Contractor's construction services for 380 flats denied GST exemption under Notification 12/2017 entry 10, attracts 18% tax rate

The AAR, Rajasthan ruled that a contractor's services for construction of 380 flats did not qualify for GST exemption under entry 10 of Notification 12/2017-Central Tax (Rate). The agreement required the applicant to provide machinery and materials besides labor, making it not a pure labor contract service. Additionally, it could not be established that the work was under Pradhan Mantri Awas Yojana. The services were classified under HSN code 9954(xii) attracting 18% GST rate as construction services under the residuary category.

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1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which exempts pure labour contracts related to construction under the Pradhan Mantri Awas Yojana (PMAY) or Housing for All (Urban) Mission, applies to the pure labour services provided by the applicant in the construction of flats under the Affordable Housing SchemeRs.

(b) If the exemption under Entry No. 10 is not applicable, then what is the correct classification and Harmonized System of Nomenclature (HSN) code for the pure labour services provided by the applicant, and what GST rate appliesRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 on the applicant's pure labour services

Relevant Legal Framework and Precedents:

Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) exempts from GST the intra-state supply of services provided by way of pure labour contracts related to construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or PMAY.

The exemption is subject to the condition that the services pertain to beneficiary-led individual house construction or enhancement under the specified government schemes.

A precedent cited by the jurisdictional officer was an earlier Advance Ruling (RAJ/AAR/2019-20/28) where pure labour contract services supplied for construction under PMAY were held to be exempt under the same notification.

Court's Interpretation and Reasoning:

The AAR examined the applicant's submissions, agreement documents, and comments from the jurisdictional officer. The applicant provided pure labour services under a subcontract with M/s BCM Builders LLP, who had a contract with the Rajasthan Government for construction of 380 flats under the Affordable Housing Scheme under PMAY.

However, on scrutiny of the agreement, the AAR found that the applicant was obligated not only to provide labour but also to supply machinery and other materials for the construction project. This fact was critical because the exemption under Entry No. 10 applies strictly to pure labour contracts, i.e., contracts where only labour services are provided without supply of materials or machinery.

Further, the exemption applies only to beneficiary-led individual house construction or enhancement under PMAY. The applicant was unable to furnish proof within the stipulated time that BCM Builders LLP was indeed working under PMAY. Without such proof, the exemption could not be extended to the applicant's services.

Key Evidence and Findings:

• The agreement between the applicant and BCM Builders LLP showed obligations beyond pure labour, including provision of machinery and materials.
• The applicant failed to provide documentary evidence confirming BCM Builders LLP's contract under PMAY within the required time.
• The jurisdictional officer's comments and prior Advance Ruling supported the principle that subcontracting does not alter the nature of the original contract, and pure labour subcontractors can claim exemption if all conditions are met.

Application of Law to Facts:

The AAR applied the legal definition of pure labour contracts and the conditions of the exemption notification to the facts. Since the applicant's contract included supply of machinery/materials, it did not qualify as a pure labour contract. Additionally, lack of proof regarding the PMAY project status meant the services did not fall within the scope of the exemption.

Treatment of Competing Arguments:

The applicant argued that the exemption should apply as the services were "activity-based" and subcontracting should not affect eligibility. The jurisdictional officer and AAR acknowledged this principle but emphasized the need for strict compliance with the conditions of the notification, especially the nature of contract and scheme applicability. The absence of proof and the mixed nature of the contract led the AAR to reject the exemption claim.

Conclusion on Issue 1:

The exemption under Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 does not apply to the applicant's services because the contract is not a pure labour contract and the applicant failed to establish that the services pertain to PMAY.

Issue 2: Classification and HSN code for the applicant's pure labour services if Entry No. 10 exemption is not applicable

Relevant Legal Framework:

Notification No. 11/2017-Central Tax (Rate) classifies construction services under Chapter 99, Section 5, Heading 9954. Various sub-items (i) to (xi) specify particular construction services attracting different GST rates. Services not covered under these sub-items fall under the residuary category (xii), which attracts GST at 18%.

Court's Interpretation and Reasoning:

The AAR examined the nature of the applicant's services and found that the services did not fit within any of the specified sub-items (i) to (xi) under Heading 9954. Therefore, the services fall under the residuary sub-head (xii) of Heading 9954.

Key Evidence and Findings:

• The applicant's services involved labour and machinery supply for construction, which did not align with the descriptions in sub-items (i) to (xi).
• The residuary category (xii) under Heading 9954 was the appropriate classification.

Application of Law to Facts:

Since the exemption was not applicable, the applicant's services are taxable under the residuary construction services category attracting GST at 18%.

Treatment of Competing Arguments:

The applicant sought clarity on classification if exemption was denied. The AAR provided clear guidance based on the statutory notifications and classification rules.

Conclusion on Issue 2:

The applicant's services are classifiable under HSN code 9954 (xii) attracting GST at 18%.

3. SIGNIFICANT HOLDINGS

The AAR held:

"As per the above entry of the notification we found the following main requirements to get the benefit of the above notification :- (a) Services provided by way of pure labor contracts. (b) Applicable only to the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana."

"Therefore, in view above facts, we hold that agreement between the applicant and M/s B.C.M. BUILDERS LLP is not a pure labour contract service supplied for construction of 380 flats in BCM Asiyana at Marwad Junction, Pali (Rajasthan)."

"Further, benefit of the relevant entry of the notification is applicable only to the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana. Here, we found that the applicant ... has not provided proof ... Therefore, on this ground alone, the service provides by the applicant for construction of flats is not covered under entry No 10 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (as amended)."

"On going through the Notification No. 11/2017-Central Tax (Rate) we found that the construction services fall under section 5 of Chapter 99 ... When we go through the description mentioned against item no. (i) to (xi), the nature of work do not found place in item no. (1) to (xi). As such, it shall fall under the residuary sub-head i.e. (xii) attracting GST at the rate of 18%. Hence, we hold that the service provided by the taxpayer fall under HSN code 9954 (xii) with GST rate 18%."

Final determinations:

1. Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 is not applicable to the applicant's services.

2. The applicant's services are classifiable under HSN code 9954 (xii) and attract GST at 18%.

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