Mud Engineering Services with Chemicals Qualify as Composite Supply under GST: AP HC sets aside AAAR Ruling [Read Order]
Mud engineers continuously monitor drilling parameters and determine the precise composition and quantity of chemicals to be injected, making the goods component inseparable from the service element.
The Andhra Pradesh High Court has held that the supply of mud engineering services together with mud chemicals and additives on a consumption basis qualifies as a composite supply under GST ( Goods and Services Tax) .
The petitioner, Halliburton Offshore Services Inc an oilfield services provider, had entered into a contract with Oil India Limited for providing mud engineering and drilling support services for oil well operations in the Krishna-Godavari basin.
The contract covered mud engineering services, operation and management of mud plants, drilling and waste management services, fluid management, and supply of drilling mud chemicals and additives tailored to well conditions.
Due to uncertainty regarding GST classification and rate, the petitioner approached the Advance Ruling Authority seeking clarification on whether the bundled supply of services and chemicals constituted a composite supply.
The AAR and the AAAR held that the services and chemicals were separate supplies and not naturally bundled, mainly because they were invoiced separately and could be supplied independently.
During the hearing before the court, it disagreed with this approach and said that the definition of composite supply under Section 2(30) of the GST Act requires supplies to be naturally bundled and supplied in conjunction with each other in the ordinary course of business, with one being the principal supply.
The Court observed that mud engineering services are linked with the supply and use of drilling fluids, chemicals, and additives, since these substances are essential to maintain borehole stability and ensure safe and efficient drilling operations.
The bench also noted that mud engineers continuously monitor drilling parameters and determine the precise composition and quantity of chemicals to be injected, making the goods component inseparable from the service element.
After reading the contract between the petitioner and Oil India, Justices R.Raghunandan Rao and T.C.D Sekhar held that “the chemicals and other substances, supplied by the petitioner, are not off the shelf goods, but compounds, prepared by the petitioner, to suit the peculiar requirements of the drilling site. In the circumstances, the supply of mud engineering services and the supply of chemicals etc would have to be treated as a composite supply.”
Accordingly, it set aside the ruling of AAAR deciding that the supply of services and goods, by the petitioner, to M/s Oil India Limited, is a composite supply.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
