Classification of Contract as Composite Supply under GST: Implications and Rulings

The case involved the classification of a contract as a composite supply of services under GST laws. The applicant argued that their contract, combining ESCO Model and O&M work, constituted a single indivisible supply involving both goods and services. The contract included activities related to the improvement of water supply systems and the installation of machinery permanently attached to the earth. The ruling determined that the contract qualified as a works contract, categorized as a composite supply of services. The applicable GST rate depended on the percentage of goods in the total value of the composite supply, with GST ranging from nil to 12% (6% CGST + 6% SGST).

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Issues Involved:
1. Classification of the supply as goods or services.
2. Determination of the GST rate applicable to the composite supply.

Issue-wise Detailed Analysis:

1. Classification of the Supply as Goods or Services:

The applicant, M/s G A Infra Pvt. Ltd., is engaged in providing comprehensive water services, including designing, installing, commissioning, operating, and maintaining solar energy-based bore well water pumping systems, reverse osmosis plants, and fluoride control projects on an ESCO and O&M contract. The applicant contends that the contract combines ESCO Model and O&M work, forming a single indivisible supply, thus qualifying as a composite supply. The contract involves activities such as replacement, refurbishment, repair, rehabilitation of pump sets, switchgears, mechanical and electrical equipment, and other related tasks. The applicant argues that since the contract involves immovable property, it should be treated as a works contract, which is classified as a supply of service under Schedule II.

2. Determination of the GST Rate Applicable to the Composite Supply:

The scope of work in the ESCO model includes improvement of the water supply system involving pump houses, pumping stations, transmission lines, switchyards, storage tanks, and headwork campuses. The contract involves the transfer of property in goods, such as new pumping machinery and mechanical/electrical equipment. The applicant asserts that the contract is a works contract, which is a composite supply involving both goods and services. According to Notification No 12/2017-CT (Rate) dated 28.06.2017, if the value of goods in the composite supply does not exceed 25% of the total value and the supply is to a Governmental Authority for functions under Article 243W, no GST is applicable. If the value of goods exceeds 25%, the applicable GST rate is 12% (6% CGST + 6% SGST).

Findings, Analysis & Conclusion:

The contract combines ESCO Model and O&M work, forming a single indivisible supply. The activities under ESCO model and O&M contract are closely linked, making it a composite supply. The scope of work involves significant improvements to the water supply system, including the replacement and installation of new machinery and equipment, which are permanently attached to the earth, thus qualifying as immovable property. Based on the General Clauses Act 1897 and CBEC circular number 58/1/2002-CX, items that cannot be dismantled without substantial damage are considered immovable property. Therefore, the contract is classified as a works contract, which is a composite supply of services.

Ruling:

The activity of O&M of the Fluoride Control Project on the ESCO Model and O&M work by the applicant is undertaken for a Government Department. The applicability of GST is as follows:
a. If the supply of goods is below 25% of the total value of the composite supply, GST will be NIL.
b. If the supply of goods exceeds 25% of the total value of the composite supply, GST will be 12% (6% CGST + 6% SGST).

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