In re Ion Exchange India Limited (GST AAR Rajasthan)
AAR held that services provided under EPC contract awarded to the applicant by M/S Vedanta for setting up of a ‘Sulphate Removal Plant’ broadly ranging from designing, engineering, Surveys, procurement, fabrication, manufacturing, erection & installation, facilities construction, Pre commissioning & Commissioning, training etc. and satisfactory hand over of complete ‘Sulphate Removal Plant’ as per contract, it is a “work contract” of composite supply. The composite supply is a mixed of goods & services and would be taxed accordingly under S. No. 3 Heading 9954 (ii) of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017 and GST @ 18 % (9% CGST and 9% SGST) is payable.
FULL TEXT OF THE ORDER OF AUTHORITY OF ADVANCE RULING, RAJASTHAN
Note: Under Section 100 of the CGST/RGST Act, 2017, an appeal against this ruling lies before the Appellate Authority for Advance Ruling constituted under section 99 of CGST/RGST Act, 2017, within a period of 30 days from the date of service of this order.
> At the outset, we would like to make it clear that the provisions of both the CGST Act and the RGST 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 provision under the RGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / RGST Act would be mentioned as being under the “GST Act”.
> The issue raised by M/s Ion Exchange India Limited, C/o Thapar Associates, 358/2, Near Axis Bank Limited, Rajapark, Jaipur- 302004, Rajasthan – (hereinafter the applicant) is fit to pronounce advance ruling as it falls under the ambit of the Section 97(2) (a) given as under: –
a. Classification of goods and /or services or both
> Further, the applicant being a registered person (GSTIN is 08AAAC11726L1ZK as per the declaration given by him in Form ARA-01) the issue raised by the applicant is neither pending for proceedings nor proceedings were passed by any authority. Based on the above observations, the applicant is admitted to pronounce advance ruling.
A. SUBMISSION AND INTERPRETATION OF THE APPLICANT;
1.1 M/S. ION Exchange India Limited (“Applicant”) is engaged in the business of water treatment, waste-water treatment and its recycling. The Applicant offers wide range of customized treatment plants for water, waste liquids and wastewater which are installed in thermal and nuclear power plants, fertilizer factories, refineries, and the petrochemical and other industries. As a part of its business operations, the Applicant enters into Engineering, Procurement and Construction (“EPC”)contracts with its customers.
1.2 As a part of its business operations, the Applicant has entered into an EPC contract with M/s. Vedanta Limited (“Vedanta”) vide Contract No. 4600008952 dt. 14.08.2018. Vedanta is a globally diversified natural resources company which is engaged in the business of exploration and mining of various natural resources. The Applicant has been informed that Cairn (Vedanta’s upstream Oil & Gas vertical) is the operator of Onshore RN-ON-90/1 block which is located in Barmer basin and having 38 oil and gas discoveries, including Mangala, Bhagyam and Aishwarya fields. The relevant extract of the EPC contract outlining the Scope of Work entered between the Applicant and M/s. Vedanta is enclosed.
1.3 According to the said EPC contract, the Applicant has to undertake the construction of ‘Sulphate Removal Plant’ or SRP with respect to the petroleum operations at Mangala wells (“Subject services”). For the purpose of construction of the said plant, the Applicant will have to undertake the following activities as per the specification & customization laid down in the EPC contract:-
a) Design and Engineering: Project Management;
b) Surveys (pre-engineering, pre-construction/ pre-installation and post installation;
c) Procurement and supply including vendor management, procurements and logistics management;
d) Manufacturing, fabrication, inspection and testing, FAT, packing, shipping, shipment insurance, transportation and delivery to site complete with associated loading/unloading and shifting of material;
e) Construction, erection and installation of facilities including construction management and Local Contractor Management;
f) Mechanical Completion, Tie-ins with existing facilities, SAT, site testing, pre-commissioning;
g) Commissioning, RFSU, Performance Guarantee Test Run including site restoration works and waste management;
h) Training and handover of facilities including associated QHSE management.
Details regarding Sulphate Removal Plant
1.4 Sulphate removal plant is a water treatment plant which treats the saline water on the basis of Nano filtration & Reverse Osmosis technology. This technology is used to separate sulphate Ions from Water. Since this is an EPC project, there are following steps in construction of the plant:
a) Engineering: Applicant is carrying out customized designing of this plant n their New Delhi office and uses various Engineering software to design the customized plant as per specifications provided by Vedanta Various disciplines like Civil, Mechanical, Piping, Pipeline, Electrical, Instrumentation and Telecom engineers work together and issue drawings which are used for construction of the customized plant after approval from Vedanta.
b) Procurement: The Applicant is the manufacturer of the key components of this plant. These components are manufactured specifically suiting and customized to the requirements of Vedanta. Applicant procures other auxiliary components from various reputed manufactures and supplies them to the customized plant location for construction.
c) Construction: Applicant has engaged various construction teams at plant location who construct the customized plant as per the approved design drawings. This construction team installs the component manufactured by Applicant and those supplied by various manufacturers. All these components are then assembled with the interconnecting process piping and pipeline as per approved design drawings. Respective electrical, instrumentation and telecom components are installed so that the plant is ready to function and controlled as per Vedanta specifications.
Reason for undertaking sulphate removal
1.5 The output from the sulphate removal plant is purified water which are used by Vedanta for drilling operations. It is pertinent to mention that while drilling petroleum crude Oil, Mangala wells produces hydrogen sulfide (H2S) which is very poisonous, corrosive and flammable. The increased concentration of H2S not only poses an integrity threat to the oil wells and surface facilities, it is also a safety hazard to personnel who comes in contact with the gas. Therefore, as a mitigating measure, sulphate free water is recommended for controlling the H2S.
1.6 The Applicant under the said contract is providing the services of execution of customized Sulphate Removal plant for Vedanta in the State of Rajasthan and invoices are raised charging 18% GST rate under Heading 9954. However, vide Notification No. 20/2019-Central Tax(Rate) dated 30.09.2019, Entry No. 24(ii) of the Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017 (“Rate Notification”) has been amended to include within its ambit, inter alia, support services to mining, and Entry No. 21(ia) thereof has been newly inserted to cover within its ambit professional, technical and business services relating to petroleum operations, both taxable at 12% GST rate. Post the introduction of the more specific entries above, the Applicant intends to ascertain whether the Subject services supplied by it to Vedanta are classifiable under Sr. No. 24 (ii), viz., Support Services to Mining or under Sr. No. 21(ia), viz., Professional, Technical & Business Services to Mining.
1.7 Upon analysis of the various Headings of Classification of services under the Rate Notification, the Applicant intends to ascertain whether the Subject services are appropriately classifiable under the Heading 9986 [Sr. No. 24(ii)] (viz., “Support services to exploration, mining or drilling of petroleum crude or natural gas or both”) or alternatively under the Heading 9983 [Sr. No. 21(ia)] (viz., “Other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both”) and are liable to 12% rate of GST under the CGST Act.
APPLICANT’S ELIGIBILITY FOR ADVANCE RULING
1.8 Section 97 of the Central Goods and Service Tax Act, 2017 (‘CGST Act’), entails that advance ruling may be filed by an Applicant for a transaction of supply of goods or services being undertaken or proposed to be undertaken on following questions:-
a) Classification of any goods or services or both;
b) Applicability of a notification issued under the provisions of this Act;
c) Determination of time and value of supply of goods or services or both;
d) Admissibility of input tax credit of tax paid or deemed to have been paid;
e) Determination of the liability to pay tax on any goods or services or both;
f) Whether applicant is required to be registered;
g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.
1.9 The Applicant submits that the issue on which advance ruling is sought in the instant matter post release of Notification No. 20/2019-Central Tax(Rate) dated 30.09.2019, is whether the services supplied by the Applicant to Vedanta qualify as Support Services to Mining (Sr. No. 24) or Professional, Technical or Business Services to Mining (Sr. No. 21) under the Rate Notification.
1.10 The term ‘Applicant’ under Section 95 (c) of CGST Act has been defined to mean any person registered or desirous of obtaining registration under this Act. As submitted earlier, the Applicant is registered in Rajasthan. Thus, the Applicant qualifies to be an ‘Applicant’ under Section 95(c) of the CGST Act. Further, the question sought by the Applicant is also covered under Section 97(2)(a) of CGST Act. Similar provisions exist in the RGST Act. Hence, present advance ruling application is maintainable before the Hon’ble Rajasthan Authority for Advance Ruling
A. SUPPLY OF SERVICES BY THE APPLICANT SHOULD BE CLASSIFIED AS ‘SUPPORT SERVICES TO EXPLORATION, MINING OR DRILLING OF PETROLEUM CRUDE OR NATURAL GAS OR BOTH UNDER Sr. No, 24(ii) OF HEADING 9986 OF THE RATE NOTIFICATION
1.11 The Applicant is of the view that the services regarding construction of water treatment plant qualify as ‘support services to mining’ under Sr. No. 24(ii) of the Rate Notification. The Applicant submits that the Rate Notification prescribes the principles of classification which are to be adopted while interpreting the entries provided therein. In this regard, the Explanation to the Rate Notification prescribes as under:
“Explanation. – For the purposes this notification,-
……………………………………….
(ii) Reference to “Chapter”, “Section” or “Heading”, wherever they occur, unless the context otherwise requires, shall mean respectively as “Chapter , “Section ” and “Heading” in the Scheme of classification of services annexed to notification No. 11/2017-Central Tax (Rate) dated 26.06.2017.
…………………………”
Therefore, while determining the classification of the subject services under the Rate Notification, reference must be made to the Scheme of Classification of Services (‘Scheme of Classification’) which forms part of such Notification.
1.12 The Hon’ble Supreme Court in the case of UOI v. Playworld Electronics Pvt. Ltd. reported at AIR 1990 SC 2002 held that while determining the taxability of a transaction, it is important to understand its true commercial nature. Therefore, before analyzing the classification of the construction services rendered by the Applicant, the nature and scope of the services being undertaken by the Applicant is discussed hereunder.
Nature of Subject services
1.13 The Applicant reiterates that it is engaged in the business of treatment of water, waste-water and its recycling, the activities required to be carried out by the Applicant under the scope of work of the EPC Contract involves the construction of customized Sulphate Removal plant based upon Nanofiltration & Reverse Osmosis technology to remove sulphate from water which is named as Sulphate Removal Plant.
1.14 Sulphate Removal Plant reduces the sulphate ions present in the Saline water to the acceptable levels for water injection. Sulphate removal is a technology utilized by the oil industry to produce low sulfate water for injection.
1.15 The Applicant further submits that there are innumerable benefits of the Sulfate Removal Plant in the overall mining operations. Few of them are listed below:
