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of <h1>Non-government entities excluded from Notification cl. 3(vi); works contracts taxable at 18% GST from 1 Jan 2022</h1> AAR held the applicant and the recipient do not qualify as a Union territory or local authority for GST purposes, so contracts previously eligible under ... Rate of GST applicable on the project scope of work before and after the amendment in the N/N. 11/2017-Central Tax (Rate) dated 28June 2017 - the term “Government entity” was removed from serial no. 3(vi) of the notification w.e.f. 01 January 2022 and thereafter the serial no. 3(vi) of the notification was omitted w.e.f. 18 July 2022 - operation and maintenance services post implementation would qualify as composite supply of works contract or not. What is the rate of GST applicable on the project scope of work before and after the said amendment in the notification? - HELD THAT:- This Authority is of the considered view that the applicant, Delhi Police and CDAC do not qualify as a Union territory under UTGST Act. 2017 or a local authority under Section 2(69) of the GST Act, 2017 for the purposes of GST law. The contracts were initially covered under Clause 3(vi) of Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017, which prescribed a concessional GST rate of 12% for works contract services provided to the Central Government, State Government, Union territory, local authority, Governmental Authority, or Government Entity. However, changes were introduced through Notification No. 22/2021-Central Tax (Rate), effective 1 January 2022, which removed Governmental Authorities and Government Entities from the list of eligible recipients under Clause 3(vi). Further, Notification No. 3/2022-Central Tax (Rate) dated 13 July 2022 omitted Clause 3(vi) entirely from the rate notification with effect from 18 July 2022, thereby eliminating the concessional tax rate category for such works altogether. As a result of these legislative changes, any works contract services delivered by the Applicant to CDAC shall now fall under Clause 3(xii) of the same notification instead of clause 3(vi) under which the rate was 12% prior to aforesaid legislative changes w.e.f. 01st January. 2022. Consequently, such services shall attract GST at the rate of 18% with effect from 01 January 2022 in respect of the applicant. Whether the operation and maintenance services post implementation would qualify as composite supply of works contract? - HELD THAT:- The services relating to the operation and maintenance of the surveillance system, when provided as part of a package with installation and commissioning, should be treated as a composite supply of works contract under GST law. Following the deletion of the concessional 12% GST rate due to the deletion of the entry at Sr. No.3 (vi) of the instant notification, provision for such works contract services (specifically via Clause 3(vi)), O&M services rendered by the Applicant under the Contract with CDAC shall attract GST at the rate of 18% with effect from 01 January 2022 and more clearly with effect from 18 July 2022. This position flows from both the current legal provisions and prevailing industry practice, which sees O&M as an integral element of works contract supply rather than a separable or stand-alone service. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the implementation (supply, installation, commissioning) of the city-wide surveillance system qualifies as a works contract/original works under Section 2(119) of the CGST Act and Notification No.12/2017 (original works) and, if so, the rate of GST applicable before and after amendments to Serial No.3(vi) of Notification No.11/2017 (i.e. effect of notifications dated 31.12.2021 and 13.07.2022). 2. Whether operation and maintenance (O&M) services provided post-implementation form part of a composite supply of works contract (with the principal supply being the works contract) and, consequently, the GST rate applicable to such O&M services in light of the amendments to Serial No.3(vi) of Notification No.11/2017. 3. Whether the recipient(s) of the services (the contracting government-related entities) qualify as a 'Union territory' or a 'local authority' for the purpose of eligibility under Serial No.3(vi) as amended. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Qualification of implementation as works contract / original works and applicable GST rate pre- and post-amendments Legal framework: Section 7 (supply) and Schedule II (entry treating works contract as supply of services) read with Section 2(119) (definition of 'works contract') govern classification; Notification No.11/2017 prescribes concessional rates for certain construction/works-contract composite supplies (Serial No.3(vi)); Notification No.12/2017 defines 'original works.' Amendments by notification dated 31.12.2021 substituted the list of eligible recipients and the subsequent notification dated 13.07.2022 omitted Serial No.3(vi) effective 18.07.2022. Precedent treatment: State AAR orders (noted by the Authority) - prior AAR determinations treated comprehensive CCTV/surveillance projects as immovable property and works contracts (e.g., Allied Digital; Sterlite) and applied works-contract/works classification; relevant judicial principles on annexation and object of annexation (Municipal Corporation of Greater Bombay v. Indian Oil Corporation; Duncan-affiliated jurisprudence) were relied upon to determine permanence. Interpretation and reasoning: The surveillance system comprises permanently affixed poles/cantilevers, underground OFC, raised flooring, server racks, integrated command centres and permanent ICCC infrastructure; these components, when considered by extent and object of annexation, indicate permanence and attachment to earth. Applying the tests from established authority (extent of annexation and object/intention of annexation), the components are intended for long-term city-wide surveillance and are not temporary or movable in ordinary course. Transfer of property in goods occurs in execution of the contract intertwined with installation/erection. Therefore the implementation satisfies the statutory indicia of a works contract under Section 2(119) and also falls within 'original works' as per Notification No.12/2017 Clause 2(zs) (erection/commissioning/installation of plant, machinery or equipment or structures). Ratio vs. Obiter: Ratio: The determination that the implementation constitutes a works contract/original works (based on annexation test and object of annexation) is central to the ruling and operates as binding reasoning for classification under GST. Conclusions: Prior to amendment (i.e., before 01.01.2022) Serial No.3(vi) covered composite works-contract supplies to specified government-related recipients at concessional rate (12%); with the substitution effective 01.01.2022 and eventual omission effective 18.07.2022, the concessional category was narrowed and subsequently removed. For the present contract, the Authority finds implementation qualifies as works contract/original works; in consequence, after the amendment(s) such works-contract services fall outside the omitted concessional entry and attract the general rate applicable to comparable construction/works services (18% - 9% CGST + 9% SGST) with effect from 01.01.2022 (and more clearly after 18.07.2022 when the entry was omitted). Issue 2 - Whether O&M services post-implementation qualify as composite supply of works contract and applicable rate Legal framework: Section 2(30) (definition of composite supply), Section 2(90) (principal supply), Schedule II (treatment of works contract as supply of services), and Section 2(119) (works contract) are determinative. Notification No.11/2017 (Serial No.3(vi)) historically provided concessional rate for composite works-contract supplies to certain public bodies; amendments affected eligibility. Precedent treatment: Prior AAR holdings (Allied Digital; Sterlite) treated comprehensive surveillance/network projects as works contracts with composite supply character. Industry practice and prior rulings view O&M as integral to EPC/works contracts in government tenders. Interpretation and reasoning: The O&M obligations (preventive/corrective maintenance, spare replacement, helpdesk, SLA compliance, manpower, facility management, network monitoring, integration support) are contractually inseparable from the initial erection/commissioning; they are naturally bundled and are supplied in conjunction with the principal works-contract supply. The objective and commercial reality - that the infrastructure would be non-functional for its intended purpose without O&M - supports classification of O&M as ancillary to the principal works-contract supply. Accordingly, under the composite-supply test the principal supply is the works contract (installation/erection/commissioning) and O&M is ancillary. Ratio vs. Obiter: Ratio: The conclusion that O&M services provided as part of the same contract form a composite supply with the principal works-contract supply (and thereby inherit the tax treatment of the principal supply) is a binding outcome of the analysis. Conclusions: Where O&M is contractually bundled and naturally linked to erection/installation/commissioning, it constitutes a composite supply of a works contract. Given the amendment and omission of Serial No.3(vi), such bundled works-contract supplies (inclusive of O&M) attract the general works/ construction rate - determined here as 18% (9% CGST + 9% SGST) with effect from 01.01.2022 (and consequent to the omission effective 18.07.2022). Issue 3 - Whether recipient(s) qualify as 'Union territory' or 'local authority' for eligibility under Serial No.3(vi) Legal framework: Definitions under UTGST Act and Section 2(69) of the GST Act for 'Union territory' and 'local authority' govern eligibility for concessional entries. The textual definitions are exhaustive. Interpretation and reasoning: The contractual counterparties (an autonomous society/agency and the police) do not fall within the statutory definitions of 'Union territory' or 'local authority' as enumerated (which include specified territories under UTGST or defined municipal/local bodies). A conjoint reading shows such government-related entities are not automatically equated to Union territory or local authority for the purpose of the concessional entry. Ratio vs. Obiter: Ratio: The finding that the recipients in this contract do not qualify as 'Union territory' or 'local authority' for Serial No.3(vi) eligibility is determinative for applicability of the concessional rate. Conclusions: The recipients are not within the statutory definitions of Union territory or local authority; hence, post-amendment the contract does not qualify for the narrowed concessional category and must be taxed under the residual/general applicable rate (18%). Ancillary observations 1. The Authority relied on established principles of annexation (extent and object), industry practice in EPC/government contracts, and prior administrative rulings to determine composite supply and works-contract character; those precedents were followed rather than distinguished or overruled. 2. The classification conclusions are ratio decidendi for tax treatment of implementation and bundled O&M in the factual matrix described; application to different factual matrices would require fresh analysis of permanence/annexation and contractual bundling.
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