Local authorities u/s2(69) CGST, composite O&M contracts partly exempt under Entry 3A of Notification 12/2017

The AAR held that the recipient Municipal Corporation and Municipalities are "local authorities" under s.2(69) CGST Act and that the activities are in relation to functions entrusted under Arts. 243G and 243W. However, the services provided are not invariably "pure services" under Entry 3 of N/N. 12/2017, as several contracts involve supply of spare parts and other goods. The supplies are to be treated as composite supplies, with the principal supply being operation and maintenance of movable goods (vehicles and machinery). Exemption under Entry 3A is available only where the value of goods does not exceed 25% of the total contract value.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether operation and maintenance services provided to municipal corporations and municipalities qualify as exempt "pure services" under Entry 3 of Notification No. 12/2017-Central Tax (Rate).

1.2 Whether operation and maintenance services provided to municipal corporations and municipalities qualify as exempt composite supplies under Entry 3A of Notification No. 12/2017-Central Tax (Rate).

1.3 Whether the concerned municipal corporations and municipalities constitute "local authority" and whether the activities performed are "in relation to" functions entrusted under Articles 243G and 243W of the Constitution.

1.4 How the remaining operation and maintenance contracts are to be classified and taxed where the value of goods exceeds 25% of the total value of supply.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 and 2: Exemption under Entry 3 (pure services) and Entry 3A (composite supply) of Notification No. 12/2017-Central Tax (Rate)

Legal framework

2.1 The Court considered Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, Entry 3, which exempts "pure services (excluding works contract service or other composite supplies involving supply of any goods)" provided to Central Government, State Government, Union territory, local authority or governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution.

2.2 The Court also considered Entry 3A of the same notification (inserted by Notification No. 02/2018-Central Tax (Rate) dated 25.01.2018), which exempts composite supplies of goods and services where the value of goods does not exceed 25% of the total value, subject to similar recipient and functional conditions under Articles 243G and 243W.

2.3 The Court referred to the definitions and concepts of "pure services" (not defined in the GST Act but understood as supply of services without any supply of goods), "composite supply" under Section 2(30) of the GST Act, and to Articles 243G, 243W along with the Eleventh and Twelfth Schedules of the Constitution.

Interpretation and reasoning

2.4 The Court identified three cumulative conditions for exemption under Entry 3: (a) the supply must be a pure service (excluding works contract and other composite supplies involving goods); (b) the recipient must be Central Government, State Government, Union territory, local authority or governmental authority; and (c) the activity must be in relation to a function entrusted under Article 243G or 243W.

2.5 For Entry 3A, the Court held that the following conditions must be cumulatively satisfied: (a) the supply must be a composite supply of goods and services; (b) the value of goods component must not exceed 25% of the total value; (c) recipient must be Central Government, State Government, Union territory, local authority, governmental authority or government entity; and (d) the activity must be in relation to functions entrusted under Article 243G or 243W.

2.6 On examination of the work orders produced (seventeen categories of contracts relating to operation and maintenance of compactors, SWM vehicles, tippers, jetting-cum-suction machines, deep suction vehicles, desilt machines, ambulances, hearse vans, hydraulic ladder, movable toilets, sanitising machines, compost units, cesspool emptiers, and engagement of manpower for cleaning, sweeping, park maintenance, etc.), the Court segregated activities by their nature.

2.7 The Court found that the activities under serial nos. 5, 6 and 16 (engaging unskilled labour and driver for cleaning Ganga ghats; cleaning and maintenance of municipality office with sufficient manpower along with some machinery; and engagement of manpower for regular sweeping, cutting of grass, cleaning of wedges with equipment in municipality parks) were essentially supplies of manpower for municipal functions and therefore of the nature of pure services.

2.8 The remaining work orders, primarily involving operation and maintenance of vehicles and machinery used for solid waste management, sewerage/drainage and public health, were held to be maintenance of movable goods (vehicles and machinery) and thus to involve supply of goods (e.g., spare parts, consumables), making them composite supplies.

2.9 The Court noted that in at least one work order (annual operation and maintenance contract of movable compactor for Baranagar Municipality) supply of spare parts was explicitly included. Even where not explicitly mentioned, the nature of maintenance contracts implied possible supply of goods. In absence of detailed contract documents and specific evidence on the quantum of goods supplied, the Court treated these as composite supplies whose exemption would depend on the proportion of goods value.

Conclusions

2.10 Supplies relating to (i) unskilled labour and drivers for cleaning Ganga ghats for special cleanliness drive; (ii) manpower for cleaning and maintenance of municipality office; and (iii) manpower for regular sweeping, cutting of grass and cleaning of wedges in municipality parks are pure services. Since they are provided to local authorities and relate to functions entrusted under Articles 243G/243W, they fall under Entry 3 of Notification No. 12/2017-Central Tax (Rate) and are exempt.

2.11 All other operation and maintenance contracts examined are composite supplies, with maintenance of movable goods as principal supply and with a goods component (spares, parts, etc.). If, in such contracts, the value of supply of goods does not exceed 25% of the total value of supply, those services fall under Entry 3A of Notification No. 12/2017-Central Tax (Rate) (as amended by Notification No. 02/2018-Central Tax (Rate)) and are exempt.

2.12 If, in those composite supplies, the value of goods exceeds 25% of the total value, the services do not qualify under Entry 3A and are taxable, classified under SAC 9987 and covered by Serial No. 25 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended, attracting GST at 9% CGST + 9% SGST.

Issue 3: Status of municipalities as "local authority" and nexus with constitutional functions

Legal framework

2.13 The Court referred to Section 2(69) of the GST Act, which defines "local authority" to include a "Municipality" as defined in Article 243P(e) of the Constitution, and to Article 243Q which provides for constitution of municipal councils and municipal corporations.

2.14 The Court examined Articles 243G and 243W and the Eleventh and Twelfth Schedules, particularly entries concerning health and sanitation, public health, sanitation, conservancy, solid waste management, urban amenities including parks and public conveniences, roads and public health-related functions.

Interpretation and reasoning

2.15 The Court held that Howrah Municipal Corporation, Baranagar Municipality and Uttarpara-Kotrung Municipality each qualify as "local authority" within the meaning of Section 2(69)(b) of the GST Act read with Article 243P(e) and Article 243Q of the Constitution.

2.16 The Court found that the activities undertaken under the various work orders-relating to solid waste management, sewerage and drainage, cleaning of Ganga ghats, maintenance of municipal offices, park maintenance, public health-related machinery and vehicles-are in relation to functions entrusted to local bodies, including those reflected in Serial Nos. 13 and 23 of the Eleventh Schedule (roads, health and sanitation) and Serial Nos. 4, 6, 12 and 17 of the Twelfth Schedule (roads and bridges, public health, sanitation, solid waste management, urban amenities such as parks, and public amenities including public conveniences).

Conclusions

2.17 The municipal corporations and municipalities receiving the services are "local authorities" for purposes of Notifications No. 12/2017-Central Tax (Rate) and 11/2017-Central Tax (Rate).

2.18 The services in question are "by way of activity in relation to" functions entrusted under Articles 243G and 243W, thereby satisfying the functional requirement for exemption under Entries 3 and 3A of Notification No. 12/2017-Central Tax (Rate), subject to classification of each supply as pure or composite and to the 25% goods-value condition where applicable.

---