• Dated 12^th March, 2025

HIGH COURT RULES SOLAR POWER GENERATING SYSTEMS ARE MOVABLE PROPERTY, NOT WORKS CONTRACTS

The Andhra Pradesh court holds that solar power generating systems are not immovable property and should not be taxed as works contracts under GST.

BACKGROUND OF THE CASE:

Sterling and Wilson Pvt. Ltd. (hereinafter referred to as "the petitioner") is engaged in the business of setting up solar power plants. The petitioner had been paying GST at 5% on its turnover for the relevant period, January 2018 to March 2018, based on its classification of the supply as a composite supply. The petitioner filed a refund application under Section 54 of the A.P. Goods and Services Tax Act, 2017, for the accumulated input tax credit, citing a higher tax rate on inputs than on the finished goods.

The tax authorities denied the refund claim and initiated a fresh assessment for the period from November 30, 2017, to September 30, 2018. A show cause notice was issued, proposing to assess the petitioner's transactions at 18% GST, citing them as a "works contract" under Section 2(119) of the GST Act. Despite the petitioner's objections, the assessing authority upheld the demand, raising a tax liability to the tune of Rs. 63 crores, along with an equivalent penalty.

On appeal, the Appellate Authority confirmed the tax assessment but reduced the penalty. Aggrieved by the ruling, the petitioner approached the Andhra Pradesh High Court.

PETITIONER'S CONTENTIONS:

• The petitioner argued that its activities should be treated as a composite supply under Section 2(30) of the GST Act, which attracts a 5% tax rate.
• The solar power generating system supplied by the petitioner is not an immovable property and, therefore, does not qualify as a "works contract."
• The civil foundation is embedded in the earth, but the solar modules and the overall system are not permanently attached to the foundation. Instead, the foundation exists to support the system.
• The Appellate Authority's classification of the transaction as a works contract was based on an erroneous interpretation of the Transfer of Property Act and was not supported by facts.
• The petitioner cited relevant GST notifications (Notification No. 01/2017-CT(Rate) and Notification No. 11/2017-CT(Rate)) that prescribe a 5% tax rate for solar power plants, further reinforcing its classification of the supply.

RESPONDENT'S CONTENTIONS:

• The tax authorities contended that the supply constituted a works contract as defined in Section 2(119) of the GST Act, which includes construction, installation, and commissioning of immovable property.
• The solar modules and mounting structures were permanently affixed to the earth, and their removal would require dismantling, making them part of an immovable structure.
• The purpose of fixing the solar modules on a civil foundation was for the beneficial enjoyment of the land, a key criterion for classifying the property as immovable.
• The nature of the contract between the petitioner and its clients demonstrated that the intent was to create a permanent installation, rather than a removable system.
• The appellate authority relied on judicial precedents, including Duncan Industries Ltd. v. State of Uttar Pradesh, to argue that machinery permanently embedded in the earth should be treated as immovable property.

RULING AND REASONING:

• The court analyzed the definition of "works contract" under Section 2(119) of the GST Act, which applies only to contracts involving immovable property.
• Relying on the test set out in Commissioner of Central Excise v. Solid and Correct Engineering Works, the court distinguished between moveable and immovable property:
  • "Movable property" includes anything that is not permanently attached to the earth.
  • "Immovable property" includes structures that are permanently fixed for beneficial enjoyment of the land.
• The court found that the solar power generating system was not rooted in the earth nor permanently embedded like a building or a tree.
• The civil foundation was embedded in the earth, but the solar modules and other components were mounted on it merely for operational efficiency. The primary purpose of the foundation was to support the solar power system, not the other way around.
• The court noted that the revenue relied on the Duncan Industries case, which involved a fertilizer plant with permanently embedded machinery. However, that case involved a finding of permanent attachment, which was not applicable to the present case.
• Concluding that the solar power generating system was not immovable property, the court held that the transactions did not constitute a "works contract" under the GST Act.
• The court ruled in favor of the petitioner, allowing the writ petition and setting aside the demand order.

COMMENTS:

The ruling reinforces the distinction between movable and immovable property in GST classification, emphasizing that mere affixation does not make a structure immovable; intent and purpose matter. It has significant implications for infrastructure and renewable energy projects, allowing solar power installations, among others, to qualify for a lower GST rate of 5% as composite supplies rather than 18% as works contracts. The judgment also urges assessing authorities to apply proper legal tests, ensuring future disputes focus on permanence and the necessity of attachment for land use.

Case Reference: Sterling and Wilson Pvt. Ltd. vs. Joint Commissioner (2025) 26 Centax 301 (A.P.), decided on 10-01-2025

AUTHOR: DEBANJAN RANU

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