Manpower services to private contractor for government project not exempt under GST N/N. 12/2017 due to indirect supply

AAR West Bengal ruled that manpower services provided by the applicant to a private entity (WTL) for a government project do not qualify for GST exemption under N/N. 12/2017. While the services were deemed "pure services," the exemption requires direct supply to government entities. Since the applicant contracted with WTL (who had the government contract), rather than directly with the Public Health Engineering Department, the second condition for exemption was not satisfied, making the services taxable under GST.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) are:

(a) Whether the services provided under the 'Jal Jeevan Mission' project to Government entities qualify as exempted services under the GST regime;

(b) Specifically, whether the services supplied by the applicant fall under the exemption notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, particularly entry number 3 which exempts "pure services" provided to Government entities in relation to functions entrusted to Panchayats or Municipalities under Articles 243G and 243W of the Constitution;

(c) Whether the applicant's supply of manpower services to Webel Technology Limited (WTL), which in turn provides services to the Public Health Engineering Directorate (PHED), Government of West Bengal, can be treated as supply directly to the Government for the purpose of exemption.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Services as Exempted under Notification No. 12/2017-Central Tax (Rate)

Relevant Legal Framework and Precedents: The GST Act, 2017, along with Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, governs the exemption of certain services from GST. Entry number 3 of this notification exempts "pure services" provided to Central Government, State Government, Union Territory, or local authority by way of any activity in relation to functions entrusted to Panchayats under Article 243G or Municipalities under Article 243W of the Constitution.

Court's Interpretation and Reasoning: The Authority examined whether the services supplied by the applicant qualify as exempted under this entry. The exemption requires satisfaction of three cumulative conditions:

• The supply must be "pure services" excluding works contract or composite supplies involving goods;
• The services must be provided directly to Government entities (Central, State, UT, or local authority);
• The services must relate to functions entrusted to Panchayats or Municipalities under the Constitution.

Key Evidence and Findings: The applicant supplies manpower services comprising Junior Engineers and Data Entry Operators to WTL, which holds the contract with PHED, Government of West Bengal, for executing the Jal Jeevan Mission project. The applicant initially charged GST at 18% based on the classification under HSN code 998513. Subsequently, PHED issued a memo asserting that GST on such services is NIL under the relevant notifications and directed WTL to refund the excess GST paid.

Application of Law to Facts: The Authority analyzed each condition:

• Pure Services: The applicant's supply involves only manpower services without transfer of goods, qualifying as "pure services."
• Recipient of Services: The applicant's contract is with WTL, not directly with PHED or any Government entity. Payment flows from WTL to the applicant, making WTL the recipient under Section 2(93) of the GST Act. Therefore, the applicant does not provide services directly to the Government.
• Relation to Entrusted Functions: Since the second condition fails, the Authority did not proceed to examine whether the services relate to functions under Articles 243G or 243W.

Treatment of Competing Arguments: The applicant contended that the services are taxable at 18% as supplied by the principal employer and fall under taxable manpower services. The Government entity (PHED) asserted exemption under the notification. The Authority gave weight to the contractual and payment structure, emphasizing the recipient definition under the GST Act, which negates direct supply to Government by the applicant.

Conclusion: The services supplied by the applicant do not satisfy the condition of being provided directly to Government entities. Hence, they do not qualify for exemption under entry number 3 of Notification No. 12/2017-Central Tax (Rate).

3. SIGNIFICANT HOLDINGS

The Authority's crucial legal reasoning is encapsulated in the following:

"The applicant provides services to Webel Technology Limited and not to the Public Health Engineering Department, Government of West Bengal. The instant supply of services would not qualify to be an exempted supply under serial number 3 of the notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended."

Core principles established include:

• The exemption under entry number 3 of Notification No. 12/2017-Central Tax (Rate) is contingent upon the supplier providing pure services directly to Government or local authorities in relation to specified constitutional functions;
• The contractual and payment nexus is critical in determining the "recipient" and thereby the applicability of exemption. Services supplied to an intermediary entity (WTL) are not deemed supplied to Government;
• All conditions enumerated in the exemption notification must be cumulatively satisfied to claim exemption;
• Manpower supply services, even if ultimately used for Government projects, do not automatically qualify for exemption if supplied through an intermediary.

Final determinations on the issues are:

• The services under the Jal Jeevan Mission project supplied by the applicant to WTL are taxable and not exempt under the said notification;
• The classification of services as exempted supply to Government entities under entry number 3 is not applicable where the supplier is not directly contracting with or receiving consideration from the Government;
• The GST charged at 18% by the applicant is justified, and the directive by PHED to refund GST is not sustainable in the context of the applicant's contractual position.

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