The Appellate Authority considered an appeal against an Advance Ruling regarding GST classification of reimbursement for lost or damaged drilling equipment. The Court upheld the Ruling, holding the reimbursement is a supply of goods, not a composite supply, and must be taxed based on the HSN of goods.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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BEFORE THE APPELLATE AUTHORITY FOR ADVANCE RULING for the State of Andhra Pradesh (Goods and Service Tax )
(Office at O/o Chief Commissioner of State Tax, Govt. of A.P., D NO 5-56, Block-B, R.K.Spring Valley Apartment, Bunder Road, Edupugallu, Vijayawada, Andhra Pradesh – 521151)
Present:
Sri PEEYUSH KUMAR (Member) (State Tax)
Sri NARESH PENUMAKA (Member) (Central Tax)
The 28th day of November, 2020
Order /AAAR/AP/ 08(GST)/2020
| 1 | Name and address of the appellant |
M/s. Halliburton Offshore Services Inc. (LIH),Plot No.5A3, Unit-2, ADB Road, Vakalpudi, East Godavari District- 533004, Andhra Pradesh. |
|---|---|---|
| 2 | GSTIN | 37AAACH5154M1ZC |
| 3 | Date of filing of Form GST ARA-02 |
01.09.2020 |
| 4 | Hearing (Virtual) | 17.11.2020 |
| 5 | Authorized Representative | Sri Prasad Paranjape,Advocate |
| 6 | Jurisdictional Authority – Centre |
Superintendent, Ramanayyapeta Range, Kakinada CGST Division. |
(Under Section 101 of the Central Goods and 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 AdvanceRuling 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, East Coast of Indian Offshore waters.
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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
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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 recordedas 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 theappellant 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 entered by the appellant with ONGC is reproduced here under:
OPERATOR shall reimburse CONTRACTOR for loss of or damage to CONTRACTORs down hole equipment, as under, provided that such loss or damage is not occasioned by normal wear and tear or negligence on the part of the CONTRACTOR or due to defective material.
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6. The appellant has to immediately inform ONGC about the LIH equipment for ONGC’s verification 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 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 AARNo.16/AP/GST/2020 dated 13.05.2020held:
10. Being aggrieved by the impugned Order, the appellant has filed the present appeal, inter alia, on the following grounds which are urged without prejudice to each other.
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2. Grounds of Appeal:
1. The reimbursement of LIH, damaged beyond repair goods/ equipment is not a transaction of“supply of goods”.
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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 principalsupply.”
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 whichenables
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the Appellant to recover the cost of equipment lost/ damaged during the course of providing theservices.
b)Industry practice:Theabove 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 isfor a bundled supply of services and it specifically provides for LIHreimbursement.
c) Whetherthe supplies are inter-dependent or incidentalto each other: In the present case, asstated in the facts above, it issubmitted 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 asbundledservices.
Oxford English Dictionary (Online version)
Theaction or on instance of twoor more events or things occurring at the sortie point in timeor s pace
Merriam Webster Dictionary (Online version)
The state of being conjoined ( Conjoined - being, coming, or brought together so as to meet, touch, overlap, or unite)
Occurrence together in time or space
Chambers Dictionary (Online version)
A joining togethercombinatio n
The coinciding of tw o or more events
Cambridge Dictionary (Online version)
The situation in which events or conditions combine or happen together
Upon the perusal of the above definitions, it appears that the term “in conjunction with” means supplied made at the same point in timeor space.
3.5 . It is submitted that in the present case intention of ONGC is not to receive
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individual supply of goods or services butexecution of entire scope of work in relation to their operations of DP rings of 1500m water depth capability and anchormoored rings of 600mwater depth capability for drilling exploratory/ development/ water injection wellsand workover/completion operations including re-entry primarily in KG offshore, Eastcoast of Indianoffshore waters.
“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.
The saidclause merely seeks to clarify that some se rvi ces (out of the bundled
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services under contract) may be required to be performed even after dehiring of the last rig and as such the individual services shall be successively de- hired as per the requirement of the last well of the last rig to bede-hired.
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between the Applicant and ONGC are so closely linked that they have to be treated asa single supply for purpose of levy of GST.
(90) “principalsupply”means the supply of goods orservices whichconstitutes thepredominant element of a compositesupplyand to which o other supply farming part of thatcomposite supply is ancillary.
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a . Jit Ram Shiv Kumar And Ors. Etc vs. State Of Haryana &Anr. reported in 1980 AIR 1285
b . Dunlop India Ltd vs. Union of India and Ors, reported in 1977 AIR 597
b . Grant a personal hearing and permit the Appellant to produce additional documents and other materials at the time of personal hearing.
c . For such further and other reliefs as this Hon’ble Appellate Authority may deem fit in the facts and circumstances of the case.
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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
Primarily, the contention of the appellant is the reimbursementof damaged beyond repair goods/LIHequipment 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 mode, from one form, currency or denomination, to another form, currency ordenomination 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 retrievable. When such equipment / tools are lost in hole or damaged beyond repair, drilling services cannot be performed until new equipment / tools are made available by the Applicant. This leads to disruption of services due to such LIH equipment.Thepayment made in the form of reimbursement for the damages /replacement of the Lost in Hole (LIH) equipment necessitates the appellant to replacethe tools / equipment instantly in order to
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continue the drilling services.Hence, the reimbursement of LIH is meant to buy and replace the lost goods.Section 7(1) defines supply as,
Section 7(1) For the purposes of this Act, the expression “supply” includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
Thus, the reimbursement of LIH tools/equipment is nothing but the consideration received for the procurement of damaged goodsi.e., the damaged tools/ lost in holeequipment, in the course of its business of drilling operations.
Now we scrutinize whether the supply of drilling services and reimbursement of LIH are composite supplies or not.
The composite supplyunder 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
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 bundledservices 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 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
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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 –
No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.”
In the instant case the contract agreement expressly provides that there is no single price or at no point of time, the customer pays the same amount for both the supplies in discussion. Besides, the two supplies i.e., the drilling services and LIH reimbursement are nowhere expressly advertised as a package.Moreover under the stated facts and circumstances of the present case vide para 31.4 of the agreement, which reads as under,
“Separately, given the nature of the scope of work to be carried out, there is a possibility of accidents occurring, whereby certain the equipment/tools owned by the Applicant may be irretrievably lost during operations .”
The transaction of reimbursement towards lost in hole / damage beyond repair of equipment is 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 servicesshall not be applicable to all the supplies
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made under the contract with ONGC,Basing on the natureof actual goods involved in the subject activity, and theirHSN classification notifiedfor the goods,the provlsions relating to chargeability and levy of GST under the CGST Act and the Rules made there under are applicable to the supply ofgoods.
Accordingly, the order of the Authority for Advance Ruling, A,P.needs no interference.
Order
The Ruling of Authority for Advance Ruling, A.P.vide Ruling No. 16/AP|GST12020 dated : 1.3.05.2020, is upheld.
Sd/- Peeyush Kumar Chief Commissioner (State Tax) Member
Sd/- Naresh Penumaka Chief Commissioner(Central Tax) Member
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3 issues framed by the court
Whether reimbursement received for lost or damaged equipment can be classified as a supply of goods liable to GST under Section 7.
Whether the supply of drilling services and reimbursement of lost equipment constitute a composite supply under Section 2(30).
Whether the principal supply rate should apply to the reimbursement if it forms part of a composite supply.
Colour shows how this judgement treated each authority
Abbott Healthcare Pvt. Ltd. vs. Commr. Of Commercial TaxReferred¶99
Abbott Healthcare Pvt. Ltd. vs. Commr. Of Commercial Tax, Thrissur, 2020 (34) G.S.T.L. 579 (Ker.)
Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax OfficerReferred¶103
Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, 1990 (077) STC 0182
Rashtriya Ispat Nigam Ltd.Referred¶103
(2002) 126 STC 114 (SC)
Ushabala Chits Private LimitedReferred¶114
Ushabala Chits Private Limited (AAR No. 13/AP/GST/2020)
Levob Verzekeringen BVReferred¶115
Levob Verzekeringen BV, OV Bank NV vs. Staatssecretaris van Financien [2005] EUECJ C- 41/04
Field Fisher Waterhouse CaseReferred¶118
Field Fisher Waterhouse Case C392/11
Jit Ram Shiv Kumar And Ors. Etc vs. State Of Haryana & Anr.Referred¶134
Jit Ram Shiv Kumar And Ors. Etc vs. State Of Haryana & Anr. 1980 AIR 1285 · Who else cites this
Dunlop India Ltd vs. Union of India and OrsReferred¶135
Dunlop India Ltd vs. Union of India and Ors, 1977 AIR 597 · Who else cites this
5 provisions across 1 enactments
M/s. Halliburton Offshore Services Inc. (LIH)
Authority for Advance Ruling
PEEYUSH KUMAR
NARESH PENUMAKA
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
