The Andhra Pradesh High Court ruled that inseparable goods essential to services form a composite supply, and billing methods cannot alter tax classification under GST law. Judges said chemicals and mud engineering were naturally bundled for safe drilling operations.
ANDHRA PRADESH: The Andhra Pradesh High Court ruled that when goods are inseparable and essential for the provision of services, the transaction can be classified as a composite supply. The method of billing does not influence the tax classification.
The Court further stated that the goods and services were naturally bundled and provided together in the ordinary course of business. The contract’s primary aim was to facilitate effective and safe drilling operations, with the supply of chemicals being integral to the performance of mud engineering services.
Facts of the Case:
The petitioner, operating via a Project Office in Mumbai and an operational base in Andhra Pradesh, entered into a contract on September 8, 2014, with Oil India Limited to provide mud engineering and related services in the Krishna-Godavari Basin. The contract encompassed a range of responsibilities, including:
- Mud engineering services
- Supply of drilling fluids, chemicals, and additives
- Operation of mud plants
- Deployment of centrifuges, filtration systems, and laboratory equipment
- Designing and supervising mud programs for high-temperature and high-pressure wells
Under the Goods and Services Tax (GST) framework, the petitioner sought an advance ruling to determine whether the supply of mud engineering services alongside drilling chemicals, provided on a consumption basis, qualified as a “composite supply” under Section 2(30) of the CGST Act.
The Authority for Advance Ruling (AAR) concluded that the goods (chemicals) and services were independent taxable supplies and did not meet the criteria for composite supply. The Appellate Authority for Advance Ruling (AAAR) upheld this view, asserting that the supplies were not “naturally bundled” and could be separately provided. Dissatisfied with these findings, the petitioner appealed to the High Court.
Issue:
Whether the supply of mud engineering services together with drilling fluids and chemicals on a consumption basis under one contract constitutes a composite supply under Section 2(30) of the CGST Act?
Observations of the court:
Section 2(30) of the CGST Act defines composite supply
“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or/and services, 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.
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
The Court determined that the contract should be assessed in its entirety, emphasizing that it should not be artificially divided into separate components. It noted that mud engineering services inherently necessitate the use of drilling fluids and chemicals for their execution. The chemicals are specifically formulated for consumption during drilling and lack independent commercial viability without the service component.
The Court further indicated that the goods and services were naturally bundled and provided together in the normal course of business. The primary goal of the contract was to ensure effective and safe drilling operations, making the supply of chemicals essential to the execution of mud engineering services.
The Court clarified that separate invoicing does not change the inherent nature of the transaction. Thus, it held that the supplies fell under the definition of a composite supply as per the CGST Act. However, the determination of the applicable GST rate was left to be adjudicated by the competent authority.
Consequently, the High Court allowed the writ petition and nullified the rulings of both the AAR and AAAR.
Case Title: Halliburton Offshore Services Inc. Versus Union of India, The Pr. Commissioner of CGST, Vishakhapatnam
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