2025 (11) TMI 111 - AAR - GST

Ruling: Flow meter maintenance charges are separate from recycled water principal supply under Section 2(30) CGST, taxable 18%

AAR held that maintenance charges for flow meters installed at end-user premises do not form an integral part of the principal supply of recycled water ... Classification of suuply - composite supply or not - maintenance charges of flow meters installed at the end user premises to record the recycled water falls - rate applicable to principal supply - HELD THAT:- It is evident that the maintenance charges levied for flow meters do not form an integral part of the principal supply, and hence, cannot be regarded as a composite supply within the meaning assigned under Section 2(30) of the CGST Act. A composite supply requires that two or more taxable supplies be naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which must be a principal supply. In the present instance, the maintenance of flow meters constitutes a distinct, standalone supply that is not naturally bundled with the supply of recycled water. It is not incidental or ancillary to the supply of water and is capable of being rendered independently by any third-party service provider. As such, it does not satisfy the essential conditions required to qualify as a composite supply. The maintenance of flow meters is to be treated as a standalone supply of service, falling under Heading 9987 – Maintenance, repair and installation (except construction) services, taxable at 18% (9% CGST + 9% SGST) under Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended. The earlier ruling of the Authority confirming nil rate for recycled water under Sl. No. 99 of Notification No. 02/2017-CT(R) continues to hold good and is not disputed. However, the ancillary maintenance charges cannot take the character of the principal supply, as they are independent, contractual, and separately priced.\ The maintenance of flow meters installed at HPCL’s premises does not form part of a composite supply with recycled water. The said activity is independent supply of service, classifiable under SAC 9987, and liable to GST at 18%. ISSUES PRESENTED AND CONSIDERED 1. Whether maintenance charges for flow meters installed at the end-user premises to record recycled water constitute a composite supply with the supply of recycled water under Section 2(30) of the CGST Act. 2. If treated as a composite supply, whether the principal supply's nil rate (exemption for recycled water) applies to the ancillary maintenance charges. 3. If not a composite supply, the proper classification (SAC/HSN) and applicable GST rate for the maintenance charges. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Whether maintenance charges for flow meters constitute a composite supply with recycled water Legal framework: Composite supply is defined in Section 2(30) of the CGST Act; a composite supply requires two or more taxable supplies that are 'naturally bundled' and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Section 2(90) defines 'principal supply.' Section 8(a) provides that tax on a composite supply is determined by treating the supply as that of the principal supply. Guidance on 'naturally bundled' from prior CBIC circulars and service taxation guidance (Finance Act, 1994 era) is relevant for indicators of bundling (consumer perception, common market practice, single price/packaging, elements not available separately, integral nature). Precedent treatment: The Authority relied on the explanatory guidance in CBIC materials (Taxation of Services: An Education Guide) to identify indicators of natural bundling. An earlier Advance Ruling by the Authority recognising recycled water as nil-rated was noted and applied to the principal supply only; the prior ruling on nil rate for recycled water is treated as operative for that component. Interpretation and reasoning: The Court examined contractual terms (explicit separate charge of 0.75% for maintenance, separate supply prices for product/clear water, separate clauses for metering and calibration) and factual matrix (only flow meters installed at end-user premises, no other automation/instrumentation at premises, maintenance charged separately monthly and subject to revision). Applying the 'naturally bundled' indicators, the Court found: (a) the maintenance charges are separately priced and contractually segregated; (b) the maintenance service is capable of being provided independently by third parties; (c) the maintenance is not integral such that removing it would fundamentally change the nature of the supply of water; and (d) there is no single packaged price or ordinary market practice indicating that maintenance is supplied only as part of water supply. Ratio vs. Obiter: Ratio - where contractually and factually the maintenance of meters is separately charged, is capable of independent supply, and is not naturally bundled in the ordinary course of business, it does not qualify as a composite supply with recycled water. Observations on indicators from CBIC guidance are interpretative aids (supporting ratio) rather than novel legal propositions. Conclusion: The maintenance of flow meters does not form part of a composite supply with the supply of recycled water under Section 2(30). (Cross-reference: Issues 2 and 3.) ISSUE-WISE DETAILED ANALYSIS - Issue 2: If composite, whether the principal supply's nil rate applies to maintenance charges Legal framework: Section 8(a) mandates treating a composite supply as a supply of the principal supply for tax liability; therefore, if maintenance were a component of a composite supply whose principal supply is nil-rated, the ancillary component would inherit that rate. Precedent treatment: The Authority acknowledged its prior ruling that recycled water qualifies for nil rate under the relevant notification; that ruling remains applicable to the supply of recycled water itself. Interpretation and reasoning: Because the Court concluded (Issue 1) that maintenance charges are not part of a composite supply, the question of applying the principal supply's nil rate to the maintenance component does not arise. The Court explicitly treated the query as contingent on the composite supply determination and determined that, on facts and contract, no composite supply exists. Ratio vs. Obiter: Ratio - where a component is not part of a composite supply, it cannot inherit the principal supply's tax character; the Court's treatment that the question of nil rate application 'does not arise' is dispositive for the present facts. Conclusion: Not applicable - the principal supply's nil rate cannot be applied to the maintenance charges because maintenance is not part of a composite supply. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Classification and taxability of maintenance charges if not composite Legal framework: Independent services are to be classified under the appropriate SAC/HSN and taxed as per notifications; maintenance, repair and installation (except construction) services are commonly classified under Heading/SAC 9987 and attract the standard rates specified in the rate notifications. Precedent treatment: The Authority treated installation and subsequent maintenance as distinct supplies in line with prior rulings and the legislative scheme separating supply characterization from tax rate applicability; the earlier advance ruling on recycled water being nil was preserved for that supply alone. Interpretation and reasoning: Given the contractual separation (explicit clause for maintenance charges), independent nature of the service (third parties can perform calibration/maintenance), separate periodic billing, and absence of other instrumentation at the delivery point, the maintenance of flow meters is a standalone supply of service. The Authority classified it under SAC 9987 - 'Maintenance, repair and installation (except construction) services' - and applied the applicable standard rate under the rate notification (18% total: 9% CGST + 9% SGST for the State jurisdiction). The factual finding that only flow meters (and UPS backup from GVSCCL) are present, with no broader automation integral to the water supply, reinforced independent classification. Ratio vs. Obiter: Ratio - maintenance of meters in these circumstances is an independent taxable service classifiable under SAC 9987 and taxable at 18%. Observations about capability of third-party provision and indicators of separability support the ratio. Conclusion: Maintenance charges are an independent supply of services classifiable under SAC 9987 and taxable at 18% (9% CGST + 9% SGST). The earlier ruling that recycled water is nil-rated remains applicable to the recycled water supply only; ancillary maintenance charges do not share that nil status. ADDITIONAL REASONING NOTES AND CROSS-REFERENCES - Contractual allocation of consideration and explicit separate charging are determinative indicia; where maintenance is separately priced and invoiced, it weighs against composite supply characterization (see Issue 1 and Issue 3). - The 'naturally bundled' test is fact-sensitive; indicators such as market practice, consumer expectation, single pricing, and integrality were applied to the factual record and found absent for bundling here (cross-reference Issue 1). - Preservation of prior advance ruling on nil rate for recycled water: That ruling governs only the supply of recycled water and does not extend to separately charged maintenance services (cross-reference Issues 2 and 3). CONCLUSIVE RULINGS (ratio): - Maintenance charges for flow meters installed at the end-user premises do not constitute a composite supply with the supply of recycled water. - The question of applying the principal supply's nil rate to maintenance charges does not arise. - Maintenance services are classifiable under SAC 9987 and taxable at 18% (9% CGST + 9% SGST) as per the relevant rate notification.