GST on Freight in Split Contracts for Turnkey Works Projects
The Maharashtra AAR ruled that transportation charges in linked project contracts attract 18% GST as part of a works contract.
- Ruling
- NO.GST-ARA- 16/2018-19/B- 74 dated 25/7/2018
- Dated
- 25 Jul 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Emco Limited asked if freight charges in split project contracts are GST exempt.
- The authority ruled freight charges in tied contracts attract 18 percent GST.
- Splitting supply and service contracts does not create an independent freight service.
- Linked contracts are treated as a single composite works contract under GST.
In short
Emco Limited took on a transmission line project for Power Grid Corporation of India Limited and split it into two agreements: one for supplying goods and another for services like transportation and installation. The company asked if the freight charges were exempt from Goods and Services Tax (GST). The tax authority examined the contracts and found that a default in one agreement counted as a default in the other. Because the project was indivisible, the authority ruled that transportation was part of a single works contract and taxable at 18%.
What has changed
How it worked before
Businesses executing turnkey infrastructure projects often split their agreements into separate goods supply and service contracts, assuming freight charges in the service contract could be treated as exempt standalone transportation.
What has changed
The Maharashtra Authority for Advance Ruling in order NO.GST-ARA- 16/2018-19/B- 74 Mumbai decided that cross-linked contracts form a single works contract under GST. Transportation listed in such contracts cannot be treated as an exempt freight service. Instead, it forms part of the overall works contract service and attracts 18% GST.
Who this affects
Engineering, procurement, and construction contractors who split turnkey project agreements into separate supply and service contracts.
An example
ABC Solar Construction enters into two agreements with a buyer for a solar plant: one to sell equipment and another to transport and install it. The agreements state that failing to deliver equipment cancels the installation contract as well. ABC assumes the transportation portion is exempt from GST as a standalone freight service. Based on this ruling, tax officers will likely view both contracts as a single works contract and charge 18% GST on the freight charges.
What you should do
If your business splits turnkey contracts into supply and transport agreements, check if they contain cross-fall breach clauses that link them together. Remember that an advance ruling binds only the company that asked for it, so you cannot automatically apply this to your own business without professional advice.
If you do nothing
If you treat freight charges as exempt in split turnkey contracts, tax authorities may later reclassify the entire setup as a single works contract. You could face demand notices for unpaid 18% GST on transportation charges, along with interest and penalties. This can create unexpected tax liabilities long after project prices have been finalized.
The terms explained
- works contract
- A single project agreement that involves both supplying goods and providing services like construction, installation, or erection on a site.
- cross-fall breach clause
- A contract rule stating that breaking one agreement automatically counts as breaking another related agreement.
- composite supply
- A transaction consisting of two or more goods or services that are naturally bundled and supplied together in business.
- input tax credit
- A mechanism that lets businesses reduce the tax they owe on sales by the tax they already paid on business purchases.
The ruling in detail
Authority for Advance Ruling
EMCO LIMITED
NO.GST-ARA- 16/2018-19/B- 74 dated 25/7/2018 · Maharashtra
Questions before the authority
- Whether GST is leviable on the transportation charges levied by the Applicant on PGCIL?
- In case the GST is payable, what would be the rate of GST to be charged on such charges?
Facts
The Applicant entered into two contracts with Power Grid Corporation of India Limited (PGCIL) for a transmission line project: an Ex-works Supply Contract for products and a Service Contract covering inland transportation, insurance, erection, testing, and commissioning. The Applicant sought clarification on whether GST applies to the transportation charges recovered under the contract and the applicable tax rate, contending that freight charges were exempt under Notification No. 12/2017-Central Tax (Rate).
Ruling
| Question | What the authority ruled |
|---|---|
| Leviability of GST on transportation charges levied on PGCIL | Answered in the affirmative Treated as integral part of a composite supply |
| Rate of GST applicable on transportation charges | 18% Sr. no. 3(ii) of Notification No. 1/2017-Central Tax (Rate) |
The Authority held that the transportation charges are an **integral component of a composite works contract** and not a standalone transportation service. Consequently, GST is leviable on such charges at the rate of 18%.
Reasoning
The AAR observed that despite executing two separate agreements (Supply Contract and Service Contract), both contracts were cross-linked through cross-fall breach clauses and single-source responsibility provisions, making them inter-dependent and part of a single indivisible project. Relying on the Supreme Court ruling in M/s. Indure Ltd., the Authority concluded that the overall contract is a **works contract** under Section 2(119) of the CGST Act, 2017 involving erection, commissioning, and transfer of property in goods. Under Schedule II entry 6(a), works contracts are classified as a supply of services. Therefore, transportation is an element of the composite works contract and attracts 18% GST under Sr. No. 3(ii) of Notification No. 1/2017-Central Tax (Rate).
Provisions relied on
- Section 2(119) of CGST Act, 2017
- Section 2(30) of CGST Act, 2017
- Section 8 of CGST Act, 2017
- Schedule II entry 6(a) of CGST Act, 2017
- Notification No. 1/2017-Central Tax (Rate)
- Notification No. 12/2017-Central Tax (Rate)
For the practitioner
Tax practitioners should note that artificial splitting of turnkey projects into separate supply and service contracts will not convert freight or transportation components into exempt standalone GTA services when **cross-fall breach clauses** link the contracts. Where contracts are interdependent, the entire consideration, including freight, is taxable at the applicable works contract GST rate of 18%.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/maha-gst-ara-16-b-74_dt._25.07.18_emco.pdf
Legibility of the scan, as read: high.
Prepared 21-10-2026.
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