GST UPDATE ON CLASSIFICATION OF SERVICES OF MINING WORK 73/2020-21

Under the Indirect Tax regime, the classification of various items which are the subject matter of tax, be it goods or services, is an essential and integral part of the whole levy and collection mechanism. It is important both from the taxpayer’s perspective and tax collector’s perspective to have a definite class or group under which subject matters of tax can be divided. The same dispute has been resolved by various Advance Rulings under the GST regime. In this update, we shall be discussing AAR ruling of Rajasthan pronounced in the case of M/s KSC Buildcon Private Limited which shall be important for Mining industry.
M/s KSC Buildcon Private Limited is an unregistered person who has signed a contract agreement for development work of mines including the earthwork of drilling, excavation, removal, transportation of marble and dumping of waste material. Further they are responsible to build roads for movement of vehicles and for safe maintenance of the roads. Moreover the applicant is also required to deploy machinery such as IR, Poclain, JCB, Loader, Trucks along with Operation personnel, skilled and unskilled Manpower, Engineers and Accountants etc. The consideration for the above work is fixed per Metric tonne on target based production.
The applicant seeks advance Ruling with respect to the following questions

Applicability of SAC and classification of said work contract in either of the two codes Viz SAC 9973 – Leasing or rental services concerning machinery & equipment with or without operator or SAC 9954 – Composite supply of work contract services?
What is the difference between operator and Manpower as per GST provisions?
Whether the Special Purpose Vehicles in the work order are classified as “Machinery”?

The Applicant contends that SAC 9973 shall not be applicable as they have not entered into rent or lease agreement as along with machines they have supplied operators and have undertaken the whole project of mining work as mentioned above. So they contend that the work undertaken by them fall under SAC 9954 as they didn’t find any other relevant classification.

Going through the agreement between the applicant and M/s AMP Minerals Pvt. Ltd.(company owning mining site) the AAR Rajasthan has found that the applicant was tasked to extract minerals by way of providing the above services mentioned. Further it is pertinent to note that the applicant has not taken the land on lease. The contention of the applicant that it is cither a Leasing or rental service of machinery with or without operator or a Works Contract Service is not tenable on following grounds –
a. The final output or basis of consideration, is quantum of mineral extracted, whereas, supply of machinery is not done with M/s AMP but for the benefit of himself. Nowhere in the agreement, M/s AMP asks the applicant to lease manpower and vehicles.
b. The foremost conditions of Work Contract Services as defined in .Section 2(119) of CGST Act, 2017 are that it leads to creation of an immovable property and then transfer of the said property in goods, whereas in the instant case, no immovable property is created and question of transfer is does not; arises as ownership of the property and minerals is with M/s AMP.
Applicant is providing a support to M/s AMP in extraction of mineral and therefore it is a kind of supplying support Service. Whereas the supply cannot be categorized as that of goods due to the fact that minerals and mining site both are under the ownership of M/s AMP throughout agreement and post-agreement too. Thus the activity undertaken by the applicant is a ‘Service’ under CGST Act, 2017.
Further, the contention raised by the applicant that his issue is similar to matter discussed in advance ruling order passed by Jharkhand Authority for Advance Ruling (JAAR) vide Order No. JHR/AAR/2018-19/01 dated 02.08.2018 is also not tenable on the ground that the order passed by JAAR is related to a partnership firm which is engaged in providing works contract services to a government entity whereas in the instant case, both facts are non-existing.
Looking into the facts, Rajasthan AAR has concluded that the service provided by the applicant is classified under “Supporting service related to mining” SAC 998622 which attracts tax rate of 18%.
The answer to the remaining two questions was not answered as they don’t fall within the scope of AAR as detailed in section 97(2) of CGST Act 2017. Overall Section 97(2) of the CGST Act is still not wide enough to cover all issues where a taxpayer will be interested in seeking Advance Ruling. Some of these issues are refund, ITC reversals mandated under GST law, interest, penalty, procedural issues etc.

The Government needs to have a fresh look at whole Advance Ruling Mechanism under GST regime. The Government must attempt to widen the mechanism as far as possible and eliminate entry barriers. Further, AARs need to be more judicious vis a-vis the present revenue-minded approach. For this purpose, we are regularly demanding a centralised advance ruling authority and inclusion of judicial members in this mechanism. Then only this will be useful otherwise trade and industry is feeling that there is no utility of the same.
This is solely for educational purpose.
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GST UPDATE ON CLASSIFICATION OF SERVICES OF MINING WORK 73/2020-21

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