In re Rochem Seperation Systems India Pvt Ltd (GST AAR Maharashtra)
Summary: The Maharashtra Authority for Advance Ruling (AAR) held that maintenance, repair and overhaul services provided by Rochem Separation Systems (India) Private Limited in respect of reverse osmosis (RO) plants installed on ships, warships, reconnaissance vessels and submarines of the Indian Navy and Indian Coast Guard are liable to GST at 18%. The Authority rejected the applicant’s claim for the concessional 5% GST rate under Notification No. 02/2021-Central Tax (Rate), dated 2 June 2021, which provides a reduced rate for maintenance, repair or overhaul services in respect of ships and other vessels, their engines and other components or parts. The Authority concluded that RO plants are independent machinery used for water purification and cannot be regarded as integral components or parts of vessels merely because they are installed on board ships.
The applicant was engaged in providing repair, maintenance and overhaul services relating to RO plants and water purification systems installed on ships belonging to the Indian Navy and Indian Coast Guard. The activities included preventive maintenance, routine maintenance, inspection and checking of safety controls, examination of operational systems, supply of consumables, replacement of defective parts and repairs necessary to ensure the continued functioning of the equipment. The applicant had received a maintenance order dated 21 June 2022 from the Fleet Maintenance Unit, Mumbai. The Indian Navy had directed the applicant to charge GST at 5% in accordance with the concessional notification, and the applicant sought an advance ruling confirming the applicable rate.
Applicant’s Claim for Concessional GST
The applicant submitted that maintenance and repair services concerning RO plants installed on naval vessels were sufficiently connected with the functioning and operation of those vessels to fall within the expression “in respect of ships and other vessels, their engines and other components or parts” appearing in Entry 25(ib) of Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 02/2021-Central Tax (Rate). According to the applicant, the expression “in respect of” had a wide connotation and should not be confined to services performed directly on a ship’s hull, propulsion system or machinery forming an inseparable part of the vessel.
The applicant argued that RO plants were installed on board naval vessels to provide purified water and support the operational requirements of ships and their personnel. Their maintenance and overhaul were therefore services connected with the vessels. It relied on the decision in Hindustan Aeronautics Ltd. v. State of Karnataka and principles governing the interpretation of statutory expressions, including the doctrine of noscitur a sociis and ejusdem generis.
The applicant also maintained that the contracts constituted composite supplies under Section 2(30) of the Central Goods and Services Tax Act, 2017. The principal supply was the provision of maintenance and repair services, while the supply of spare parts and consumables was incidental and ancillary to those services. Under Section 2(90), the principal supply determines the character of a composite supply, and the applicant contended that the entire contract should accordingly receive the concessional rate applicable to maintenance and repair of vessels.
Contract Structure and Composite Supply
The Authority examined the maintenance contract submitted by the applicant and observed that it contained two principal components: labour services relating to installation, repair and maintenance of RO plants, and the supply of spare parts and consumables required during servicing. Serial Nos. 1 to 351 of the contract related to service activities, while Serial No. 352 onwards covered spare parts. The spare parts were supplied only when necessary for performing maintenance or repair activities.
The Authority accepted that maintenance services constituted the dominant element of the transaction and that spare parts and consumables were supplied in conjunction with those services. Consequently, the arrangement could qualify as a composite supply. However, the Authority clarified that the classification of a transaction as a composite supply did not automatically establish eligibility for a concessional GST rate. The applicable rate still depended on whether the principal supply satisfied the description of the service covered by the relevant notification.
Earlier Advance Ruling on RO Plant Classification
A significant factor in the Authority’s reasoning was an earlier ruling involving the same applicant, Advance Ruling No. GST-ARA-2021-22/B-10, dated 31 October 2022. In that proceeding, the Authority had examined whether RO plants supplied to the Indian Navy could be classified as parts of vessels for concessional GST purposes.
The earlier ruling held that RO plants were independent machinery used for purification of water, classifiable under HSN 8421, and could not be regarded as integral parts of ships. Ships could exist and function without such equipment, and RO plants were auxiliary equipment providing purified water for crew members and personnel on board. Accordingly, the earlier ruling held that the RO plants were not eligible for the concessional GST rate applicable to parts of vessels and were taxable at 18%.
The Authority considered this earlier classification relevant to determining the GST rate on maintenance and repair services. Since RO plants were not parts or components of vessels, services performed on such equipment could not be brought within the concessional entry merely because the machinery was installed on a ship.
Interpretation of the Expression “In Respect Of”
The applicant placed particular emphasis on the broad interpretation of the expression “in respect of” and relied on the decision in Union of India v. Vijay Chand Jain to contend that the phrase included matters having a direct or proximate connection with the subject. The applicant argued that the maintenance of RO plants had a sufficient operational connection with naval vessels to qualify under the notification.
The Authority did not accept that interpretation in the circumstances of the case. It observed that Entry 25(ib) specifically referred to maintenance, repair or overhaul services in respect of ships and other vessels, their engines and other components or parts. The expression could not be interpreted in isolation from the remaining language of the entry. The services must relate to the ships themselves, their engines or their components or parts.
Since RO plants were independent machinery rather than components or parts of ships, the Authority held that maintenance of such equipment remained maintenance of machinery. The installation of machinery on a vessel did not change the essential nature of the equipment or convert the service into maintenance of a vessel or its components.
Judicial Precedents and Statutory Interpretation
The applicant relied on Hindustan Aeronautics Ltd. v. State of Karnataka to support examination of the real nature of the transaction and the intention of the contracting parties. It also cited Oswal Agro Mills Ltd. v. Collector of Central Excise, Attorney General v. Prince Ernest Augustus of Hanover and Siddeshwari Cotton Mills (P.) Ltd. v. Union of India in support of contextual interpretation and the principles of ejusdem generis and noscitur a sociis.
The Authority distinguished the applicant’s reliance on these principles. It found that the description of the concessional entry was sufficiently specific and that RO plants could be identified as independent machinery. The general words of the notification could not be extended to include maintenance of machinery that did not qualify as a ship, engine, component or part.
The Authority also considered the Maharashtra AAR decision in Cummins India Limited, dated 21 December 2021, concerning annual maintenance contracts involving spare parts and services. It observed that the facts of that ruling were different and that the earlier decision did not govern the present application.
Applicable GST Rate and Final Ruling
The Authority held that the applicant’s services were classifiable under SAC 9987 as maintenance and repair services of machinery and equipment. Where the contract involved only repair or maintenance of RO plants, the applicable GST rate was 18%. Where the contract also included spare parts and consumables supplied in conjunction with the maintenance services, the entire composite supply would likewise attract GST at 18%, because the principal supply was maintenance of machinery.
Consequently, the Authority ruled that maintenance and repair contracts executed between the Indian Navy and the applicant in respect of RO plants on board warships, reconnaissance vessels and other ships were not covered by Entry 25(ib) of Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 02/2021-Central Tax (Rate). The applicable GST rate was therefore 18%, comprising CGST at 9% and SGST at 9%.
Conclusion: The ruling establishes, on the facts examined by the Maharashtra AAR, that the concessional GST rate for maintenance, repair and overhaul of ships cannot be claimed merely because the machinery being serviced is installed on board a vessel. The nature and classification of the equipment and the precise scope of the notification are decisive. RO plants classified as independent water purification machinery do not qualify as ship components, and their maintenance and repair services attract GST at 18%.
Cases Discussed
- Hindustan Aeronautics Ltd. v. State of Karnataka — (1984) 4 ATR 744; (1984) 1 SCC 706 (Supreme Court). Discussed concerning the nature of contracts and the need to examine the substance of transactions.
- Cummins India Limited, In re — Maharashtra AAR, Order No. MAH/AAAR/AM-RM/01/2021-22, dated 21 December 2021, as identified in the supplied order. Considered concerning composite supplies involving annual maintenance services and spare parts; distinguished on facts.
- Oswal Agro Mills Ltd. v. Collector of Central Excise — 1993 AIR 2288 (Supreme Court). Cited regarding principles of statutory interpretation and ejusdem generis.
- Siddeshwari Cotton Mills (P.) Ltd. v. Union of India — 1989 SC 1989 (Supreme Court). Cited concerning the interpretation of statutory expressions through contextual principles.
- Attorney General v. Prince Ernest Augustus of Hanover — (1957). Cited concerning the contextual interpretation of statutory provisions.
- Union of India v. Vijay Chand Jain — Cited by the applicant concerning the broad meaning of the expression “in respect of”.
