2024 (10) TMI 876 - AAR - GST

Exemption under GST - Composite supply - scope of Local Authority - Whether the activity of providing, laying, jointing, testing and commissioning of sewer system and all ancillary works is exempt under entry 3B of the NN 13/2017-CT (Rate) dated 28.06.2017? - HELD THAT - In the instant case the applicant is engaged in providing works contract services . The applicant also admits the fact that they are engaged in supply of goods along with services for an immovable property. Thus, the services provided by the applicant are found to be works contract services, where goods along with services are supplied. KOTA NAGAR NIGAM is covered under the definition of Local Authority. In the instant case, the applicant is providing services to KOTA NAGAR NIGAM which is a local authority. Vide Notification No. 16/2021-Central Tax (Rate) dtd 18.11.2021 w.e.f. 01.01.2022, a Government Authority or a Government Entity words are omitted from SR No. 3 and 3A of the Notification No. 12/2017-CTR dtd 28.06.2017. From the para 5.52, it is clear that the Sr No. 3B was inserted to provide the exemptions on supply of certain services supplied to Government Authority, which was previously curtailed by the above referred Notification dtd 18.112021 w.e.f. 01,01.2022. Thus, entry Sr No. 3B is not a new entry, rather it is extension of existing entries of Sr No. 3 and 3A. The Sr No. 3 and 3A of the Notification No.12/2017-CTR dtd 28.06.2017 are applicable only in the case of pure services or composite supply having value of supply of goods not more than 25 percent. Since, Sr No 3B is also extension of Sr No 3 and 3A and all these entries are inter-related and it won t be appropriate to read all these entries in isolation or individually. Therefore, Sr No. 3B will also be applicable in case of pure services or composite supply, where value of the goods is not more than 25 percent. The applicant provides services to Nagar Nigam, Kota, which is a local authority and all the three entries Sr No 3, 3A and 3B of the Notification No. 12/2017-CTR dtd 28.06.2017 are consistent and should not be read individually, the rate of tax on services provided by the applicant should be decided in terms of Sr No. 3 and 3A, since the said entries cover services provided to local authority , there is no need to go to Sr No. 3B. The applicant is providing its services to NAGAR NIGAM, KOTA (local authority) of laying, jointing, testing and commissioning of Sewerage System and all ancillary works along with Design, construction, supply, installation, testing and commissioning (Civil, Mechanical, electrical, instrumentation other necessary works) of Sewage Pumping Stations, Upgradation of effluent of existing Sewage Treatment Plant with provision for treated waste water reuse including I year defect liability with 10 years O M for towns under package AMRUT-2.O/RAJ/SEWERAGF-21 for Kota North, Rajasthan. So, exemption entry No. 3B is not applicable to the applicant. The activity of providing, laying, jointing, testing and commissioning of sewer system and all ancillary works by the applicant to Nagar Nigam Kota, being a local authority is not exempted under entry 3B of the NN 13/2017-CT (Rate) dated 28.06.2017.

Summary

Issues Involved:
1. Applicability of GST exemption under Entry 3B of Notification No. 13/2023-CT (Rate) dated 19.10.2023.
2. Classification of the contract as a works contract under GST.
3. Interpretation of composite supply and its tax implications.

Issue-wise Detailed Analysis:

1. Applicability of GST Exemption under Entry 3B:

The applicant, engaged in providing and commissioning sewer systems, sought clarification on whether their activities were exempt under Entry 3B of Notification No. 13/2023-CT (Rate), which exempts services provided to a Governmental Authority by way of sanitation conservancy. The applicant argued that their services fit under this exemption as they were provided to a governmental authority, namely Nagar Nigam Kota, which is classified as a local authority under the Rajasthan Municipalities Act, 2009.

However, the ruling clarified that Entry 3B is an extension of Entries 3 and 3A, which cover pure services and composite supplies with a goods component not exceeding 25%. Since the applicant's contract involves a significant supply of goods, the exemption under Entry 3B does not apply. The ruling emphasized that the entries should not be read in isolation, and the applicant's services do not qualify for the exemption as they do not fit the criteria of pure services or limited composite supply.

2. Classification of the Contract as a Works Contract:

The contract in question involves providing, laying, jointing, testing, and commissioning of sewer systems, including ancillary works and the supply of goods. According to Section 2(119) of the CGST Act, a works contract involves construction or installation services for immovable property with a transfer of goods. The ruling confirmed that the applicant's activities are indeed works contract services as they involve the construction and commissioning of an immovable sewerage system, which involves the transfer of goods in the execution of the contract.

The ruling also highlighted that works contracts are considered a composite supply of services under Schedule II of the CGST Act, where the supply of goods and services is integral to the execution of the contract.

3. Interpretation of Composite Supply and Its Tax Implications:

The applicant argued that their activities constitute a composite supply, classifiable under HSN 9954, and should be exempt under Entry 3B. However, the ruling clarified that the composite supply involves both goods and services, and the value of the goods component exceeds 25% of the total value, thus disqualifying it from the exemption under Entry 3A or 3B.

The ruling emphasized that the classification of a composite supply should consider the predominant element, which in this case includes substantial goods supply. Therefore, the composite supply is taxable as a works contract service, and the exemption under Entry 3B does not apply.

Conclusion:

The Authority for Advance Ruling concluded that the applicant's activities do not qualify for exemption under Entry 3B of Notification No. 13/2023-CT (Rate) as the services provided are not pure services or limited composite supplies. The activities are classified as works contract services involving significant goods supply, making them taxable under the GST regime. The ruling underscores the importance of understanding the composite nature of supplies and their predominant elements in determining tax liabilities.