No Separate GST On Chemicals Supplied Under Mud Engineering Contracts: Andhra Pradesh High Court

The Andhra Pradesh High Court has recently held that GST cannot be levied separately on mud engineering services and the supply of drilling chemicals, ruling that such contracts constitute a composite supply under the Goods and Services Tax law.

A Division Bench comprising Justice R Raghunandan Rao and Justice T.C.D. Sekhar allowed a writ petition filed by Halliburton Offshore Services Inc., setting aside orders passed by the Authority for Advance Ruling and the Appellate Authority for Advance Ruling, which had treated the transaction as involving separate taxable supplies.

The petitioner, a foreign oilfield services company registered outside India with a project office in India, had entered into a contract with Oil India Limited for providing mud engineering services in connection with drilling operations in the Krishna-Godavari Basin.

The contract required the petitioner not only to monitor and manage drilling operations but also to supply drilling mud, chemicals and additives specially prepared to suit the peculiar requirements of the drilling site.

To resolve ambiguity on GST liability, the petitioner approached the Authority for Advance Ruling seeking a declaration that the supply of services along with chemicals amounted to a composite supply.

The Authority, however, held that the contract did not qualify as a composite supply. This view was affirmed by the Appellate Authority for Advance Ruling, which relied on pre-GST service tax guidelines to conclude that the supplies were not naturally bundled.

Disagreeing with this approach, the High Court held that the authorities had failed to appreciate the true nature of the contract. The bench observed:

“A mud engineer would be monitoring the drilling of oil wells and advising the quantity and composition of the chemicals and other substances that need to be injected into the borewells, to ensure safe and efficient drilling of oil and gas wells. Thus, the supply of mud engineering services cannot be separated from the supply of chemical etc, to ensure that the drilling is done within the permissible parameters.”

The court emphasised that under Section 2(30) of the CGST Act, a supply qualifies as composite when the goods and services are naturally bundled and supplied in conjunction with each other in the ordinary course of business. The bench noted that the fact that separate bills may be raised for goods would not determine the nature of the transaction.

It further observed:

“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.”

Holding that the transaction was a composite supply, the court ruled that the separate levy of GST on goods and services was unsustainable and allowed the writ petition.

The Court, however, left open the issue of determination of the applicable GST rate, observing that the said question had not been decided by the advance ruling authorities.

For Petitioner: Advocates, Sri Prasad Paranjape and Kadimisetty Sai Sreenadh 

For Respondent: Senior Standing Counsel, Santhi Chandra for CBIC