2024 (2) TMI 1358 - AAAR - GST

EPC contract services for gas processing infrastructure classified under construction services, attract 18% GST under Section 100(2)

The AAAR Rajasthan ruled that an appeal filed on 19.10.2021 against an AAR order communicated on 21.09.2021 was within the 30-day statutory period under ... Support services to oil and gas extraction - other professional, technical and business services relating to exploration, mining or drilling - works contract - composite supply - classification to be determined by nature of supply - specific description preferred over general description - explanatory notes to the Scheme of Classification of Services - inclusive interpretation of 'includes' in explanatory notes - omission of entry in rate notificationSupport services to oil and gas extraction - explanatory notes to the Scheme of Classification of Services - classification to be determined by nature of supply - Whether the supplies undertaken by the appellant are classifiable under SAC Heading 998621 as 'support services to oil and gas extraction'. - HELD THAT: - The authority examined the EPC contract scope and the explanatory notes to the Scheme of Classification. The explanatory note for SAC 998621 covers services that directly support extraction (e.g., derrick erection, well casing, cementing, test drilling) but these activities are distinct from creation of the infrastructure itself. The EPC contract assigned to the appellant required design, procurement, erection, installation, construction of well pads, pipelines, processing terminal, buildings, roads, utilities and handover - i.e., creation of new/augmented infrastructure for enhanced production. Those activities are construction/establishment of facilities rather than ancillary support services to extraction as envisaged in SAC 998621. Consequently, the nature of the appellant's supplies does not fit the support-services description in the explanatory notes and cannot be classified under SAC Heading 998621.The supplies are not classifiable under SAC Heading 998621.Other professional, technical and business services relating to exploration, mining or drilling - explanatory notes to the Scheme of Classification of Services - specific description preferred over general description - Whether the supplies alternatively merit classification under Heading 9983 as 'other professional, technical and business services relating to exploration, mining or drilling'. - HELD THAT: - The explanatory notes for headings under 9983 (e.g., geological/geophysical consulting, mineral exploration and evaluation) describe advisory, consulting and evaluation activities. The appellant's contractual obligations are to construct and hand over physical infrastructure and to perform engineering, procurement and construction works rather than to provide geological/geophysical consulting, feasibility studies or comparable advisory services. The factual nature of the contract thus does not match the service descriptions under Heading 9983, and the CBIC circular distinction (most activities falling under 9986; certain technical/consulting services under 9983) was considered but does not bring these construction-oriented EPC activities within 9983.The supplies are not classifiable under Heading 9983.Works contract - composite supply - classification to be determined by nature of supply - omission of entry in rate notification - Whether the supplies are correctly classifiable as construction services under SAC Heading 9954 (works contract/composite supply) and the consequence of omission of entry SI. No. 3(ii) in the Rate Notification. - HELD THAT: - The EPC contract entails transfer of property in goods in the execution of building, erection, installation, pipeline laying, commissioning and handover of immovable facilities. Such composite supply falls within the statutory definition of 'works contract' and, by Schedule 11 (Para 6), is treated as a supply of services. The explanatory notes to SAC 9954 encompass construction services for mining and related facilities; the appellant's activities - construction of well pads, pipelines, terminals, buildings and associated works - squarely correspond to construction services. The AAR's classification of the supply under SAC 9954 is therefore sustained. Although entry SI. No. 3(ii) of Notification No. 11/2017 (the specific sub-item relied upon by the AAR) had been omitted effective 01.04.2019 and thus its rate provision was not available for the relevant period, the correct applicable item within SI. No. 3 after considering the remaining entries is item (xii) (construction services not otherwise specified), and the supplies attract tax at the rate applicable under that item.The supplies are classifiable as construction services/works contract under SAC Heading 9954; the AAR's classification is sustained and the applicable rate is that corresponding to item (xii) of SI. No. 3 of Notification No. 11/2017 (as amended).Final Conclusion: The appeal is disposed of by upholding the AAR's classification of the appellant's supplies as construction services/works contract under SAC Heading 9954. The supplies do not qualify as 'support services to oil and gas extraction' under SAC 998621 nor as 'other professional, technical and business services' under Heading 9983. The AAR's rate determination is modified to apply the rate corresponding to item (xii) of SI. No. 3 of Notification No. 11/2017 (as amended), and the appeal is otherwise dismissed. Issues involved:1. Classification of services under SAC Heading 998621.2. Alternative classification under SAC Heading 9983.3. Correct classification under SAC Heading 9954.4. Validity of AAR's ruling on classification and applicable tax rate.Summary:I. Classification under SAC Heading 998621:The Appellant contended that the services provided under the EPC contract should be classified as 'support services to oil and gas extraction' under SAC Heading 998621. They argued that their activities, including construction and installation of infrastructure for gas extraction, fall within this category as per the CBIC Circular No. 114/33/2019-GST and the United Nations Central Product Classification (UNCPC). However, the ruling clarified that the services provided by the Appellant involve the creation of infrastructure, which is distinct from support services to oil and gas extraction. Support services, as defined, include activities like derrick erection, well casing, and cementing, which are directly related to the extraction process, not the establishment of infrastructure. Hence, the Appellant's activities do not fall under SAC Heading 998621.II. Alternative classification under SAC Heading 9983:The Appellant alternatively suggested that their services could be classified under SAC Heading 9983 as 'other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both.' They argued that their project management services, including design, planning, and commissioning, fall within this category. However, the ruling noted that SAC Heading 9983 primarily covers geological and geophysical consulting services and mineral exploration and evaluation, which are distinct from the construction and installation activities undertaken by the Appellant. Therefore, the Appellant's services do not merit classification under SAC Heading 9983.III. Classification under SAC Heading 9954:The ruling confirmed that the services provided by the Appellant are classifiable under SAC Heading 9954, which pertains to construction services. The Appellant's activities, including the construction of well pads, pipelines, terminals, and other infrastructure, clearly fall within this category. The ruling emphasized that the Appellant's contract involves a composite supply of services and goods, amounting to a works contract as defined under clause (119) of Section 2 of the CGST Act, 2017. Therefore, the appropriate classification for the Appellant's services is under SAC Heading 9954.IV. Validity of AAR's ruling on classification and applicable tax rate:The Appellant challenged the AAR's ruling on the grounds that it was based on a non-existent provision of law, as the relevant entry in the rate notification had been omitted. The ruling acknowledged this omission but clarified that the classification under SAC Heading 9954 remains valid. The applicable tax rate for the Appellant's services, as per item (xii) of entry at SI. No. 3 of Notification No. 11/2017-CT (R), dated 28.06.2017, is 18% (9% CGST + 9% SGST).Conclusion:The Appellant's services are correctly classified under SAC Heading 9954 as construction services, attracting a tax rate of 18%. The claims for classification under SAC Heading 998621 or 9983 are not sustainable based on the nature of the activities described in the EPC contract. The ruling of the AAR, except for the tax rate reference, is upheld.