Taxability of works contract of dredging river-bed. Such supply is exempt with effect from 24/01/2018
ABCAUS Case Law Citation:
ABCAUS 3043 (2019) (07) AAR
The State Construction Corporation Limited (the recipient) had awarded the applicant a contract for sectioning of rivers (Right Drainage) in the State. The Applicant sought a ruling from the GST Authority for Advance (AAR) on whether the recipient was a government entity in terms of clause 2 (zfa) of Notification No 9/2017 lntegrated Tax (Rate) dated 28/06/2017 (the Exemption Notification).
He further sought a ruling on the taxability of his supply in terms of the Notification No. 08/2017 – lntegrated Tax (Rate) dated 28/06/2017 (the Rate Notification) and the Exemption Notification, as the case may be.
The Bench observed from the contract that the applicant was required to perform desiltation by dredging the river/nallah, including fixing of pipe lines, floaters and floating pipe lines for disposing water slurry consisting of silt, sand etc. The value of the contract included cost of labour, materials, consumables, POL, and spare parts and accessories for maintenance of the dredgers. lt also included cost of building islands/dykes by providing geo tubes/geo fabrics and accessories or by tin sheets required for formation of bunds for dumping of the dredged materials. The contract also included the cost of all pre and post dredging survey.
The Bench observed that the contract included the cost of clearing thickly grown water hyacinth from canal and drainage channels. lt was evident from the description of the work that it was a composite supply of works contract, improving and modifying the river-bed and embankments.
The Bench further noted from the work order, that 98% of the work was related to dredging. The communication from the Executive Engineer, Drainage Division also clarified that the cost of material transferred for completion of the dredging work was 5% of the total contract value.
The bench opined that dredging of channels, which included desiltation of the channels, dumping of dredged materials and building of dykes etc., therefore, appeared to be predominantly earthwork, as understood in common parlance.
Thus the Bench was of the view that the applicant was executing a works contract, more than 75% of which was earthwork. The recipient was a government entity and the work being executed is part of an irrigation project under the Department of Water Resources if State Government. lt was, therefore taxable @5%o with effect from 13/10/2017 in terms of Sl No.3(vii) of the Rate Notification, as it stood post amendment under Notification No.39/2017 – lntegrated Tax (Rate) dated 13/10/2017.
The Bench observed that the question of applicability of the Exemption Notification comes into play with effect from 25/01/2018, when it was amended adding Sl 3A vide Notification No. 2/2018 lntegrated Tax (Rate) dated 25/01/2018. Sl No. 34 of the Exemption Notification provides, “Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution.”
The Bench noted that the Circular No. 51/25/2018-GST dated 31/07/2018 leaves no doubt that the phrase ‘in relation to any function’, as applied to Sl No. 3 or 3A above, makes no substantial difference between Sl No. 25(a) of the ST Notification and Sl No. 3 or 3A of the Exemption Notification. Under the previous service tax regime, the exemption was limited to certain functions specified in Sl No. 25(a) of the ST Notification, whereas, under the GST the ambit has been broadened to include any such functions that are performed by a Panchayat or a municipality under specific provisions of the Constitution.
The Bench opined that the Applicant’s eligibility under Sl No. 3A of the Exemption Notification had to be examined from three aspects:
(1) whether the supply being made is a composite supply, where supply of goods constitutes not more than 25% of the value of the composite supply,
(2) whether the recipient is government, local authority, governmental authority or a government entity, and
(3) whether the supply was in relation to any function entrusted to a Panchayat or a Municipality under the Constitution?
The Bench opined that from the description of the work it appeared that it improved the navigability of the riverbed and channels – an activity toward development of irrigation and waterways. lt was, therefore, an activity in relation to the function listed under Sl No. 5 of the Eleventh Schedule, as entrusted to a Panchayat under Article 243G of the Constitution of lndia.
Therefore, exemption under Sl No. 34 of the Exemption Notification was applicable to the Applicant’s supply of the said works contract service.
The Bench riled as under:
(a) The recipient, was a government entity in terms of clause 2 (zfa) of Notification No 9/2017 – lntegrated Tax (Rate) dated 28/06/2017.
(b) The Applicant’s supply was taxable @18% under Sl No. 3(vii) of Notification No. 8/2017 – lntegrated Tax (Rate) dated 28/06/2017 till 12/10/2017. The supply was taxable @ 5% under with effect from 13/10/2017 till 24/01/2018. It has since been exempted under Sl No. 3A of Notification No 9/2017-lntegrated Tax (Rate) dated 28/06/2017, as amended by Notification No. 2/2018- lntegrated Tax (Rate) dated 25/01/2018.