Drilling and blasting for boulder extraction qualifies as works contract under Entry 3(x) but loses concessional GST rate post-amendment

AAR Maharashtra ruled that drilling and blasting operations with explosives for boulder extraction constitutes a composite supply of works contract. The applicant, as sub-contractor, qualified for 5% GST rate under Entry 3(x) of Notification 11/2017-CT(R) when main contractor provided services to government entities. However, following amendment via Notification 15/2021-CT(R) effective January 1, 2022, which deleted "Governmental Authority" and "Government Entity" from Entry 3(vii), the applicant's services no longer qualify for the concessional rate under Entry 3(x).

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Issues Involved:
1. Classification of the activity as supply of goods, services, or a composite supply of 'works contract'.
2. Applicability of Entry 3(x) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 for the activity carried out by the applicant.

Detailed Analysis:

Issue 1: Classification of the Activity
Relevant Facts:
- The applicant, M/s Kapil Sons Explosives LLP, is engaged in drilling and blasting works using industrial explosives.
- The main contractor, M/s Balajee Infratech & Constructions Pvt Ltd, has been awarded a contract by CIDCO for land development, including drilling, blasting, and reclamation works.
- The applicant is subcontracted to provide drilling and blasting operations with explosives for extracting boulders at the designated site.

Applicant's Interpretation:
- The applicant argues that the activity involves both goods (explosives) and services (drilling and blasting), thus constituting a composite supply.
- The term "works contract" under Section 2(119) of the CGST Act includes activities involving immovable property and transfer of property in goods in some form.

Authority's Findings:
- The activity performed by the applicant is a composite supply as defined under GST laws.
- Reference is made to the decision in M/s KHEDUT HAT [2018-TIOL-173-AAR-GST], which held that blasting work with the use of explosives is a composite supply.
- The activity involves immovable property (airport land), thus classifying it as a composite supply of works contract.

Conclusion:
- The activity carried out by the applicant is classified as a composite supply of 'works contract'.

Issue 2: Applicability of Entry 3(x) of Notification No. 11/2017-CT (Rate)
Relevant Facts:
- The main contractor, M/s Balajee, is providing services to CIDCO, a governmental authority, predominantly involving earthwork constituting more than 75% of the value of the works contract.
- The applicant contends that their subcontracted services should be classified under Entry 3(x) of the Notification, which allows for a 5% GST rate.

Applicant's Interpretation:
- The applicant argues that since the main contractor’s services are classified under Entry 3(vii), their subcontracted services should fall under Entry 3(x), thus qualifying for the reduced tax rate.
- The applicant provides evidence that the main contractor’s work involves predominantly earthwork and is billed under HSN Code 9954 at a 5% GST rate.

Jurisdictional Officer's Submissions:
- The officer agrees that the applicant’s activity is a composite supply of works contract but contends that it does not predominantly involve earthwork.
- The officer argues that the applicant’s activity should be categorized under Entry 3(xii) of the Notification, which is taxed at 18%.

Authority's Findings:
- The authority agrees that the applicant’s work is a composite supply of works contract.
- The authority examines whether the subcontracted work falls under Entry 3(x), which depends on the classification of the main contractor’s services under Entry 3(vii).
- The authority acknowledges that the main contractor’s work is predominantly earthwork and qualifies for the reduced tax rate.
- However, the Notification No. 15/2021-CT(R) dated 18.11.2021, effective from 01.01.2022, excludes “Governmental Authority” and “Government Entity” from Entry 3(vii).

Conclusion:
- Before 01.01.2022, the applicant’s services would qualify under Entry 3(x) and be taxed at 5% if the main contractor’s services fall under Entry 3(vii).
- From 01.01.2022, due to the amendment in the Notification, the applicant’s services do not qualify under Entry 3(x).

Final Order:
1. The activity carried out by the applicant is classified as a composite supply of 'works contract'.
2. The activity does not qualify for classification under Entry 3(x) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 for the reduced tax rate of 5%.

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