Classification of supply— The present appeal has been filed against the Advance Ruling issued by the Authority for Advance Ruling, Andhra Pradesh.

The issue at hand is to decide— 

a) The classification of supply of the ‘reimbursement of LIH Damaged beyond repair goods/equipment’.

b) Whether the supply of drilling services and reimbursement of LIH are composite supply or not and;

c) Subsequently, in case of it being a composite supply, whether the rate of GST applicable to supply of drilling services, being the principal supply, should apply to all the supplies made under the contract with ONGC.

Primarily, the contention of the appellant is the reimbursement of damaged beyond repair goods/LIH equipment is not a transaction of “Supply of Goods”. 

In the instant case, the appellant uses certain specialized equipment / tools for drilling oil and gas wells in offshore and onshore environment to pre-defined bottom hole targets which are carried out beneath the surface of the earth.

When such equipment / tools are lost in hole or damaged beyond repair, drilling services cannot be performed until new equipment / tools are made available by the Applicant. This leads to disruption of services due to such LIH equipment. The payment made in the form of reimbursement for the damages /replacement of the Lost in Hole (LIH) equipment necessitates the appellant to replace the tools / equipment instantly in order to continue the drilling services. Hence, the reimbursement of LIH is meant to buy and replace the lost goods. 

Held that— the supply of drilling services and reimbursement of LIH are not composite supplies. Therefore, the rate of GST applicable to supply of drilling services shall not be applicable to all the supplies made under the contract with ONGC, Basing on the nature of actual goods involved in the subject activity, and their HSN classification notified for the goods, the provisions relating to chargeability and levy of GST under the CGST Act and the Rules made there under are applicable to the supply of goods. Accordingly, the order of the Authority for Advance Ruling, A.P. needs no interference.