TMI Blog2020 (11) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... pment. The payment made in the form of reimbursement for the damages /replacement of the Lost in Hole (LIH) equipment necessitates the appellant to replace the tools / equipment instantly in order to continue the drilling services. Hence, the reimbursement of LIH is meant to buy and replace the lost goods. The reimbursement of LIH tools/equipment is nothing but the consideration received for the procurement of damaged goods i.e., the damaged tools/ lost in hole equipment, in the course of its business of drilling operations. Whether the supply of drilling services and reimbursement of LIH are composite supplies or not? - HELD THAT:- Following are the parameters for determining the supplies as composite supplies a. There should be a taxable person and a recipient. 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. It is need to be examined whether all the above parameters are meted out by the present transaction in discussion. The taxable person, being the appellant makes the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Service Tax Act and the Andhra Pradesh Goods and Service Tax Act). At the outset, we would like to make it clear that the provisions of both the CGST Act and the APGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the APGST Act. The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017and the Andhra Pradesh Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and APGST Act ] by M/s.Halliburton Offshore Services Inc. (LIH) (herein after referred to as the Appellant ) against the Advance Ruling No. 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, Eas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonnel as per List of (Crew) Personnel and scope. xi) It shall be responsibility of CONTRACTOR to provide any cross-overs between its tools and drill stems of various rigs for which CONTRACTOR shall coordinate with Rig Contractors. xii) It shall be responsibility of CONTRACTOR to provide any items / equipment for making its units of various services / equipment compatible with the rig power supply for which CONTRACTOR shall interact with the Rig Contractor for timely mobilization and commencement of services. xiii) It shall be responsibility of the CONTRACTOR to provide compatible units as per zonal requirements of Rig Safety like Zone 0, Zone 1 etc. and rig electrical 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 busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erification of the same. Post verification by ONGC, the appellant raises an invoice on ONGC for reimbursement of amount towards LIH equipment based on pricing methodology provided in the contract. 7. Post the implementation of GST, i.e. with effect from 01.07.2017, the appellant started raising invoices for the reimbursement towards LIH equipment by charging GST @ 18% (9% CGST and 9% SGST/UTGST) by classifying the said supplies as agreeing to tolerate a situation as prescribed under Sl.No. 5(e) of Schedule II to the CGST Act under the SAC/HSN No. 999794. 8. The appellant in terms of Section 97 of the CGST Act, made an application before the Authority for 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement received towards LIH equipment. For qualifying a transaction to be of transfer of title in goods, there has to be pre-agreement to identify the goods and the goods should be in deliverable state and in fact been delivered. In the present case, none of these conditions get fulfilled and hence the transaction cannot qualify to be that of transfer of title in goods. 1.5 The LIH reimbursement is akin to an incremental contingent cost incurred in providing of drilling/ mining services, which is recovered by the appellant asper the value agreed in the contract, accordingly, it is an integral part of and connected with the main contract of providing drilling/ mining 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 equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice Tax Education Guide dated 20thJune 2020 issued by the CBIC under the erstwhile Finance Act, 1994. 3.2. Upon the perusal of the above, following criteria can be used for determining whether the supplies are naturally bundled or not: a. Expectation of a typical customer b. Industry practice c. Whether the supplies are incidental or inter-dependent to each other a) Expectation of the customer: In the present case, the expectation of a typical customer is to receive all the supplies in entirety for the drilling/ mining activity undertaken. LIH reimbursement is a part of the same contract which enables the Appellant to recover 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the services. Accordingly, the reimbursement of LIH equipment happens at the same time while the services are being provided. Hence the said reimbursement of LIH equipment is in conjunction with the main services provided. 3.7 Reference is made to the judgment of the Hon ble Kerala High Court in the case of Abbott Healthcare Pvt. Ltd. vs. Commr. Of Commercial Tax, Thrissur, 2020 (34) G.S.T.L. 579 (Ker.), wherein the Hon ble High Court has held as follows: 11. In my view, a finding as regards composite supply must be taken into account supplies as effected at a given point in time on as is where is basis. In 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act can be performed independently. 3.13. It is submitted that in view of the aforesaid submissions, the Ld. Authority has erred in holding that the bundled services provided by the Appellant cannot be considered as a composite supply. 3.14. Reference is made to the Ruling of Ld. Authority in the case of Ushabala Chits Private Limited (AAR No. 13/AP/GST/2020), wherein; while considering the taxability of interest/penalty collected for delay in payment of monthly subscription by the members of the Chit Fund, the Ld. Authority ruled that- The additional amount being charged or delayed payment termed as Interest, rate fee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... farming part of that composite supply is ancillary. 4.3. In the present case, undoubtedly, the predominant element of the supply made to ONCG under the above contract is the supply of drilling/ mining services and the reimbursement of LIH equipment is ancillary and incidental to the above supply. 4.4. In view of the aforesaid, it is clear that the supplies made under the aforesaid contract to ONGC qualify as composite supply, where in the supply of drilling/ mining services is the principal supply. 4.5. Accordingly, in terms of Section 8 of the CGST Act, the rate of GST applicable to the supply of drilling/ mining services is applicable to both the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For such further and other reliefs as this Hon ble Appellate Authority may deem fit in the facts and circumstances of the case. 3. Virtual Hearing: The proceedings of Hearing were conducted through video conference on 17th November 2020, for which the authorized representative, Sri Prasad Paranjape, Advocate attended and reiterated submissions already made. 4. Discussions and Findings: We have gone through the entire records of the appeal, facts of the case, and also considered the written and oral submissions made at length by the appellant as well, in light of the ruling pronounced by the AAR. The issue at hand is to decide a) The classification 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the supply of drilling services and reimbursement of LIH are composite supplies or not. The composite supply under Section 2(30); (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 a principal supply; It is evident from the above that the following are the parameters for determining the supplies as composite supplies a. There should be a taxable person and a recipient. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a distinct event or rather an occurrence that may or may not happen in the regular course of business. LIH event is thus entirely contingent and outside the normal stream of supplies under the agreement. Asper terms and conditions of the agreement signed between the appellant and ONGC, the appellant raises a separate invoice on ONGC for reimbursement of amount towards LIH equipment as per the calculation provided in the contract. Even in terms of the clauses under the Contract, reimbursement towards LIH equipment does not find mention under the scope of work at Annexure II to the General Conditions of the Contract, but is a separate clause under the Special Conditions of the Contract contemplating a potential event that may or may not occur during the tenure of the Contract. Thus, the said supplies are not made in conjunction with each other, which implies that they are not meant to be made together or in combination in the normal course of business as a single package of composite supplies. It is clarified beyond doubt that the supply of drilling services and reimbursement of LIH are not composite supplies. Therefore, the rate of GST applicable to supply of drilling services sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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