Tamilnadu AAAR upheld order of AAR’s on denying GST exemption on drilling activity for agricultural purposes

Introduction: An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAAR is as follows:

• Whether GST exemption has to be granted for undertaking drilling of bore well in agricultural land as it is for agricultural purpose.

Facts of the appeal made to AAAR, by Tvl. Aravind Drillers, (appellant)’, dated 30-Jun-2021:

The appellant, Tvl. Aravind Drillers is involved in the activity of providing drilling services for industrial, agricultural, personal users. Their general business is into the drilling of land, as required. When drilling works are done for agriculturists and their compressors are used for pumping water for agricultural cultivation, the appellant herein submits that they take a confirmation letter from the service recipient that the bore wells are used are exclusively for agricultural purposes. The appellant had raised two questions to the AAR whereby it required clarification if the drilling of bore wells for agricultural purposes and renting of compressors for pumping of water from the bore wells for agricultural purposes amount to agricultural operations undertaken directly with raising agricultural produce and if yes, whether the said activity would be classified under entry S.No. 54 of Notification 12/2017 CT (Rate) dated 28.Jun.2017.

The AAR vide its Order No. 39/AAR/2020 dated 18.Dec.2020 ruled that the drilling activity and renting of compressors for pumping water from the bore wells will not be construed as ‘Support Service for agriculture’ classifiable under SAC 9986 and hence S.No. 54 of Notification 12/2017 CT (Rate) dated 28.Jun.2017 will not be applicable for the two cases.

Aggrieved by the order passed by the AAR, the appellant appealed to the appellate authority as below. The appellant produced the S.No. 54 of Notification 12/2017 CT (Rate) dated 28.Jun.2017 as given in link below.

http://gstcouncil.gov.in/sites/default/files/All-rate-notification/ Notification12-CGST.pdf

As per the above notification, activities which fall under the exemption category and which are construed as ‘support service for agriculture’ are enumerated under ‘S.No. 54. Heading 9986’. The appellant is of the contention that the notification is not exhaustive and is inclusive and other allied agricultural services can be added. Also the explanatory note to the exemption category elaborates on the activities which can be classified under ‘support service for agriculture’ but excludes the following four services under this heading as given below.

• Formation and clearance of agricultural land – 995432
• Services provided by agronomists and agricultural economists – 998311
• Other pest control services – 998531 and
• Water distribution services through mains ( on a fee or contract basis) – 998633

The appellant further contended that the notification should be read excluding the explanatory notes provided as ruled in a Supreme Court case, CCEx, Jaipur Vs. Mewar Bartan Nirman Udyog, 2008, where it was stated that notification are to be read strictly and only S.No. 54 is to be considered for interpreting the exemption activities, excluding the explanatory notes. Further the appellant presented the Supreme Court ruling in the case of CCEx Vs. Rajasthan State Chemical Works 1991 where it was held that the term ‘in or in relation’ has a wide connotation and cannot be interpreted in a narrow sense. Hence the appellant contended that the intention of the government is to provide exemption to such activities as listed and similar activities.

The appellant explained further that the activity of digging bore wells is integral to agricultural activity for providing water supply for irrigation and contended that Heading 9986 has to be read in an inclusive sense. Supreme Court ruling under HCL Limited Vs. Collector of Customs, New Delhi, 2001 and Share Medical care Vs. Union of India, 2007 were referenced where the appellant contended that when a tax payer can avail benefits under two headings, it is the responsibility of authority to grant such benefits.

For the case of compressor pumps, the appellant is of the view that since the compressor pumps are used for flushing water out off the bore wells, the activity has to be read in an inclusive sense and also further quoted that under the erstwhile service tax regime, the Finance Minister through letter No. FNo. 354/35/2014 – TRU dated 04.Mar.2014, had classified bore well drilling for supply of water for agricultural purposes was exempt from service tax and it was further covered under the negative list under Section 66D(d)(1) of Finance Act. With the onset of GST, the appellant submitted that this exemption was carried through Notification No, 12/2017 dated 28.Jun.2017 and hence their activities are exempt from GST.

Observations and final ruling by AAAR vide Order No. A.R.Appeal No. 04/2021/AAAR dated 30.Jun.2021:

The AAAR held the personal hearing for the appellant on 22.Jun.2021 and the authorized representative of the appellate represented their case as above. The AAAR observed that the appellant was paying GST on the drilling activities conducted by it for industrial purposes under Heading 995434 but requesting for exemption for the same activity under Heading 9986 as it relates to agricultural purposes. The appellate authority opined that one activity cannot be classified under two headings and the appellant has erred in making such classification in the first place. The AAAR also opined that since the same equipment was used for both industrial and agricultural drilling, the tax authorities cannot make a distinction as such for splitting the activities which will lead to tax evasion.

For the letter presented under the erstwhile service tax regime which was adopted by the GST regime too, the AAAR clarified that the question of classifying the bore well activity under the exemption list was still under discussion and not decided.

The AAAR on the above reasoning dismissed the appeal made by the appellant herein and concluded that it does not find any infirmity on the order passed by the lower authority vide Order No. 39/AAR/2020 dated 18.Dec.2020.

To Read the Judgement Download the PDF Given Below :