GST on Freight Charges in Split Turnkey Contracts Explained
West Bengal AAR ruled that split turnkey contracts with cross-breach clauses form a single works contract taxable at 18% on total value.
- Ruling
- 04/WBAAR/2018-19 dated 11/05/2018
- Dated
- 11 May 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
- EMC Ltd asked if freight bills in a split contract are tax-exempt
- The authority ruled the split agreements form one single works contract
- GST applies at 18% on total project value including freight charges
- Cross-fall breach clauses prevent separating material supply and transportation for tax
In short
EMC Ltd won a contract from Power Grid Corporation of India to erect power transmission lines. The project was split into two contracts: one for supplying materials and another for transportation, insurance, and installation. The company billed freight separately and claimed a GST exemption available for local transportation services. The tax authority had to decide whether freight could be billed separately as an exempt service or if the entire project was one combined works contract.
What has changed
How it worked before
Contractors routinely split turnkey infrastructure projects into separate contracts for materials, freight, and erection. Many assumed that issuing separate bills for transportation allowed them to claim GST exemptions meant for local goods transport.
What has changed
The authority ruled under Order 04/WBAAR/2018-19 dated 11/05/2018 that linked agreements with cross-fall breach clauses form an indivisible works contract under Section 2(119) of the GST Act. Because a breach in one contract cancels the other, the project is a single supply. As a result, freight cannot be separated to claim an exemption, and GST at 18% applies to the total contract value under Notification No. 11/2017-Central Tax (Rate).
Who this affects
Infrastructure contractors, EPC companies, and businesses executing turnkey construction projects using split contracts for materials and services.
An example
Apex Infra receives a project to build an electrical sub-station for a state utility. Apex signs two agreements: one for equipment supply and another for transport and erection, with a clause stating that cancelling one cancels both. Apex bills freight separately and claims a GST exemption on local transport. Under the logic of this ruling, the tax department would treat both agreements as one works contract and collect 18% GST on the entire contract amount, including freight.
What you should do
Review your existing contracts to see if cross-default or cross-fall breach clauses tie your supply and service agreements together. Remember that an advance ruling binds only the company that requested it and its specific tax authority. If you have similar split arrangements, consult a tax professional or apply for your own advance ruling before claiming freight exemptions.
If you do nothing
If you split contracts and claim freight exemptions without review, tax officers may audit your agreements for cross-breach clauses. If they find the contracts are tied together, they will reclassify the whole project as a works contract. You will then face demands for unpaid GST at 18% on freight, along with mandatory interest and penalties.
The terms explained
- works contract service
- A tax classification for contracts that combine supplying materials and performing construction or installation work on immovable property.
- cross fall breach clause
- A contract term stating that defaulting on one related agreement automatically counts as a default on all other agreements in the project.
- input tax credit
- A GST mechanism allowing businesses to deduct the tax paid on purchases from the GST collected on sales.
The ruling in detail
Authority for Advance Ruling
EMC Ltd
04/WBAAR/2018-19 dated 11/05/2018 · West Bengal
Questions before the authority
- Whether the Applicant is liable to pay tax on separate freight bills raised for inland/local transportation under a contract split into supply of materials and supply of allied services.
Facts
The Applicant was awarded contracts for setting up transmission lines and sub-stations (Tower Package) by M/s Power Grid Corporation of India. The project was divided into two separate agreements: a First Contract for ex-factory supply of materials, and a Second Contract for allied services including inland transportation, in-transit insurance, erection, and commissioning. The Applicant issued separate freight bills for transportation and claimed exemption as a non-GTA service provider under Notification No. 12/2017-Central Tax (Rate).
Ruling
| Question | What the authority ruled |
|---|---|
| Taxability of separate freight bills under split contracts for execution of a Tower Package | Taxable at 18% as part of composite works contract service. Price components of both contracts must be clubbed together under Serial No. 3(ii) of Notification No. 11/2017-Central Tax (Rate). |
The Authority ruled that the Applicant supplies an indivisible **works contract service** under Section 2(119) of the GST Act, of which freight and transportation are mere components. Consequently, GST must be paid at **18% on the entire composite value** of the supply, including material supply, freight, transportation, erection, and commissioning.
Reasoning
The First Contract for material supply cannot be executed independently of the Second Contract because the place of supply involves movement and assembly at site pursuant to Section 10(1) of the IGST Act. Both agreements are explicitly linked by a **cross fall breach clause**, establishing a single-source responsibility contract where a breach in one contract automatically constitutes a breach in the other. This interdependence converts the split arrangements into an indivisible composite works contract service under Section 2(119) of the GST Act. Therefore, individual elements like freight cannot be severed to claim standalone transport exemption, and the total contract value is taxable at 18% under Notification No. 11/2017-Central Tax (Rate).
Provisions relied on
- Section 97(2)(a) of the CGST/WBGST Act, 2017
- Section 97(2)(e) of the CGST/WBGST Act, 2017
- Section 2(119) of the CGST/WBGST Act, 2017
- Section 10(1)(a) of the IGST Act, 2017
- Section 10(1)(d) of the IGST Act, 2017
- Notification No. 12/2017-Central Tax (Rate) dated 28/06/2017
- Notification No. 11/2017-Central Tax (Rate) dated 28/06/2017
For the practitioner
This ruling highlights that splitting turnkey infrastructure projects into separate material supply and freight/erection contracts will not enable lower tax rates or freight exemptions if bound by **cross fall breach clauses**. Practitioners representing EPC contractors should ensure that split contracts are analyzed as composite works contract supplies when cross-default liability exists.
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/wb_aar04_2018-19_dt_11-05-18_emc.pdf
Legibility of the scan, as read: high.
Prepared 18-10-2026.
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