Drilling and blasting work for tunnel construction ruled as composite supply taxable at 12% GST under Entry 3(iv) Notification 11/2017-CT

The AAR Maharashtra ruled that drilling and blasting work for tunnel construction constitutes a composite supply of works contract services. The applicant, engaged as sub-contractor for rock tunneling work involving explosives and materials, was found to provide both goods and services elements. The Authority determined this activity falls under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017, making it taxable at 12% GST rate. The ruling was supported by similar precedent from AAR Gujarat regarding blasting work classification as composite supply.

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Issues Involved:
1. Classification of the activity as supply of goods, services, or a composite supply of 'works contract'.
2. Classification of the activity as Composite Supply of works contract for Construction of tunnel under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 taxable at the rate of 12%.

Issue-wise Detailed Analysis:

Issue 1: Classification of the Activity
The applicant, M/s. Kapil Sons, is engaged in drilling and blasting works using industrial explosives and other materials. They were subcontracted by M/s. Navyauga Engineering Company Limited (NECL) for constructing tunnels through drilling and blasting. The applicant questioned whether their activity should be classified as a supply of goods, services, or a composite supply of 'works contract'.

The Authority examined the nature of the work, which involves both goods (explosives, tools, materials) and services (drilling, blasting, rubble removal). According to Section 2(30) of the CGST Act, a composite supply consists of two or more taxable supplies of goods or services naturally bundled and supplied in conjunction with each other. The Authority found that the applicant’s activities fit this definition as they involve both goods and services supplied together to achieve the construction of tunnels.

The Authority referred to the definition of 'works contract' under Section 2(119) of the CGST Act, which includes contracts for construction involving the transfer of property in goods. The Supreme Court’s judgment in Larsen & Toubro Limited vs. State of Karnataka supported the inclusion of goods in some other form within the definition of 'goods'. Therefore, the Authority concluded that the applicant’s activities qualify as a composite supply of works contract.

Issue 2: Classification under Notification No. 11/2017-CT (Rate)
The second issue was whether the activity should be classified under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017, which specifies a 12% tax rate for composite supplies of works contract for construction of tunnels.

The Authority noted that the main contractor, NECL, was engaged by MSRDC for constructing tunnels, and the applicant was subcontracted for drilling and blasting. The nature of the work, involving both goods and services, aligns with the definition of composite supply of works contract under Section 2(119) of the CGST Act. The Authority observed that the applicant’s activities are integral to the construction of the tunnels, which are immovable properties.

The Authority cited the Advance Ruling Authority of Gujarat’s decision in the case of M/s KHEDUT HAT, which held that blasting work with explosives is a composite supply. Consequently, the Authority concluded that the applicant’s activities fall under Entry 3(iv) of Notification No. 11/2017-CT (Rate), making them taxable at 12%.

Order:
1. The activity carried out by the applicant is classified as a 'composite supply' of works contract.
2. The activity is classified under Entry 3(iv) of Notification No. 11/2017-CT (Rate) dated 28.06.2017, taxable at the rate of 12%.

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