Testing and commissioning rail track services classified as pure construction service under Sl. No. 3(xii) attracting 18% GST

The AAR held that the testing and commissioning service of rail tracks provided by the applicant is not a composite supply or works contract under Sl. No. 3(vi)(a) of Notification No. 11/2017-Central Tax (Rate). Since the supply of goods and erection services are contracted separately with distinct parties, the services by the applicant do not involve transfer of goods property and cannot be combined as a works contract. The service qualifies as a pure construction service under Chapter heading 9954 and is classifiable under Sl. No. 3(xii) of the Notification, attracting GST at 18%.

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1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the testing and commissioning service of Rail Track provided by the applicant is classifiable under Sl. No. 3 (vi) (a) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 (as amended), which pertains to composite supply of works contract services provided to government entities for civil structures or original works predominantly for non-commercial use, attracting GST at 12% (6% CGST + 6% SGST)Rs.

(b) If the answer to the above is negative, then what is the correct classification and applicable rate of GST on the said serviceRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Testing and Commissioning Service under Sl. No. 3 (vi) (a) of Notification No. 11/2017-Central Tax (Rate)

Relevant Legal Framework and Precedents:

The GST Act defines "works contract" under Section 2(119) as a contract involving building, construction, erection, commissioning, or similar activities relating to immovable property wherein transfer of property in goods is involved. Schedule II, Para 6(a) treats works contract as a supply of service. Section 2(30) defines "composite supply" as naturally bundled supplies with one principal supply. Section 8 prescribes that tax liability on composite supply is determined by the principal supply.

Notification No. 11/2017-Central Tax (Rate), Sl. No. 3(vi)(a), provides concessional GST rate of 12% on composite supply of works contract services provided to government entities for civil structures or original works predominantly for non-commercial use.

Precedents such as State of Madras v. Gannon Dunkerley & Co., Kone Elevator India Ltd. v. State of Tamil Nadu, and Indure Ltd. v. CTO, were considered to understand the nature of composite versus independent contracts, and the principle of indivisibility in turnkey projects.

Court's Interpretation and Reasoning:

The applicant argued that the contract for supply of goods and the contract for erection and commissioning are parts of one indivisible turnkey works contract, naturally bundled, and hence the entire contract should be treated as a composite supply of works contract service attracting GST at 12% under Sl. No. 3(vi)(a). The applicant emphasized the presence of cross-fall breach clauses, integrated obligations, and the tailor-made nature of supplied goods, indicating a single composite contract.

The jurisdictional officer and the Authority examined whether the supply of erection and commissioning service by the applicant involved transfer of property in goods, a key element for works contract classification. It was noted that the supply of goods was by the affiliate overseas entity, while the applicant only provided erection and commissioning services without transferring goods.

The Authority observed that the goods and services were supplied by two separate entities under distinct contracts with separate invoices and consideration, and that the supplies were not naturally bundled. The goods were supplied by the overseas affiliate directly to the client, and the applicant's service was limited to erection and commissioning using materials provided by the client.

Reliance was placed on the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan, which held that consumables used in execution of a contract do not amount to transfer of property in goods. Similarly, the applicant's use of consumables like welding rods and grinding wheels did not amount to transfer of goods.

Key Evidence and Findings:

• Separate purchase orders and invoices for supply of goods and erection services.
• Distinct contractual obligations and timelines for supply and erection services.
• Absence of transfer of property in goods by the applicant.
• Use of consumables by the applicant without transfer of ownership.
• Deletion of Sl. No. 3(vi)(a) from Notification No. 11/2017 by amendment effective 18.07.2022.

Application of Law to Facts:

Since the applicant did not transfer property in goods and the supply of goods and services were by separate entities under separate contracts, the service of erection and commissioning did not qualify as a works contract service under Section 2(119). The supplies were not naturally bundled and hence not a composite supply under Section 2(30). Therefore, classification under Sl. No. 3(vi)(a) of Notification No. 11/2017 was not applicable.

Treatment of Competing Arguments:

The applicant's argument for composite supply based on turnkey project principles and cross-fall breach clauses was rejected on the ground that the contracts were distinct and separate, with no principal supply linking them. The jurisdictional officer's contention that the service was a pure service and not a works contract was accepted.

Issue 2: Correct Classification and Applicable GST Rate if Not Classified under Sl. No. 3 (vi) (a)

Relevant Legal Framework and Precedents:

Notification No. 11/2017-Central Tax (Rate), Sl. No. 3(xii) covers construction services other than those specified under Sl. Nos. (i) to (xi), attracting GST at 18% (9% CGST + 9% SGST). The service of erection and commissioning, when not qualifying as works contract, falls under this residuary category.

Court's Interpretation and Reasoning:

The Authority found that since the applicant's service was solely erection and commissioning using materials supplied by the client or affiliate, without transfer of goods, it was a pure service. Such services fall under Sl. No. 3(xii) of Notification No. 11/2017 and attract GST at 18%.

Key Evidence and Findings:

• Invoices and purchase orders showing separate supply and service contracts.
• Applicant's own admission of paying GST at 18% on erection and commissioning services.
• Legal provisions and notifications specifying 18% GST rate on construction services not covered under other specific entries.

Application of Law to Facts:

Given the nature of the service and absence of transfer of property in goods, the erection and commissioning service is classified under Sl. No. 3(xii) of Notification No. 11/2017, attracting 18% GST.

Treatment of Competing Arguments:

The applicant's contention for 12% GST under works contract classification was rejected on the grounds discussed above. The jurisdictional officer's stand for 18% GST under construction services was upheld.

3. SIGNIFICANT HOLDINGS

"The supply by the applicant does not involve any transfer of property in goods from the applicant to their client, the said service cannot be considered as a works contract."

"Though both the supplies are covered under the same purchase order, we find that in effect, as far as GST is concerned, both the orders are separate and clearly divisible and distinct, where both consideration and liability for breach of contract are distinct and separate on both the suppliers."

"The goods are being supplied by an overseas entity and the service is being provided by a different entity and therefore both the supplies cannot be combined together to classify the service provided by the applicant as a composite service."

"The service provided by the applicant in the present case is pure service of erection and commissioning on the basis of the materials submitted by the client."

"The classification under S. No. 3 (vi) (a) of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 would not be applicable in the present case as the supply of services of erection and commissioning by the applicant would not qualify as a composite supply of works contract service."

"The said services shall be classified under Heading 9954 and more specifically under Sr. No. 3(xii) of Notification 11/2017-Central Tax (Rate) dated 28.6.2017 and the rate of tax will be 18% i.e. @ 9% CGST + 9% SGST."

Core principles established include:

• For a service to qualify as a works contract under GST, there must be transfer of property in goods involved in execution of contract relating to immovable property.
• Separate contracts for supply of goods and for erection and commissioning services by different entities cannot be treated as a single composite supply or works contract.
• Use of consumables in erection and commissioning without transfer of ownership does not amount to transfer of property in goods.
• Classification and applicable GST rate depend on the nature of supply and contractual arrangements, not merely on the form of the contract or purchase order.

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