2024 (3) TMI 45 - AAAR - GST

EPC contract services for sulphate removal plant classified as construction services under SAC 9954, not oil and gas support services

In Re: M/s. ION Exchange (India) Limited

The AAAR Rajasthan ruled that EPC contract services for survey, designing, installation and commissioning of a sulphate removal plant are classifiable ... Classification of supply - survey, designing, installation and commissioning of project under EPC contract - to be classified under SAC Heading No. 9954 which relates to construction services or not - rate of tax applicable on the said supplies by the Appellant - SI. No. 3 (ii) of Notification No. 11/2017-CT(R), dated 28.06.2017 - time limitation for filing appeal. Whether the appeal has been filed within stipulated period (i.e. thirty days from the date on which the Ruling sought to be appealed against is communicated to the Appellant) prescribed under Section 100 (2) of CGST Act, 2017 or not? - HELD THAT:- It is found that the date of communication of the Order of AAR, Rajasthan to the Appellant was 21.09.2021 and the appeal was filed on the portal on 19.10.2021. Thus, the Appellant have filed the appeal within statutory period of 30 days of date of communication of the Order of the AAR. Whether the supplies proposed by the Appellant in pursuance of the EPC contract with M/s Vedanta Limited are classifiable under SAC Heading No. 998621 of the Scheme of classification of services of under Heading 9983 or under Heading 9954? - HELD THAT:- The Appellant have not denied the fact that supply of service under the EPC Contract in question also involves transfer of property in goods. The only contention by the Appellant in this regard is that the scope of Heading 9986 does not exclude Works Contract Service. As can be seen from the appeal as also from the EPC Contract submitted by the Appellant, the Appellant have been assigned the work related to establishment of infrastructure for the proposed Sulphate removal plant as well as other facility - One of the important aspects of the EPC Contract is that Appellant are responsible for doing civil or structural work which includes jungle clearance, Gabion Wall & mattress around the plot, foundation, structures, buildings like control building, sub-stations, switchyard, fire stations and sheds, roads, paving and drains etc. and the contract contains provisions which prescribe the quality of various types of material such as concrete for foundation and structural steel material. The Appellant shall also obtain all necessary approval. Coming to the proposed classification under Heading 998621 it is observed that the said heading covers ‘support services to oil and gas extraction’ which is self explanatory in as much as the services proposed to be classified under this heading provide support to the main activity of oil and gas extraction and such activity of extraction eventually requires the infrastructure facilities established. These three parts of the entire gamut of oil and gas extraction are clearly distinguished from each other. Support service has to be essentially distinct from the main activity of oil and gas extraction. And establishment of infrastructure facilities in the form of SRP, pipelines, control buildings, sub-stations, switchyards, toilets and fire stations, to illustrate a few, is clearly a distinct feature of the activity of oil and gas extraction. Hence, support services to oil and gas extraction is clearly distinguishable from establishment of infrastructure facilities for oil and gas extraction and the former cannot be confused with the latter. Since, the Appellant have been tasked with establishment of Sulphate Removal Plant, the activities undertaken by the Appellant in pursuance of the EPC Contract cannot, by any stretch of imagination, be said to be support services to oil and gas extraction. The distinction between the activities undertaken by the Appellant in terms of the EPC contract and the activities included in the definition of SAC Heading No. 998621 is strikingly clear. Therefore, the activities undertaken by the Appellant in pursuance of the EPC Contract cannot be classified under SAC Heading No. 998621 as these are not in the nature of support services to oil and gas extraction. SAC Heading No. 998341 covers a wide range of activities which include provision of advice, guidance and operational assistance concerning the location of oil and gas fields including feasibility studies. But, it is observed that the Appellant have not proposed to undertake any such activity rather the Appellant have proposed to undertake establishment/ creation/ construction of infrastructure facilities for oil and gas extraction(execution of Sulphate Removal Plant) which are quite different and distinct from the advice concerning location of gas fields. SAC Heading No. 9954 of the Scheme of Classification covers the overall construction services with SAC Heading No. 995425 the general construction services of mines and industrial plants. The explanatory notes clarify that the said service code includes construction services for mining and related facilities associated with mining operations. Since, oil and gas exploration is also a form of mining; therefore, the construction services proposed to be supplied by the Appellant for execution of Sulphate Removal Plant are appropriately classifiable under the SAC Heading No. 9954. Since, the nature of supply justifies its classification as construction services of mining, it is observed that there is no conflict suggesting preference to specific description under SAC Heading No. 998621 to general description under SAC Heading No. 9954 because the nature of activities clearly indicates that the supply is classifiable under SAC Heading No. 9954. Entry Sl. No. 3(ii) of Notification No. 11/2017-CT(R), dated 28.06.2017 was omitted with effect from 01.04.2019 and, therefore, the supplies proposed to be undertaken by the Appellant could not have been eligible for the rate prescribed therein. However, it is observed that up to Notification No. 3/2019-CT (R), dated 29.03.2019, major changes have been made in the said entry under Sl. No. 3 of the basic Notification No. 11/2017-CT(R), dated 28.06.2017 to provide for different rates of tax for supplies under the categories of supply of construction services or supply of works contract services - the said item (xii) of entry at Sl. No. 3 of Notification No. 11/2017-CT(R), dated 28.06.2017, as amended up to Notification No. 3/2019-CT (R), dated 29.03.2019 prescribes Central Tax @ 9% on the supplies proposed to be undertaken in terms of the EPC Contract and therefore, the supplies proposed to be undertaken by the Appellant attract tax at the rate of 18%. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the services provided under the EPC contract for the construction of a Sulphate Removal Plant are classifiable under SAC Heading No. 998621 as 'Support services to exploration, mining or drilling of petroleum crude or natural gas or both.'Alternatively, whether these services could be classified under SAC Heading No. 9983 as 'Other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both.'Whether the services are correctly classified under SAC Heading No. 9954 as 'Construction Services' and if so, what is the applicable GST rateRs.Whether the AAR's ruling, which classified the services under a non-existent entry in the rate notification, is valid.2. ISSUE-WISE DETAILED ANALYSISClassification under SAC Heading No. 998621Relevant legal framework and precedents: SAC Heading No. 998621 covers 'Support services to oil and gas extraction,' which includes activities like derrick erection, well casing, and cementing. The CBIC Circular No. 114/33/2019-GST provides clarification on this heading.Court's interpretation and reasoning: The court found that the services provided by the appellant were not support services to oil and gas extraction but were instead related to the establishment of infrastructure for extraction.Key evidence and findings: The EPC contract involved construction and installation activities, which are distinct from support services as described under SAC Heading No. 998621.Conclusions: The services do not qualify as support services to oil and gas extraction and are not classifiable under SAC Heading No. 998621.Classification under SAC Heading No. 9983Relevant legal framework and precedents: SAC Heading No. 9983 includes 'Other professional, technical and business services,' which are broad in nature.Court's interpretation and reasoning: The court concluded that the services provided did not fit within the scope of SAC Heading No. 9983, as they were primarily construction-related.Key evidence and findings: The appellant's activities were centered around construction and commissioning of infrastructure, not professional or technical consulting services.Conclusions: The services are not classifiable under SAC Heading No. 9983.Classification under SAC Heading No. 9954Relevant legal framework and precedents: SAC Heading No. 9954 pertains to 'Construction Services,' which includes construction of industrial plants and related facilities.Court's interpretation and reasoning: The court determined that the services provided under the EPC contract are construction services, as they involve the creation of infrastructure for oil extraction.Key evidence and findings: The EPC contract detailed activities such as construction, installation, and commissioning, which align with construction services.Conclusions: The services are correctly classified under SAC Heading No. 9954, attracting a GST rate of 18%.Non-existent Entry in AAR's RulingRelevant legal framework and precedents: The AAR's ruling referenced an entry in the rate notification that was omitted as of 01.04.2019.Court's interpretation and reasoning: The court acknowledged the omission but emphasized that the classification under SAC Heading No. 9954 remains valid.Conclusions: The AAR's ruling is modified to reflect the correct GST rate applicable under the existing provisions.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The supplies proposed to be undertaken by the Appellant are appropriately classifiable under SAC Heading No. 9954 answering to description 'Construction Services' which are in the nature of composite supply defined as works contract.'Core principles established: The classification of services must align with the specific activities detailed in the contract, and the applicable GST rate must be based on existing legal provisions.Final determinations on each issue: The services are classified under SAC Heading No. 9954, attracting a GST rate of 18%. The AAR's ruling is upheld with modifications to reflect the correct rate.The judgment comprehensively addresses the classification of services under the GST framework, emphasizing the importance of aligning service descriptions with contractual activities and ensuring compliance with current legal provisions.