2019 (9) TMI 823 - AAR - GST

Classification of goods - rate of tax - composite supply - various systems, sub-systems and onboard spares supplied by the applicant for use in the Warships, Vessels and Submarines meant for Indian Navy and Shipbuilders -whether the supplies made by the applicant qualify to be composite supplies wherein the goods being the principal supply and whether the said goods form parts of goods of heading 8906, the warships or not? - taxable at the rate of 5% or otherwise? - applicability of Sl.No. 252 of Schedule I of Notification No. 1/2017- Central tax (Rate) and No. 1/2017. HELD THAT - The price is inclusive of the packing charges, freight charges and transit insurance charges and are includible in the price. The contract includes services like Installation and Commissioning, Training and rehosting test programmes. Hence the entire contract is a composite supply of supply, installation, commissioning, training and rehosting the test programmes with the principal supply being the supply of Fire Control Systems. It also includes the service to be provided during the warranty period. In the instant case the Applicant supplies the goods such as Fire Control Systems, Radar Systems etc., and also provides the services of the installation, commissioning, Training etc.. The equipments/ systems supplied by the applicant are custom made for warships and hence the applicant alone is qualified to install and commission them and also to train the recipients. Therefore the two supplies that of supply of goods and supply of related services, are taxable as well as naturally bundled and hence qualify as a Composite Supply. The principal supply is undoubtedly that of goods i.e. the systems. Since the principal supply is supply of goods i.e. fire control systems, the entire composite supply need to be treated as the supply of goods fire control systems. Whether the systems and assemblies (goods), supplied by the applicant qualify to be classified as parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907 or not? - HELD THAT - Chapter 89 does not have a provision for parts or accessories and hence any, system / sub-system or article or product by whatever name it is called, that is fitted to the ship or boat or a floating structure becomes either part or accessory of the said ship, irrespective of its classification. In the instant case the Applicant at para 5 of Annexure A to the application clearly admitted that all the systems being supplied by them are meant for use ON BOARD SHIPS of the Indian Navy and hence it can be construed that all the supplies are meant for warships, falling under Chapter 8906 - Therefore it implies, as admitted by the applicant, that all the supplies are meant for the goods of headings 8901, 8902, 8904, 8905, 8906, 8907 but not meant for goods of headings 8903, 8908. Various systems, sub-systems and onboard spares supplied by the applicant for use in the Warships, Vessels and Submarines meant for Indian Navy and Shipbuilders (excluding consumables and raw materials) are appropriately covered under sl.no.252 of Notification No. 01/2017-Central Tax(Rate) dated 28.06.2017, and accordingly attracts 5% GST.

Summary

Issues Involved:

1. Classification of supplies as composite or mixed supply.
2. Determination of whether the supplied goods qualify as parts of warships under heading 8906.
3. Applicability of 5% GST rate under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate).

Issue-wise Detailed Analysis:

1. Classification of Supplies as Composite or Mixed Supply:

The applicant contended that their supplies, which include systems and sub-systems for warships, are composite supplies. They argued that these supplies consist of both goods and services, with goods being the principal supply. The definition of "composite supply" under Section 2(30) of the CGST Act, 2017, was cited, which states that a composite supply must include two or more taxable supplies naturally bundled and supplied together in the ordinary course of business, with one being the principal supply.

The Authority agreed with the applicant, stating that the supplies indeed qualify as composite supplies. The contract involved supply, installation, commissioning, training, and rehosting test programs, with the principal supply being the systems (goods). Therefore, the entire composite supply should be treated as the supply of goods, making it subject to the GST rate applicable to the principal supply.

2. Determination of Whether the Supplied Goods Qualify as Parts of Warships Under Heading 8906:

The applicant argued that their supplies should be classified as parts of warships under heading 8906. They referenced Section 89.06 of the Customs Tariff, which covers other vessels, including warships. The applicant noted that Chapter 89 does not have a separate heading for parts and accessories, and thus, the supplied systems should be considered parts of warships.

The Authority examined the explanatory notes to the Customs Tariff and the Harmonized System of Nomenclature (HSN). It was noted that Chapter 89 excludes parts and accessories, which are classified under other chapters. However, since the systems supplied by the applicant are essential for the functioning of warships, they qualify as parts of warships under heading 8906. The Authority concluded that the systems and assemblies supplied by the applicant are parts of warships and therefore fall under heading 8906.

3. Applicability of 5% GST Rate Under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate):

The applicant argued that their supplies should attract a 5% GST rate under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate). They cited the entry, which states that parts of goods of headings 8901, 8902, 8904, 8905, 8906, and 8907 fall under the 5% GST rate category. The applicant also referenced various case laws and previous exemptions under Customs and Central Excise laws to support their claim.

The Authority agreed with the applicant, stating that the supplied systems, being parts of warships, are covered under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate). Therefore, these supplies attract a 5% GST rate. However, the Authority clarified that this does not apply to consumables and raw materials, which do not qualify as parts of warships.

Ruling:

Various systems, sub-systems, and onboard spares supplied by the applicant for use in warships, vessels, and submarines meant for the Indian Navy and shipbuilders (excluding consumables and raw materials) are appropriately covered under Sl.No. 252 of Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017, and accordingly attract 5% GST.