9911796707
TMI Blog2020 (11) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. CONTRACTOR should also provide & run mud plant of 15000 bbl. capacit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 terms of Clause 31 of the Contract (the reimbursement received towards the LIH equipment is referred to as "LIH reimbursement"). Clause 31 of the Contract ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Goods' in terms of Section-7 of the CGST Act, 2017. Depending upon the nature of actual goods involved in the subject activity, their classification is as per HSN notified for the goods and the Classification Rules mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, it is submitted that the key condition of Supplies to qualify as "composite supplies" are as follows: a. Supplies should be made by a taxable person to a recipient i.e. there is one common supplier and one recipient for both the supplies; b. Shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 course of business. 3.4. It is submitted that the term 'conjunction" or the phrase "in conjunction with" is not defined under the CGST Act/ IGST Act and the allied Rules. Therefore, reference is made to the definition of the term "conjunction" as defined under various dictionaries. Oxford English Dictionary (Online version) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) STC 0182, which has been affirmed by the Hon'ble Supreme Court and reported in (2002) 126 STC 114 (SC). 3.10. The said clause referred to and relied upon the Ld. Authority, reads thus: "Some services may be required even after de-hiring of the last rig and as such the individual service (s) shall be successively de-hired as per the requirement of the last well of the last rig to be de-hired." The said clause merely seeks to clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opean 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 whether leasing of immovable property and supply of associated services may constitute a single VAT exempt supply in the case of Field Fisher Waterhouse Case C392 / 11, the ECJ observed that the content of a lease may be a factor of importance. 3.18. In the aforesaid decision, the ECJ observed that the economic reason for concluding lease agreement was not only to obtain the right to occupy the premises concerned, but also for the tenant to obtain a number of servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and hence, the Appellant had made submissions to that effect. 4.9. However, the contentions raised by the appellant before the Advance Ruling Authority was rejected and it wer eheld that the subject transaction does not qualify as "agreeing to tolerate a situation". 4.10. Accordingly, the Appellant sought further advice and has raised alternative contentions in the present application for consideration for this Learned Appellate Authority. It is submitted that there is no estoppel in law to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; In the instant case, the appellant uses certain specialized equipment / tools for drilling oil and gas wells in offshore and onshore environment to pre-defined bottom hole targets which are carried out beneath the surface of the earth. There is a probability that the equipment / tools used for drilling services might get stuck or lost due to uncontrollable or unforeseen down hole environmental situations in the 0il and gas well and might not be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imbursement 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 concept of 'naturally bundled' the reliance is placed on Education Guide issued by CBEC (now CBIC) in the year 2012 as under - "9.2.4 Manner of determining if the services are bundled in the ordinary course of business Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below - a) There is a single price or the customer pays the same amount, no matter how much of the package they actua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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