Manpower services to contractor for government project denied GST exemption under notification 12/2017 due to indirect supply

The AAAR-WB ruled that appellant's manpower services to a contractor (WTL) for a government project do not qualify for GST exemption under notification 12/2017. The court held that exemption for pure services to government requires direct supply to government entities, not indirect supply through intermediaries. Since appellant contracted with WTL (who had the government contract), rather than directly with the Public Health Engineering Department, the services fail the direct supply test. The exemption requires satisfaction of all conditions including direct government supply, making further examination of constitutional function requirements unnecessary.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(i) Whether the supply of manpower services by the appellant qualifies as "pure services" under the GST law;

(ii) Whether the appellant's supply of services is made to the Central Government, State Government, Union Territory, or local authority, as required under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 for exemption;

(iii) Whether the services provided by the appellant are in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution of India;

(iv) Whether the appellant, as a sub-contractor supplying services to a government entity through a main contractor (WTL), is entitled to the exemption under the said Notification;

(v) The interpretation of the terms "recipient," "supplier," and "consideration" under the GST Act in the context of indirect supply chains;

(vi) The applicability and scope of exemption notifications to subcontracted services vis-`a-vis direct supplies to government entities;

(vii) The relevance and binding nature of advance rulings from other states and authorities in the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Classification of Services as Pure Services

Legal Framework and Precedents: Entry No. 3 of Notification No. 12/2017-Central Tax (Rate) exempts "pure services" provided to government entities. "Pure services" exclude works contract or composite supplies involving goods.

Court's Interpretation and Reasoning: The WBAAR and the Appellate Authority concurred that the appellant's supply of manpower services (labour services) does not involve any transfer of goods and thus qualifies as pure services.

Key Findings: No dispute arose on this point; the appellant's services are pure services.

Conclusion: The first condition for exemption is satisfied.

Issue (ii): Whether Services are Provided to Government or Local Authority

Legal Framework: Entry No. 3 of Notification No. 12/2017-Central Tax (Rate) requires that pure services be provided to the Central Government, State Government, Union Territory, or local authority to qualify for exemption.

Definitions under GST Act: Section 2(93) defines "recipient" as the person liable to pay consideration where consideration is payable. Section 2(105) defines "supplier" as the person supplying goods or services.

Court's Interpretation and Reasoning: The appellant provided services to WTL, a government undertaking company, which in turn supplied services to the Public Health Engineering Department (PHE), Government of West Bengal. The appellant raised invoices to WTL, which paid the appellant; WTL invoiced PHE. Therefore, the appellant's immediate recipient is WTL, not the government department directly.

The Appellate Authority examined whether WTL qualifies as a government entity or local authority. WTL is a State Government Undertaking (PSU) with over 50% government shareholding but does not possess powers of a local authority under Section 2(69)(c) of the GST Act. Hence, WTL is not a local authority or government entity for the purpose of exemption.

Accordingly, the appellant's supply is to WTL, a non-governmental recipient, failing the second condition.

Application of Law to Facts: Since the exemption notification mandates direct supply to government or local authority, indirect supply through an intermediary (WTL) is not covered.

Treatment of Competing Arguments: The appellant contended that despite invoicing WTL, the actual beneficiary and recipient of services is the government department (PHE), and therefore exemption should apply. The appellant relied on contractual facts, the nature of the project (Jal Jeevan Mission), and the principle that the actual user or beneficiary can be considered the recipient even if not liable to pay.

The Authority rejected this, emphasizing the statutory definition of recipient linked to liability to pay consideration and the explicit wording of the exemption notification requiring supply to government entities directly.

Conclusion: The second condition of direct supply to government or local authority is not satisfied by the appellant.

Issue (iii): Relation of Services to Functions Entrusted under Articles 243G/243W

Legal Framework: The exemption requires that services be in relation to functions entrusted to Panchayats or Municipalities under Articles 243G and 243W of the Constitution.

Court's Reasoning: Since the appellant failed to satisfy the second condition, the Authority refrained from examining this third condition, which is mandatory for exemption eligibility.

Conclusion: Not examined due to failure of prior condition.

Issue (iv): Entitlement of Sub-Contractor to Exemption

Legal Framework: The exemption notification does not explicitly provide for exemption to sub-contractors supplying services to main contractors who supply to government entities.

Court's Reasoning: The Authority noted that separate entries exist in other notifications to extend exemption to sub-contractors in specific contexts (e.g., works contracts). The absence of such provision in the relevant notification indicates no exemption for sub-contractors in the present case.

Conclusion: The appellant, as a sub-contractor supplying services to WTL, is not entitled to exemption.

Issue (v): Interpretation of "Recipient," "Supplier," and "Consideration"

Legal Framework: Definitions in Sections 2(93), 2(105), and 2(31) of the CGST Act are pivotal.

Court's Reasoning: The Authority emphasized the definition of recipient as the person liable to pay consideration. The appellant argued that the actual user or beneficiary can be considered recipient even if not liable to pay. However, the Authority held that the statutory definition centers on liability to pay consideration and that the appellant supplied services to WTL, who is liable to pay.

Application of Law to Facts: The appellant's invoices and payment flow confirmed WTL as recipient.

Conclusion: Recipient is WTL, not the government department, for GST exemption purposes.

Issue (vi): Applicability of Exemption Notifications to Indirect Supply Chains

Court's Reasoning: The Authority noted that the exemption notification explicitly requires direct supply to government or local authority. Extending exemption to indirect supplies through intermediaries is not supported by the notification's language.

Further, the Authority cited examples where specific provisions exist for sub-contractors in other notifications, underscoring the absence of such provision here.

Conclusion: Exemption does not extend to indirect supplies via intermediaries unless explicitly provided.

Issue (vii): Binding Nature of Advance Rulings from Other Jurisdictions

Legal Framework: Section 103 of the GST Act limits the binding effect of advance rulings to the parties and officers concerned.

Court's Reasoning: The Authority held that advance rulings from other states or authorities are not binding precedents and cannot be relied upon to override the statutory provisions or the facts of the present case.

Conclusion: The appellant's reliance on other advance rulings was not persuasive.

3. SIGNIFICANT HOLDINGS

"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."

"Exemption notification should be interpreted strictly, the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification."

"The phrase 'Pure Services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government, Union Territory, or local authority' as defined in entry sl. no. 3 of the CGST Rate Notification No. 12/2017-Central Tax (Rate) and corresponding WBGST Rate Notification No. 1136-F.T., both dated 28.06.2017, refers to a direct supply to the Central Government, State Government, Union Territory, or local authority, without the involvement of any other supplier."

"Section 103 of the GST Act explicitly states that the advance ruling pronounced by the Authority or the Appellate Authority under this Chapter shall be binding only on the appellant who had sought it and the concerned officer in respect of the appellant."

Core principles established include:

• Exemption notifications under GST must be strictly construed, with the burden on the supplier to establish eligibility.
• The recipient of services for exemption purposes is the person liable to pay consideration; indirect supply through intermediaries does not qualify.
• Sub-contractors supplying services to main contractors who supply to government entities are not entitled to exemption unless explicitly provided.
• Advance rulings are binding only on the parties to the ruling and cannot be treated as binding precedents.

Final determinations:

• The appellant's supply of manpower services is pure services.
• The appellant supplies services to WTL, not directly to the government or local authority.
• The appellant does not satisfy the mandatory condition of direct supply to government or local authority under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
• The exemption under the said notification does not apply to the appellant's supply.
• The ruling of the West Bengal Authority for Advance Ruling dated 20.12.2024 is upheld and confirmed.

---