Warship supplies: GST rate for parts, systems, and spares.

The Authority ruled that the systems, sub-systems, and onboard spares supplied for warships qualify as composite supplies with goods being the principal supply. These items are considered parts of warships under heading 8906 and are subject to a 5% GST rate under Sl.No. 252 of Notification No. 01/2017-Central Tax (Rate), excluding consumables and raw materials.

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Issues Involved:

1. Classification of supplies as composite or mixed supply.
2. Determination of whether the supplied goods qualify as parts of warships under heading 8906.
3. Applicability of 5% GST rate under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate).

Issue-wise Detailed Analysis:

1. Classification of Supplies as Composite or Mixed Supply:

The applicant contended that their supplies, which include systems and sub-systems for warships, are composite supplies. They argued that these supplies consist of both goods and services, with goods being the principal supply. The definition of "composite supply" under Section 2(30) of the CGST Act, 2017, was cited, which states that a composite supply must include two or more taxable supplies naturally bundled and supplied together in the ordinary course of business, with one being the principal supply.

The Authority agreed with the applicant, stating that the supplies indeed qualify as composite supplies. The contract involved supply, installation, commissioning, training, and rehosting test programs, with the principal supply being the systems (goods). Therefore, the entire composite supply should be treated as the supply of goods, making it subject to the GST rate applicable to the principal supply.

2. Determination of Whether the Supplied Goods Qualify as Parts of Warships Under Heading 8906:

The applicant argued that their supplies should be classified as parts of warships under heading 8906. They referenced Section 89.06 of the Customs Tariff, which covers other vessels, including warships. The applicant noted that Chapter 89 does not have a separate heading for parts and accessories, and thus, the supplied systems should be considered parts of warships.

The Authority examined the explanatory notes to the Customs Tariff and the Harmonized System of Nomenclature (HSN). It was noted that Chapter 89 excludes parts and accessories, which are classified under other chapters. However, since the systems supplied by the applicant are essential for the functioning of warships, they qualify as parts of warships under heading 8906. The Authority concluded that the systems and assemblies supplied by the applicant are parts of warships and therefore fall under heading 8906.

3. Applicability of 5% GST Rate Under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate):

The applicant argued that their supplies should attract a 5% GST rate under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate). They cited the entry, which states that parts of goods of headings 8901, 8902, 8904, 8905, 8906, and 8907 fall under the 5% GST rate category. The applicant also referenced various case laws and previous exemptions under Customs and Central Excise laws to support their claim.

The Authority agreed with the applicant, stating that the supplied systems, being parts of warships, are covered under Sl.No. 252 of Schedule I of Notification No. 01/2017-Central Tax (Rate). Therefore, these supplies attract a 5% GST rate. However, the Authority clarified that this does not apply to consumables and raw materials, which do not qualify as parts of warships.

Ruling:

Various systems, sub-systems, and onboard spares supplied by the applicant for use in warships, vessels, and submarines meant for the Indian Navy and shipbuilders (excluding consumables and raw materials) are appropriately covered under Sl.No. 252 of Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017, and accordingly attract 5% GST.

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