Project Management Consultancy services qualify as pure services but exemption denied due to insufficient government shareholding threshold

AAR Rajasthan ruled that applicant's Project Management Consultancy services to RUDSICO for water supply and sewerage infrastructure development constituted pure services under functions listed in Article 243W of the Constitution. However, exemption under Notification 12/2017 was denied as RUDSICO failed to qualify as governmental authority, with government holding only 84% paid-up capital against required 90% threshold for governmental authority status under GST notifications.

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Issues Involved:
1. Whether the 'Project Management Consultancy' services provided to RUDSICO under Rajasthan Secondary Towns Development Sector Project can be termed as 'Pure Services' as referred in SI. No. 3 - (Chapter 99) of Table mentioned in Notification No. 12/2017 - Central Tax (Rate) dated 28/06/2017 and accordingly eligible for exemption from CGST and SGST.

Detailed Analysis:

I. Interpretation of 'Pure Services':

1.1 The services provided by the Applicant, CEG, may be termed as 'Pure Services' if they exclude works contract service, exclude other composite supplies involving supply of any goods, and involve the supply of services without involving any supply of goods.
1.2 The term 'Pure Services' has not been defined in the Act, Rules, or notification. However, CBEC FAQs clarify that 'Pure Services' means supply of services without involving any supply of goods.
1.3 The term 'Works Contract' as defined in Section 2(119) of the CGST Act, 2017, involves the transfer of property in goods in the execution of a contract.
1.4 The contract between the Applicant and RUDSICO is purely a service contract with no component of transfer of property in goods.
1.5 The scope of work includes project management, execution, monitoring, construction supervision, and ensuring ESMPs are implemented.
1.6 The Joint Venture Agreement states that GST on consultancy services is exempt.

II. RUDSICO as a Governmental Authority:

2.1 RUDSICO is a State Government Company with more than 90% equity or control by the Government of Rajasthan.
2.2 The definition of "Governmental Authority" under Notification No. 11/2017 and 12/2017 includes any authority with 90% or more participation by the government.
2.3 RUDSICO is controlled by the State Government and functions under the Minister of UDH & LSG, Government of Rajasthan.

III. Services in Relation to Functions Entrusted to a Municipality:

3.1 Article 243W of the Constitution empowers Municipalities to function as institutions of self-government concerning urban planning, water supply, and other functions listed in the Twelfth Schedule.
3.2 The Twelfth Schedule includes urban planning and water supply for domestic, industrial, and commercial purposes.
3.3 RUDSICO’s objectives align with the functions listed in Article 243W, including infrastructure development and public utilities.
3.4 The project aims to improve water and wastewater services in 42 secondary towns of Rajasthan.
3.5 The PMC services provided by the Applicant are in relation to functions entrusted to a Municipality under Article 243W.

IV. Financial Administration of the Joint Venture Agreement:

4.1 The project is a joint venture involving M/s Haskoning DHV Consulting Pvt. Ltd., M/s Haskoning DHV Nederland B.V., and M/s Consulting Engineers Group Ltd.
4.2 The Leading Member is responsible for financial administration, including preparation and submission of invoices to the client.
4.3 There is no principal-agent relationship between the Leading Member and the Applicant.
4.4 The Applicant provides 'Project Management Consultancy' services to RUDSICO and raises invoices to the Leading Member for financial administration purposes.

Findings and Conclusion:

1. The services provided by the Applicant are 'Pure Services' as they involve only consultancy services without any supply of goods.
2. The services are in relation to functions entrusted to a Municipality under Article 243W of the Constitution.
3. However, RUDSICO does not qualify as a "Governmental Authority" as it does not meet the 90% government equity requirement under Notification No. 11/2017 and 12/2017.

Ruling:

The 'Project Management Consultancy' services provided to RUDSICO under the Rajasthan Secondary Towns Development Sector Project, where the invoice is raised by the Applicant to the Leading Member, who further raises an invoice to RUDSICO, cannot be termed as 'Pure Services' eligible for exemption under Notification No. 12/2017 - Central Tax (Rate) dated 28/06/2017.

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