Generation IP MPLS Network for the Indian Navy on a Turnkey Basis."

The advance ruling was sought on the question of whether the supplies of goods or services for the "selling up of the network" would qualify as "works contracts." If supplies contemplated as per the contract with BSNL are not treated as works contracts, can these continue to qualify as composite supplies?

The appellant sought an advance ruling in respect of the rate of tax applicable to the supplies made under the contract, and 18% GST was applicable.

The AAR ruled that the supplies rendered by them to BSNL are in the nature of composite supplies under "works contracts" as defined under Section 2(119) of the CGST Act.

The appellant contended that the appellant would get covered under residual entry no. 3 (xii) of the rate notification and be liable for 18% GST. However, the appellant continues to claim that the composite supply of works contract services falls under entry No. 3 (vi) of Notification No. 11/2017-Central Tax (Rate), Dated June 28, 2017, which prescribes a total GST rate of 12%.

As per entry No. 3 (vi) of Notification No. 11/2017-Central Tax (Rate), dated June 28, 2017, the recipient must be either the Central Government, State Government, Union Territory, a local authority, a governmental authority, or a government entity. The works contract must result in the construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a "civil structure" or any other original works. The resulting civil structure or other original works must be used primarily for purposes other than commerce, industry, or any other business or profession.

The AAAR has noted that the BSNL, which was set up by the Central Government itself, further, the Central Government continues to hold 100% equity in BSNL, so it is a government entity.

The AAAR quashed the AAR’s ruling and held that the civil structure or original works are meant predominantly for other uses other than commerce, industry, or any other business or profession. The ultimate contractual beneficiary must have usage other than for commerce, industry, or any other business or profession. The entity or contractor to whom the infrastructure is supplied (BSNL) by the subcontractor to the contractor, then to the contractee (Navy) is important here.

Applicant’s Name: Sterlite Technologies Ltd.

Date: 07.02.2023

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