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One issue that has constantly plagued the uninterrupted power supply (UPS) sector is the rate of tax applicable to the UPS systems sold. Historically, there have been issues concerning the rate of tax applicable to UPS system and after many rounds of litigation at various fora, the Apex Court held that the appropriate classification for the UPS would be under Heading 85.04¹ of the Central Excise Tariff, thereby putting things to rest.

With the advent of the Goods and Services Tax (GST) regime, a Pandora’s box has been opened once again in light of the recent advance ruling on the rate of tax applicable to the UPS system issued by the Hon’ble West Bengal Authority for Advance Ruling, which has also been affirmed by the Hon’ble Appellate Authority for Advance Ruling².

The Hon’ble Authority ruled that a UPS (taxable at 18%) and battery (taxable at 28%) supplied together under a single contract for one composite price without integration is a mixed supply under GST and is liable to tax at the highest rate (28%). It is the intention of this Article to analyse the bearing, the verdict would have on the industry. To begin with, we shall recapitulate the long-drawn litigation the industry has already faced in the erstwhile taxation regime on the very point of classification.

Past litigation

For an industry that enables the much-needed emergency power backup, ironically, a long-drawn litigation battle on the classification of UPS system has interrupted business.

The very first interruption began with the case of Tata Libert Ltd vs. CCE, Mumbai- 1³ where a Larger Bench of Hon’ble Tribunal examined the classification of UPS System and concluded that the battery is the core of the UPS and therefore, the correct classification is Heading 8543.

This case was reversed by the Hon’ble Delhi High Court in the cases of Eppoltone Engineers v. UOI⁴ and Guard Electronics v. Commissioner⁵.

The issue was again considered in the case of Luminous Electronics (P) Ltd v. CCE, New Delhi⁶ where a Larger Bench of 5-Members disagreed with the Larger Bench of 3-Members in the case of Tata Libert(supra) and accordingly concluded that the presence of the battery does not change the nature and function of the product. The Hon’ble Tribunal concluded that the UPS System must be classified under sub-heading 8504 and not 8543.

The decision of the Larger Bench in Luminous (supra) was approved by the Hon’ble Apex Court in the case of J.K. Synthetics v. Commissioner⁷. This decision was the silver lining that acted as the industries’ own energy boost, finally bringing in some stability.

Developments under GST

With the introduction of the GST regime, the principles of classification adopted under the erstwhile excise regime was borrowed for the purpose of the GST law along with the introduction of newer concepts relating to bundling of two or more supplies.

In light of the changes in law, one of the players in the sector thought fit to seek clarity on the correct rate of tax applicable to the UPS system sold by them vide an advance ruling.

Both the, Hon’ble Authority for Advance Ruling and the Hon’ble Appellate Authority arrived at the conclusion that the UPS system would attract GST at the highest rate of 28%.

The essence of the reasoning employed by both the Authorities to arrive at this conclusion is that the UPS and battery are not naturally bundled as the goods are not inseparable, rather, the goods can even be put to different usages.

We do believe that if an exhaustive factual matrix relating to the interconnection of the functionality of both the UPS/ batteries and the consumer perception of how the system is generally advertised, packed and sold by the industry was taken into consideration, the UPS system would have been held to be taxable at a lower rate of tax.

The rulings however, take the industry back to square one and has placed the industry at cross roads on what rate of tax must be charged. We shall now proceed to briefly discuss the impact the rulings could have on the sector.

Sectoral impact

UPS systems have gained immense popularity over time by providing reliability and protection by way of keeping critical systems running. A UPS system can be anything from the little black box that sits somewhere near a desk to the mega-ton model with the capacity to power vital businesses such as hospitals, schools, colleges, petroleum industries etc. For most of these sectors, continuous supply of power is critical and a UPS system is one of the basic needs.

The consumers of the product range predominantly from individuals to businesses, majority of whom will not be covered under the GST net and therefore, a higher rate of tax charged on the UPS system will be an added cost to such sectors. No doubt that with the lack of a power backup due to a substantial increase in the cost of UPS, an outage for such sectors can have adverse consequences for the industry and public at large.

What can suppliers of UPS systems do?

With an adverse ruling in place, the suppliers of UPS systems are left with the following options, going forward :-

Suppliers can choose to follow a cautious approach and charge GST at the rate of 28% on the UPS system as a whole, relying on the aforesaid advance rulings.
They can sell the UPS and battery separately, charging GST at the respective rates applicable to the goods.
Lastly, they can opt to classify the UPS system as a composite supply liable to tax at 18%.

However, if players in the sector choose the last option, the Department may always dispute the classification. Nevertheless, since the above discussed advance rulings do not have a binding effect on other players in the industry except for the assessee who preferred the rulings, we believe that the industry does have a good case to make out if the matter is litigated at higher forums.As all times, only time will tell its tale.