Government Contracts for Quality Inspection Exempt from GST

The services provided by the Applicant to CMWSSB and TWAD, involving inspection of materials for quality assurance, are deemed as "Pure Services" exempt from CGST and SGST under SI.No. 3 of Notification No. 12/2017-CT (Rate) dated 28th June 2017. The Applicant's services to these governmental authorities, responsible for municipal functions, fall within the exemption criteria. The ruling did not address the issue of whether the Applicant can claim SGST credit by issuing a Credit Note for previously taxed invoices.

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Issues Involved:
1. Whether the services rendered by the Applicant to CMWSSB and TWAD are exempted under SI.No. 3 of Notification No. 12/2017-CT (Rate) dated 28th June 2017.
2. If the services are exempt, whether the Applicant can take credit of SGST by issuing a Credit Note for invoices already raised with a levy of 18% GST.

Detailed Analysis:

Issue 1: Exemption of Services under Notification No. 12/2017-CT (Rate)
The Applicant, a Third Party Inspection Services Agency, sought an advance ruling on whether their services to CMWSSB and TWAD are exempt under SI.No. 3 of Notification No. 12/2017-CT (Rate) dated 28th June 2017. The services provided involve inspection of materials procured by TWAD and CMWSSB to ensure quality assurance, and the Applicant is paid a percentage of the value of materials inspected.

Verification of Agreements and Work Orders:
- The agreements with TWAD and CMWSSB indicate that the Applicant conducts inspections for various equipment and submits a final report on quality. These services are termed as “Pure Services” without involving any supply of goods/materials.
- CMWSSB and TWAD are both constituted by Acts of the Tamil Nadu State Legislature and are controlled by the government, making them "Governmental Authorities" as defined under the relevant GST notifications.

Legal Provisions and Definitions:
- SI.No. 3 of Notification No. 12/2017-CT (Rate) exempts “Pure Services” provided to a governmental authority in relation to functions entrusted to a Municipality under Article 243W of the Constitution.
- The definition of "governmental authority" includes entities set up by an Act of Parliament or State Legislature with 90% or more government participation.

Functions of CMWSSB and TWAD:
- CMWSSB, created by the Chennai Metropolitan Water Supply and Sewerage Act, 1978, and TWAD, constituted by the Tamil Nadu Water Supply and Drainage Board Act, 1970, are both responsible for water supply and sewerage functions, which are municipal functions under Article 243W of the Constitution.
- The services provided by the Applicant to these authorities are directly related to these municipal functions.

Conclusion:
The services rendered by the Applicant to CMWSSB and TWAD qualify as "Pure Services" provided to a governmental authority in relation to municipal functions. Therefore, these services are exempt from CGST and SGST under SI.No. 3 of the respective notifications.

Issue 2: Credit of SGST by Issuing Credit Note
The second issue concerns whether the Applicant can take credit of SGST by issuing a Credit Note for invoices already raised with an 18% GST levy if the services are ruled exempt.

Ruling:
The authority did not address this issue, stating it is of a procedural nature.

Ruling:
The activity of the Applicant as per the two contracts with TWAD for conducting Third Party Inspection for procurements of equipment supplied by L&T, Chennai, and with CMWSSB for conducting Third Party Inspection for procurements of equipment and chemicals involved in water supply and sewerage schemes are exempt from CGST under SI.No. 3 of Notification No. 12/2017-CT (Rate) dated 28th June 2017 and from SGST under SI.No. 3 of the G.O. (Ms) No. 73 dated 29.06.2017 as amended.

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