Works contract with earth work qualifies as composite supply under CGST Act section 2(119), exempt until January 2022 amendment

AAR Maharashtra ruled that a works contract involving earth work constituted a composite supply under CGST Act section 2(119), not falling under Sr. No. 3A of Notification 12/2017-CTR. The contract qualified for exemption under Sr. No. 3(vii) of Notification 11/2017-CTR as earth work comprised over 75% of contract value supplied to government entity GMIDC. However, the exemption ceased from January 1, 2022, following amendment via Notification 15/2021-CTR which removed "governmental authority or government entity" from eligible recipients.

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1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core legal questions:

• Whether the contract in question is covered under the term "Earth Work" and therefore falls under SI No 3A- Chapter No. 9954 as per Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017, as amended by Notification No. 2/2018-Central Tax (Rate) dated 25th January 2018.
• If the above answer is negative, whether the contract is covered under the term "Earth Work" under SI No - Chapter No. 9954 as per Notification No. 31/2017-Central Tax (Rate) dated 13th October 2017.
• If covered under any of the above notifications, what is the meaning of "Earthwork"Rs.

2. ISSUE-WISE DETAILED ANALYSIS

First Issue: Coverage under SI No 3A- Chapter No. 9954 as per Notification No. 12/2017-Central Tax (Rate)

• Relevant legal framework and precedents: The provision involves a composite supply of goods and services where the value of goods does not exceed 25% of the total value, provided to a governmental entity for activities related to functions under article 243G or 243W of the Constitution.
• Court's interpretation and reasoning: The court found that the activity is a composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, 2017, and therefore cannot be covered under Sr. No. 3A.
• Key evidence and findings: The contract involves 91% earthwork and 9% construction work, which is a composite supply of works contract.
• Application of law to facts: The court applied the definition of composite supply and works contract to determine that the activity does not fall under the specified notification.
• Treatment of competing arguments: The applicant argued for coverage under the notification, but the court relied on the definition of works contract and previous rulings.
• Conclusions: The court concluded that the contract is not covered under SI No 3A of Notification No. 12/2017-Central Tax (Rate).

Second Issue: Coverage under SI No - Chapter No. 9954 as per Notification No. 31/2017-Central Tax (Rate)

• Relevant legal framework and precedents: This notification covers composite supply of works contract involving more than 75% earthwork provided to a governmental entity.
• Court's interpretation and reasoning: The court found that the contract involves more than 75% earthwork and is provided to a governmental entity, thus covered under the notification.
• Key evidence and findings: The contract's earthwork component is 91%, and GMIDC is a governmental entity.
• Application of law to facts: The court applied the conditions of the notification to determine the contract's coverage.
• Treatment of competing arguments: The court considered the applicant's reliance on previous similar rulings and found them applicable.
• Conclusions: The court concluded that the contract is covered under SI No 3 (vii) of Notification No. 11/2017-CTR as amended by Notification No. 31/2017-CTR.

Third Issue: Meaning of "Earthwork"

• Relevant legal framework and precedents: The term "Earthwork" is not defined in GST provisions but is interpreted through dictionary definitions and previous rulings.
• Court's interpretation and reasoning: The court did not specifically address this question as it does not fall under the clauses of Section 97(2) of the CGST Act, 2017.
• Key evidence and findings: The court referred to previous rulings for the interpretation of "Earthwork."
• Application of law to facts: Not applicable as the question was not specifically answered.
• Treatment of competing arguments: The court did not engage in detailed analysis due to jurisdictional limitations.
• Conclusions: The question was not specifically answered.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The impugned activity is a Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, 2017, where such supply is to a Governmental Entity, i.e., GMIDC."
• Core principles established: The classification of a contract under GST notifications depends on the nature of the supply (composite supply of works contract) and the percentage of earthwork involved.
• Final determinations on each issue: The contract is not covered under SI No 3A of Notification No. 12/2017-Central Tax (Rate) but is covered under SI No 3 (vii) of Notification No. 11/2017-CTR as amended by Notification No. 31/2017-CTR, applicable until 31.12.2021.

This judgment provides clarity on the classification of contracts involving earthwork under GST notifications, emphasizing the importance of the percentage of earthwork and the nature of the supply as a composite works contract.

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