Services of geophysical survey test related to water supply provided to government organization qualify for GST exemption

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 appellent 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.

Facts of the application made to AAR, by taxpayer ‘Tamilnadu Water Supply and Drainage Board (TWAD) (applicant)’, dated 31-Mar-2021:

The applicant is a government organization which provides water supply and under- ground sewerage connections for village panchayats / local and urban bodies. Clarification is sough with reference to Serial No. 3 of Notification number 12/2017 CT(Rate) dated 28.Jun.2017 and Serial No. 3 of G.O(Ms) No. 73 dated 29.Jun.2017 as amended. The applicant is classified under the service provider category. There are two questions raised by the applicant with respect to the exemption notification issued by the government. The link to the exemption notification is as below.

Link

Clarification sought by applicant with reference to the Notification:

As per notification sighted above, TWAD provides services by way of material quality checking, received from contractors, for contracts undertaken by TWAD Board. TWAD had four laboratories in four different regions of Tamilnadu namely Coimbatore, Madurai, Trichy and Tindivanam and operated machines which tested quality of materials in conformity to Indian Standards comprising of steel rods, resistant Portland cement, paver blocks, PVC pipes, GI pipes, DWC pipes, electric cables etc., as brought in by the contractors to execute their projects. Testing fee is collected by the TWAD basis fixed quality testing charges framed by TWAD under turnkey system, for various schemes assigned to contractors by TWAD Board. At times, the TWAD assigns works to panchayats and municipalities and the applicant wishes to clarify whether the exemption notification will be applicable for such work which are sub-delegated too and for works undertaken by private bodies, charge GST at 18%.

The second question is with reference to service provided by applicant of geophysical survey investigation works which it undertakes to several government bodies such as Public Works Department, TN Slum Clearance Board, SIPCOT, TN Police Housing Corporation, Rural Development etc. Geophysical surveys are conducted for identifying open well sources and bore- well sources by making use of sophisticated instruments available for such testing. Fixed charges are levies by TWAD for conducting such surveys from the user departments. Similar to previous case, when functions are assigned to panchayats and municipalities, the applicant wishes to know if such survey’s assigned to be panchayats and municipalities are exempt and charge 18% for geophysical survey investigations for all other departments excluding municipalities, corporation, rural development department and town panchayats.

The applicant had submitted necessary documentary evidence to present their case to the AAR such as copies of sample test requisitions, TWAD online material quality monitoring IS Chronological order, format for collecting sample, test certificate issued by bank. They had also substantiated their case with prior order passed by the AAR under order 22/AAR/2018 dated 28.Nov.2018 and CESTAT Chennai order 41526/2018 dated 01.May.2018. A personal hearing vide virtual mode was called for and the applicant presented their case on 12.Feb.2021 where additional documents were requested with respect to copies of samples tests conducted for government and private agencies, documents related to geophysical activity performed for government and private agencies. Request two w.r.t documents related to geophysical esting could not be presented by applicant as no request were raised till now and for request one, the requisite evidences were provided to AAR by applicant.

Contention of the revenue:

The AAR is of the contention that for question one related to quality testing services provided by applicant to local bodies and other private entities will not be exempt from GST. For question 2, the geophysical surveys conducted by the applicant for local bodies will be exempt from GST provided 4 conditions as listed are satisfied which are listed as follows.

• Time of supply is after Jan.2018
• The supply shall be pure services or composite supply where value of goods does not exceed 25% of total value
• Supply has to be made only to governmental entities
• The supply should be a function entrusted to a municipality or panchayat under Article 243W or 243G of the constitution.

Observations and final ruling by AAR vide Order No. 11/AAR/2021 dated 31.Mar.2021:

The AAR carefully examined the provided facts of the case and reiterated the two questions sought to be answered by them. The AAR acknowledged the fact that both the testing for quality services provided by TWAD to contractors/local authorities and governmental authorities and the geophysical service provided by TWAD to local and governmental authorities, does fall under the category of ‘pure services’. It further acknowledged the fixed charges approved for both the services rendered by TWAD. Entry No. 3 of Notification 12/2017 CT(R ) dated 28.June.2017 was further examined where it stated as below.

“Description of services: Pure services(excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or to a union territory or local authority or a governmental authority by way of any activity in relation to any function entrusted to a panchayat under article 243G of the Constitution of India or in relation to any function entrusted to a Municipality under article 243W of the constitution”

On plain reading of the above description it can be construed that any pure services provided are exempt from GST as per conditions stated above, provided the works fall under article 243G and 243W of Constitution of India. The AAR further examined Article 243G anArticle 243W of the Constitution and quality testing of material did not form part of the listing. The AAR further examined the prior orders quoted by the applicant namely order 22/AAR/2018 dated 28.Nov.2018 and CESTAT Chennai order 41526/2018 dated 01.May.2018 and held both to be irrelevant to the instant case. AAR

Hence the AAR passed ruling that the quality material testing work provided by TWAD will not be exempt from GST in terms of entry 3 of notification 12/2017 CT(R ) dated 28.Jun.2017 as amended.

As for the geophysical survey test and reports, since the applicant has not provided any service to private agencies in this regard and has provided service only to local and governmental agencies, the AAR contended that this pure service qualifies to be exempt from GST as per entry

3 of notification 12/2017 CT(R ) dated 28.Jun.2017 as amended, provided the following conditions are fulfilled.

• Time of supply is after 24. Jan. 2018
• The supply shall be pure services.
• Supply has to be made only to governmental entities and the supply should be a function entrusted to a municipality or panchayat under Article 243W or 243G of the

Hence the AAR passed ruling that the Geophysical survey investigations is exempt from GST in terms of entry 3 of notification 12/2017 CT(R ) dated 28.Jun.2017 as amended, subjected to the fulfillment of the conditions as stipulated above. The AAR observed that the geophysical survey test and report are related to ‘water supply’ and ‘survey sketch’ as provided under Article 243W or 243G of the constitution and hence qualify for an exemption.