Blog No. 39: Consumption of goods does not change the nature service from Pure Service to Composite Service

Authority for Advance Ruling in the State of Uttarakhand ruled that contract for supply of manpower services inclusive of safety kits to be worn by the manpower is still a contract for “Pure Service” and hence exempt under entry No. 3 of Not. No. 12/2017 CT (Rate) dated 28.06.2017.

Read about the case M/s Green Cleaning Solutions reported as 2022 (1) TMI 1107 below:

Facts of the Case

1. Contract for supply of manpower for managing solid waste for an amount of Rs. 65,95,540/- inclusive of ₹ 11,75,532/- payable against safety kits to be worn by the manpower is entered with Nagar Palika Parishad.
2. Not. No. 12/2017 CT (Rate) dated 28.06.2017 provides exemption to various services provided. Vide S.No. 3 thereof, exemption is granted to the pure services:

1. provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity
2. by way of any activity in relation to any function entrusted to a Panchayat/Municipality under article 243G/243W of the Constitution

3. However, various concerns were expressed by trade for contracts involving supply of goods as well like spare parts supplied in maintenance contracts. Therefore, the scope of exemption was expanded from pure services to composite services including supply of goods to a maximum ceiling of 25%.

Issue for Consideration

4. Whether present contract is exempt from GST?

Applicant’s submissions

5. Present contract is a composite contract.
6. Value of supply of goods (17.82%) is less than 25% of the value of entire composite contract.

Findings of the Authority

7. Safety kits/ protective gears are not separate goods to be used in driving the vehicles. These safety kits were made mandatory as a precautionary measures for the safety of manpower due to COVID pandemic during Kumbh Mela 2021.
8. These safety kits are not required in normal situation and therefore cannot be termed as ‘goods’ supplied during the course of supply of service.
9.  It is not a case of “Composite Supply”.
10. It is a case of “Pure Service”. Hence, exempted under S.No. 3 of the Not. No. 12/2017 (supra)

Our Remarks

11. The issue of ‘supply of goods’ vs ‘consumption of goods’ in the course of executing a contract is required to be determined in light of facts of each contract.
12. The prices are quoted in contract at the time of bidding for contract. Said prices are quoted based on scientific calculations derived from equipment operation manuals or reports issued by competent authorities. Accordingly, the amount of wear and tear, replacement and spares is determined and added in the bid amounts.
13. The consumption of goods should not be confused with the supply of goods. For example, in contract for operation and maintenance of sewage treatment plants, the chemicals are used for treating the municipal waste. Said chemicals are not supplied to municipal authorities rather consumed by the contractor for providing maintenance services.
14. Likewise, electricity consumed for operating the plants should not be confused with supply of goods to disqualify the contractor from the benefit of exemption notification.