2022 (2) TMI 504 - AAR - GST

Classification of supply - works contract services - supply of goods or services or a composite supply - Whether the activity should be classified as Composite Supply of works contract for Construction of tunnel under Entry 3 (iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 taxable at the rate of 12%? - HELD THAT - The work awarded to the main contractor viz. NECL is construction of Tunnel and Approach roads. In order to complete the said EPC contract the main contractor has engaged the applicant as a sub-contractor for drilling and blasting work for rock tunneling - it is clear that various goods including explosives tools and other material have to be used during the process of blasting. Hence there is an element of goods involved in the said transaction. Further there is a service element also in carrying out the whole process starting from drilling till the end by removing the rubble. Hence the activity involves both the goods as well as the services. In the subject case there is definitely involvement of supply of services in the form of drilling and blasting and clearing of rubble etc. We also find that to perform such services there is requirements of goods which include explosives. The service of drilling and blasting cannot be conducted without the use of explosives and therefore there is an element of composite supply in the present case. Whether the impugned activity to be carried out by the applicant shall be classified as supply of goods or services or a composite supply of works contract ? - HELD THAT - The main contractor has been given a contract by MSRDC to construct tunnels for Mumbai Pune Expressway and accordingly the main contractor has subcontracted the tunneling work to the applicant by way of drill and blast technique of tunneling. In the subject case the work is for construction of tunnels which can be considered as immovable properties belonging to the Government of Maharashtra. Further as per the work order submitted by the applicant it clearly appears that the impugned activity carried out by the applicant can classified as composite supply of works contract for construction of tunnel. This would answer the first question raised by the applicant. Whether the impugned activity should be classified as Composite Supply of works contract for Construction of tunnel under Entry 3 (iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 taxable at the rate of 12%? - HELD THAT - The impugned activity/supply undertaken by the applicant as per the subject Work Order received from M/s NECL is drilling and blasting including all tools materials explosive vans etc. complete for approach roads and Tunnel Works . Since the impugned activity carried out by the applicant can be classified as composite supply of works contract for construction of tunnel the said supply will be covered under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017. It is further noticed that similar view has been taken by the Advance Ruling Authority of Gujarat in case of IN RE M/S. KHEDUT HAT 2018 (10) TMI 302 - AUTHORITY FOR ADVANCE RULING GUJARAT that blasting work with use of explosives is a composite supply. Thus the impugned activity carried out by the applicant is a composite supply of works contract for construction of tunnel and is covered under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017.

Summary

Issues Involved:
1. Classification of the activity as supply of goods, services, or a composite supply of 'works contract'.
2. Classification of the activity as Composite Supply of works contract for Construction of tunnel under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 taxable at the rate of 12%.

Issue-wise Detailed Analysis:

Issue 1: Classification of the Activity
The applicant, M/s. Kapil Sons, is engaged in drilling and blasting works using industrial explosives and other materials. They were subcontracted by M/s. Navyauga Engineering Company Limited (NECL) for constructing tunnels through drilling and blasting. The applicant questioned whether their activity should be classified as a supply of goods, services, or a composite supply of 'works contract'.

The Authority examined the nature of the work, which involves both goods (explosives, tools, materials) and services (drilling, blasting, rubble removal). According to Section 2(30) of the CGST Act, a composite supply consists of two or more taxable supplies of goods or services naturally bundled and supplied in conjunction with each other. The Authority found that the applicant’s activities fit this definition as they involve both goods and services supplied together to achieve the construction of tunnels.

The Authority referred to the definition of 'works contract' under Section 2(119) of the CGST Act, which includes contracts for construction involving the transfer of property in goods. The Supreme Court’s judgment in Larsen & Toubro Limited vs. State of Karnataka supported the inclusion of goods in some other form within the definition of 'goods'. Therefore, the Authority concluded that the applicant’s activities qualify as a composite supply of works contract.

Issue 2: Classification under Notification No. 11/2017-CT (Rate)
The second issue was whether the activity should be classified under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017, which specifies a 12% tax rate for composite supplies of works contract for construction of tunnels.

The Authority noted that the main contractor, NECL, was engaged by MSRDC for constructing tunnels, and the applicant was subcontracted for drilling and blasting. The nature of the work, involving both goods and services, aligns with the definition of composite supply of works contract under Section 2(119) of the CGST Act. The Authority observed that the applicant’s activities are integral to the construction of the tunnels, which are immovable properties.

The Authority cited the Advance Ruling Authority of Gujarat’s decision in the case of M/s KHEDUT HAT, which held that blasting work with explosives is a composite supply. Consequently, the Authority concluded that the applicant’s activities fall under Entry 3(iv) of Notification No. 11/2017-CT (Rate), making them taxable at 12%.

Order:
1. The activity carried out by the applicant is classified as a 'composite supply' of works contract.
2. The activity is classified under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017, taxable at the rate of 12%.