TaxTMI 
TaxTMI 
2020 (11) TMI 1041
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..... AAR No.16/AP/GST/2020 dated 13.05.2020 issued by the Authority for Advance Ruling, Andhra Pradesh. 1. Background of the Case: 1. Halliburton Offshore Services Inc. (LIH) is a global service provider, engaged in providing various oilfield services to Exploration and Production companies across the globe. The appellant has contracted for supply of bundled oilfield services to support the various oil and gas related operations in KG Offshore, East Coast of Indian Offshore waters. 2. The appellant is required to undertake the following bundled services. The relevant excerpts of the clause 2 of the agreement is produced below for reference: "2. Bundled Services Contract shall provide following services subject to detailed Scope of Work of each service: i) Mud Logging Services along with crew and Mud Logging Unit (MLU). Mud Logging data to be integrated with Rig's communication system for Real Time Data transmission from Rig to OPERATOR's onshore base offices. CONTRACTOR shall provide all hardware and software necessary to hook-up with rig's power supply and communication system. ii) Mud Services including mud chemicals along with crew. C....
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....rical supply. xiv) To take-up the job in accordance with the various articles and Schedule of Responsibilities." 3. In the course of supplying drilling/ mining services, the appellant uses its specialized equipment and tools for drillingoil and gas wells in offshore and onshore environment to pre-defined bottom hole targets which are carried out beneath the surface of the earth. The said equipment and tools are recorded as assets in books of the appellant. 4. During the normal course of its business, the appellant was awarded a Contract bearing letter of award no. 9010024545 dated 05.10.2016 by Oil and Natural Gas Corporation Limited (hereinafter referred to as "ONGC"). 5. While executing the aforesaid contract and providing the aforesaid bundled services, at certain instances the equipment and tools used by the appellant stuck lost/ damaged due to uncontrollable or unforeseen down hole environmental situations in the oil and gas well and might not be retrievable (the equipment/ tools lost in hole or damaged beyond repair are herein after referred to as "LIH equipment"). In such cases, the appellant receives reimbursement from ONGC towards such LIH equipment in te....
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....r Advance Ruling, Andhra Pradesh seeking advance ruling on the following questions: a. Whether reimbursement received towards LIH equipment can be considered as a "supply" as per section 7 of the CGST Act and hence liable to GST? b. If reimbursement received towards LIH equipment can be considered as supply and liable to GST, what would be the classification and the rate of GST applicable on such supply? Whether the same would be treated as "agreeing to tolerate an act" as per clause 5(e) of schedule II of the CGST Act, 2017 and subject to GST at the rate of 18% or the same would be treated as a composite supply of works contract' service (as a part of main service under the Contract) and thus, GST can be charged at the rate of 12% equivalent to the GST rate applicable for supply of composite 'works contract' services? 9. The Authority for Advance Ruling Andhra Pradesh in ruling orders in AAR No.16/AP/GST/2020 dated 13.05.2020 held: a) Reimbursement received towards LIH equipment is considered as a supply as per Section 7 of the CGST Act, 2017 and is liable to GST. b) The reimbursement received towards LIH equipment is classifiable as 'Supply ....
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....ining services. 1.6 In view of the aforesaid, it is submitted that the reimbursement made by ONGC to the Appellant for the LIH equipment and tools cannot be classified as independent supply of goods thereby attracting different rate of GST. It has to be treated as part of the overall bundle of services under the Contract, and accordingly charged to GST at the rate applicable to the principal supply made. 1.7 It is submitted that the Ld. Authority erred in holding that going by the methodology and nature of equipment/tools, the activity of reimbursement towards LIH/ damage beyond repair equipment/tools is rightly classifiable as "Supply of goods". 2. Reimbursement of LIH Equipment is a Composite Supply. 2.1. In terms of Section 2 (30) of the CGST Act, 2017, 'composite supply' is reproduced below: (30) "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof; which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is principal supply." 2.2. Upon the perusal of the above definition,....
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....cover the cost of equipment lost/ damaged during the course of providing the services. b) Industry practice: The above approach is the standard process followed by the other players operating in the same industry who also follow a similar business model wherein the contract is for a bundled supply of services and it specifically provides for LIH reimbursement. c) Whether the supplies are inter-dependent or incidental to each other: In the present case, as stated in the facts above, it is submitted that all the elements of the Contract are essential and inter-dependent. In absence of either of the element, the obligation under the Contract of providing drilling/ mining services cannot be concluded. Hence, the supplies are incidental and inter-dependent with each other. The contract itself terms the supplies to be made as bundled services. 3.3. Admittedly, undertaking drilling activity in offshore oil fields is a complex activity entailing providing of multiple services and goods, which are bundled together and LIH reimbursement isa part of the same activity. In view of the aforesaid, supplies under the Contract can be said to be naturally bundled in the ordinary....
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.... particular instances where the same taxable person effects a continuous supply of services coupled with periodic supplies of goods/services to be used in conjunction therewith, one could possibly view the periodic supply of goods/services as composite supplies along with the service that is continuously supplied over a period of time." In terms of the aforesaid judgement of the Hon'ble Kerala High Court it is clear that in respect of continuous supply like in the present case, the other periodic supplies are to be viewed as composite supplies. 3.8. It is submitted that the Ld. Authority has erred in placing reliance only on one clause of the entire contract i.e. clause 2.2 (ii) of the Letter of Award, which is a clarificatory clause inserted to safeguard the interest of ONGC. 3.9. It is a settled principle of law that an agreement/contract has to be read as a whole to understand its true purport and intention and cannot be referred to and relied upon in piecemeal. Reliance in this regard, is placed on the judgement of the Hon'ble Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Vishakhapatnam, 1990 (077)....
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....or penalty on the amount delayed in specified time cannot be bifurcated as such additional payment do not have its own classification. It is taking colour from original supply i.e., supply of financial and related services." 3.15. Without prejudice to the above, reference is made to foreign jurisprudence regarding "composite supply". In the case of LevobVerzekeringen BV, OV Bank NV vs. Staatssecretaris van Financien reported in [2005] EUECJ C- 41/04, the European Court of Justice held that where two or more elements or acts supplied by a taxable person to a customer are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for the purposes of application of VAT. 3.16. As stated above, all the elements of the Contract entered into between the Applicant and ONGC are so closely linked that they have to be treated as a single supply for purpose of levy of GST. 3.17 Further, it is submitted that while determining the nature of transaction it is imperative to consider the reason for entering the contract/transaction. While deciding the issue w....
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.... supply of the said services and the reimbursement of LIH. 4.6. Undisputedly the said drilling services are covered under SAC 9986 i.e., "Support services to mining, electricity, gas and water distribution." as prescribed under Notification No. 11/ 2017-CT (Rate) dated 28 June 2017 and the rate of applicable GST is 12% (CGST 6% + SGST 6%) post the amendment vide Notification No. 1/2018-CT (Rate) dated 25thJanuary 2018. Prior to that, the rate of applicable GST was 18%(CGST 9%+ SGST 9%). 4.7. It is submitted that the finding of the Ld. Authority that LIH reimbursement computed at an agreed depreciated value of the Original FOB Price of such equipment/tools and based on the methodology provided in the contract, the activity of LIH reimbursement is rightly classifiable as 'Supply of Goods' in terms of Section 7 of the CGST Act is untenable in law. 4.8. Without prejudice to the above, it is submitted that initially in the application filed before the Ld. Authority, on the basis of the advice received and its own interpretation of the law, the appellant was discharging GST @18% by classifying the LIH reimbursement as "agreeing to tolerate a situation" under the SAC/ HSN 999794 ....
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....fication of supply of the 'reimbursement of LIH Damaged beyond repair goods/equipment'. b) Whether the supply of drilling services and reimbursement of LIH are composite supply or not and; c) Subsequently, in case of it being a composite supply, whether the rate of GST applicable to supply of drilling services, being the principal supply, should apply to all the supplies made under the contract with ONGC. Primarily, the contention of the appellant is the reimbursement of damaged beyond repair goods/LIH equipment is not a transaction of "Supply of Goods". Now we examine whether the supply in discussion is 'goods or not'. Section 2(52) & 2(102)define goods and services. The extracts are reproduced below: Section 2(52) "goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; Section 2 (102) "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mod....
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....pient. b. Transaction should consist of two or more taxable supplies of goods or services or both; and c. The two or more taxable supplies should be naturally bundled and supplied in conjunction with each other in the ordinary course of business. Now we examine whether all the above parameters are meted out by the present transaction in discussion. The taxable person, being the appellant makes the taxable supplies to the recipient, being ONGC. The supply of bundled services in relation to the drilling/mining services undertaken by the appellant comprise of supply of certain goods and services. While the LIH reimbursement is another supply comprising of the cost in case of damage of equipment or toolsat an agreed depreciated value of the original FOB price of the equipment in case of the damages of equipment /tools beyond repair or loss. In context of the conditions of (a) and (b)cited, being satisfied, it now needs to be scrutinized whether the drilling services and LIH reimbursement are 'naturally bundled' and 'supplied in conjunction with each other' in the ordinary course of business. In the absence of the clear cut explanation in the Act, regarding the c....