GST on EPC contract for construction of customised additional infrastructure facilities at Mangla upgradation project

ARA, Rajasthan has pronounced judgment on 13.9.2021, in the case of L&T Hydrocarbon Engineering Ltd. (2021) 36 J.K.Jain’s GST & VR 358, that;

‘Composite Supply─EPC contract of Mangla upgradation project Stage-2-project qualifies as Composite Supply under “work contract” and attract GST @18% (CGST+SGST) under S.No.3-Heading 9954(ii) of the notfn No.11/2017-CT(R) dated 28.6.2017.’

1.Background.─The applicant was awarded a EPC contract for construction of customised additional infrastructure facilities at Mangla upgradation project Stage-2-EPC-2 (MUPS-2-EPC-2) project at Mangla wells. The scope of work under the contract is that the applicant is required to undertake various activities comprising of design and detail engineering, Feed verification. Detail Engineering, Procurement & supply, Fabrication, Manufacturing, Assembly, Inspection & Testing, Packing & loading, Shipping, Site establishment, Delivery and unloading at site, Storage and preservation, erection and Installation, Facilities construction, Insulation, Painting, Dismantling, Hook-ups, Acceptance Testing, Pre commissioning & commissioning RFSU, performance guarantee test Run, Training of Company’s commissioning & operations personnel, Project management, Construction Management, Logistic Management, Site Management, Stakeholder Management, Site Restoration as applicable and satisfactory hand over to Vedanta of the facilities all customised as per contract and forming internal part of MUPS-2-EPC-2 project.

The applicant has contended that under the EPC contract they are providing Engineering, Procurement and construction (EPC) services in relation to the upgradation of certain facilities of the Mangla oil field which is operated by Vedanta for carrying out petroleum operations. Since services are in the nature of operational or administrative assistance provided by the applicant to Vedanta, it aptly merit classification as “Support-services to mining” as per heading 9986 of the S.No.24(ii) of notfn No.11/2017-CT(R) dated 28.6.2017(as amended). The applicant further contended that alternatively the supply of services by them should be classified as other professional, Technical and Business services relating to exploration, mining or drilling of petroleum crude or natural gas or Both under Heading 9983 of S.No. 21(ia) of the notfn No.11/2017-CT(R) dated 28.6.2017 (as amended).

Now the issue to be decided whether the supply to be made by the applicant under the EPC contract awarded to them would be classified as “Support services to mining or other Professional, Technical &. Business services relating to exploration, mining or drilling of Petroleum Crude or Natural Gas or Both or otherwise in any other service”.

2. Findings by ARA.─Support services to exploration, mining or drilling of Petroleum crude or natural gas are classified under heading 9986. The explanatory Note to service code 998621 provides the scope of the said entry i.e., Support Services to Oil & gas extraction, which is reproduced below “This service code includes derrick erection, repair and dismantling services, well casing, cementing, pumping, plugging and abandoning of wells, test drilling and exploration service in connection with petroleum and gas extraction, specialized fire extinguishing services, operation oil or gas extraction unit on a fee or contract basis. This service code does not include geological, geophysical and related prospecting and consulting services”.

From the explanatory note it reveals that Support Services shall include the services to be provided for exploration, once the infrastructure/facility for exploration is built & complete in all respect and ready to start exploration. But it does not include the services to be provided before creating the infrastructure/facility. Under the EPC contract the applicant has to undertake activities from Designing, Engineering, Procurement, construction of customised facility, commissioning of permanent facility, Test run and hand over of complete facility so designed, constructed, tested & commissioned. Thus it cannot be treated as support services to oil & gas extraction.

Similarly, other professional, technical & business services are classified under heading 9983. The heading covers other Professional, Technical and business services relating to exploration, mining or drilling of Petroleum crude of natural gas or both. This heading covers “pure services” of other Professional, technical & business related and not the services provided under a EPC contract which include Engineering, Procurement & Construction. As discussed in Para 5 above, the applicant has to undertake the Designing, Engineering, Procurement, construction of customised facility, commissioning of permanent facility, Test run and hand over of complete facility so designed, constructed, tested & commissioned. Thus it cannot be classified as other professional, Technical and Business services relating to exploration, mining or drilling of petroleum crude or natural gas or Both.

3. Analysis by ARA.─In view of the above it is clear that the services provided by the applicant neither fall under “Support services to exploration, mining or drilling of Petroleum crude or natural gas or other professional, technical and business services relating to exploration, mining or drilling of Petroleum crude or natural gas or Both”.

As per EPC contract the applicant has to complete the task of setting up of MUPS2-EPC-2 project broadly ranging from designing, engineering, procurement, fabrication, manufacturing, assembly, erection and installation, facilities construction, Testing, Pre commissioning & Commissioning, Training etc. & satisfactory hand over of complete various infrastructure facilities, all customised as per contract. The applicant has to start from the scratch and bring into existence a fully operational various infrastructure facilities at MUPS-2-EPC-2 project. The execution of the project would also involve the transfer of property in goods.

In light of these fact, we examine the definition of “work contract” as provided u/s 2(119) of the CGST Act, 2017, which reads as under:–

(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

The contract is for the engineering, procurement and commissioning of MUPS2-EPC-2 project including various infrastructure facilities, all commissioned. What would be transferred is the project including the civil work and land involved in project. Various civil structure would be created and various equipment would be installed.

The said project cannot be shifted anywhere; it is essentially of the nature of immovable property. The project after completion at the time of transfer will be an immobile property. It is thus, we are of the considered view that the work specified in the EPC contract qualifies as “work contract” and will be taxed accordingly.

According to S.8, CGST Act, 2017, the tax liability on a composite or a mixed supply shall be determined in the following manner, namely:– (a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;

As per S.2(30) composite supply is defined as “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;

Further principal supply is defined u/s 2(90) as “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

Further, as per Para 6 of Schedule-II, Composite supply:–

The following composite supplies shall be treated as a supply of services, namely:–

(a) works contract as defined in clause (119) of section 2;

However, since composite supply of works contract has been explicitly classified as supply of service under Schedule II, the concept of works contract follows that–

1. Works contract in itself is a composite supply in which construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning etc. are involved along with transfer or property in goods.

2. Under GST, as per definition of works contract service if construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning is for immovable property, then it will be classified as works contract.

Further, we observe that the activity proposed to be undertaken is a composite supply of works contract, the rate of tax in given service shall be determined in accordance with the Notfn No.11/2017-CT(R) dated 28.6.2017, as amended from time to time.

4. Conclusion by ARA.─In view of the above the ARA found that the services provided under EPC contract awarded to the applicant by Vedanta for setting up of a project broadly ranging from designing, engineering, procurement, fabrication. manufacturing assembly, erection & installation, facilities construction, insulation, dismantling, Pre commissioning & Commissioning, training etc. and satisfactory hand over of complete various infrastructure facilities all customised 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 Notfn No.11/2017-CT(R) dated 28.6.2017 and GST @ 18% (9% CGST and 9% SGST) is payable.

5. Ruling by ARA.─Based on the above discussion & finding the ARA ruled as under:–

Question 1:–Whether the Services provided by the applicant are classified under S.No.4(ii) of Heading 9986 of the notfn No. 11/2017-CT(R) dated 28.6.2017 as ‘Support Services to exploration, mining or drilling of petroleum crude or natural gas or both’ and attract GST @ 12%.
Answer. No.

Question 2:–Whether the Services provided by the applicant are classified under ‘other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both’ under S.No.21(ia) of Heading 9983 of the notfn No. 11/2017-CT(R) dated 28.6.2017 (as amended) and attract GST @ 12%.
Answer: No.

Question 3:–Further, if the subject services are not classifiable under the aforesaid entries, what would be the appropriate classification for the same and at what rate GST would be imposable.
Answer: The activities of supply designing & engineering, installation, Commission of Project under EPC contract by the applicant shall attract GST @18% (CGST and SGST) under S.No.3- Heading 9954(ii) of the notfn No.11/2017-CT(R) dated 28.6.2017.

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