2020 (7) TMI 351 - AAR - GST

Determination of liability - classification to pay GST - reimbursement received by the Applicant under the Contract from the Customer towards Lost in Hole/Damage Beyond Repair of equipment/tool (in short equipment) during execution of the services mentioned in the Contract - HELD THAT - By virtue of powers vested under Sub-Section (3) of Section-7 of the CGST Act, 2017, the Government, on recommendations of the Council, specify by a notification, the transactions that are to be treated as supply of goods and not as a supply of services or a supply of service and not as a supply of goods . Further, under sub-section (2) of the Section-7 ibid notwithstanding anything contained in sub-section (1) , the activities or transactions specified in Schedule-III shall be treated neither as supply of services nor a supply of services. It is observed that the activities of the applicant (on which they sought advance ruling) under the subject contract did not figure in the list of activities or transactions as notified in Schedule-III. Therefore, the subject activity or transaction shall constitute a supply under sub-section (1) of Section-7 of the Act ibid in as much as the said activity or transactions is for a consideration and in the course of or furtherance of business - In case of damage of the equipment or tools, such reimbursement shall be repair cost (subject to maximum of the cost of equipment/tools to be reimbursed in case of the same were lost) and whereas in case of loss of equipment or tools, the amount to be reimbursed shall be the amount limited to original cost (F.O.B nearest port) reduced by depreciation at the rate of 10% per year to be proportioned for each completed month or part thereof subject to maximum depreciation of 50%. The equipment/tools are tangible and movable. The amount of reimbursement of equipment/tools which are damaged beyond repair or loss is at an agreed depreciated value of the Original FoB Price of such equipment/tools. Going by the methodology and by nature of the equipment/tools, the activity of reimbursement towards Lost in hole/Damage Beyond repair of equipment /tools is rightly classifiable as Supply of Goods in terms of Section-7 of the CGST Act, 2017. Depending upon the nature of actual goods involved in the subject activity, their classification is as per HSN notified for the goods and the Classification Rules made in this regard. Accordingly, the provisions relating to chargeability and levy of GST under the CGST Act and the Rules made there under as applicable to the supply of goods will apply. Thus, the reimbursement received towards LIH equipment is to be considered as a supply as per Section 7 of the CGST Act, 2017 and hence, liable to GST - The reimbursement received towards LIH equipment is classifiable as Supply of Goods in terms of Section-7 of the CGST Act, 2017. Depending upon the nature of actual goods involved in the subject activity, their classification is as per HSN notified for the goods and the Classification Rules made in this regard. Accordingly, the provisions relating to chargeability and levy of GST under the CGST Act and the Rules made there under as applicable to the supply of goods will apply.

Summary

Issues Involved:
1. Determination of liability and classification to pay GST on reimbursement received towards Lost in Hole (LIH) / Damages beyond Repair equipment.
2. Whether reimbursement received towards LIH equipment can be considered as a supply as per Section 7 of the CGST Act, 2017.
3. Classification and applicable GST rate on such reimbursement.
4. Whether the reimbursement should be treated as "agreeing to tolerate an act" as per clause 5(e) of Schedule II of the CGST Act, 2017, or as a composite supply of works contract service.

Issue-wise Detailed Analysis:

1. Determination of Liability and Classification to Pay GST:
The applicant, Halliburton Offshore Services Inc., sought an advance ruling to determine the GST liability and classification on the reimbursement received for LIH equipment under a contract with ONGC. The applicant contended that the reimbursement for LIH equipment should be considered as a supply of services under Section 7 of the CGST Act, 2017, and classified either under "agreeing to tolerate an act" as per clause 5(e) of Schedule II or as a composite supply of works contract service.

2. Whether Reimbursement Can Be Considered as a Supply:
The Authority examined the applicant's argument that the reimbursement for LIH equipment qualifies as a supply of services under Section 7 of the CGST Act. The applicant argued that the reimbursement is contingent upon the loss or damage of equipment during oilfield services, which is compensated by ONGC as per the contract. The Authority agreed that the reimbursement received towards LIH equipment qualifies as a supply since it falls under the broad definition of services, which includes anything other than goods, money, and securities.

3. Classification and Applicable GST Rate:
The applicant presented two possible classifications for the reimbursement:
a) "Agreeing to tolerate an act" as per clause 5(e) of Schedule II of the CGST Act, 2017.
b) Composite supply of works contract service.

The Authority analyzed the nature of the transaction and concluded that the reimbursement for LIH equipment is not a routine part of the scope of work but a contingent event. The reimbursement is a compensatory payment made by ONGC in the event of irretrievable loss of equipment. The Authority determined that the reimbursement for LIH equipment does not constitute a composite supply of works contract service but is a supply of goods.

4. Treatment as "Agreeing to Tolerate an Act" or Composite Supply:
The applicant argued that the reimbursement for LIH equipment should be treated as "agreeing to tolerate an act" under clause 5(e) of Schedule II, which would attract an 18% GST rate. However, the Authority disagreed, stating that the reimbursement for LIH equipment is not related to tolerating an act or situation but is a compensatory payment for the loss of tangible, movable property (equipment/tools). Therefore, the reimbursement is classified as a supply of goods.

Ruling:
1. The reimbursement received towards LIH equipment can be considered as a supply as per Section 7 of the CGST Act, 2017, and is liable to GST.
2. The reimbursement is classifiable as a supply of goods. The classification and GST rate will depend on the nature of the actual goods involved, as per the HSN notified for the goods and the Classification Rules. The provisions relating to chargeability and levy of GST under the CGST Act and the Rules made thereunder will apply accordingly.