• Dated 23^rd February, 2026

Functional Interdependence Key to Determining Composite Supply under GST - Andhra Pradesh High Court

BRIEF FACTS:

The assessee, entered into a contract with Oil India Limited for providing mud engineering services in relation to drilling operations in the Krishna Godavari basin. The scope of work included designing drilling fluid programs, monitoring drilling parameters, and supplying drilling mud chemicals and additives required for execution of the operations. The assessee treated the entire arrangement as a composite supply under Section 2(30) of the CGST Act, 2017. An application was filed before the Authority for Advance Ruling seeking clarification whether the supply of mud engineering services along with mud chemicals supplied on consumption basis constituted a composite supply.

The Authority for Advance Ruling held that the supplies of services and chemicals were separate taxable supplies and not naturally bundled. The Appellate Authority affirmed this view. Aggrieved, the assessee approached the High Court.

ASSESSEE'S CONTENTION:

The assessee contended that the contract had to be read as a whole and not in a fragmented manner. The dominant objective of the agreement was to ensure safe and efficient drilling operations. Mud engineering services could not be rendered without continuous supply and injection of appropriate chemicals and additives. It was submitted that the chemicals were not independent off the shelf goods sold separately in the market but were specifically formulated and supplied as part of the drilling process. The services and goods were therefore naturally bundled and supplied in conjunction with each other in the ordinary course of business. The assessee further argued that mere issuance of separate invoices or separate price break up would not alter the true character of the transaction.

DEPARTMENT'S CONTENTION:

The Department contended that the contract involved two distinct supplies namely supply of mud engineering services and supply of chemicals. Separate billing and pricing structure indicated that they were independent supplies. It was argued that since there was no single consolidated price and the goods could theoretically be supplied independently, the conditions of composite supply were not satisfied. Accordingly, GST was required to be levied separately on goods and services.

DECISION:

The High Court of Andhra Pradesh held that the definition of composite supply under Section 2(30) requires that supplies must be naturally bundled and supplied in conjunction with each other in the ordinary course of business. The Court observed that mud engineering services necessarily involve continuous monitoring of drilling operations and determination of the type and quantity of chemicals to be injected. The supply of chemicals was integral to and inseparable from the rendering of mud engineering services. Without such chemicals, the services could not achieve their intended purpose of maintaining borehole stability and ensuring safe drilling.

The Court further held that separate invoicing is not determinative of the nature of supply. What is relevant is the substance of the contract and the commercial reality of the transaction. On a holistic reading of the agreement, the supply of services and chemicals formed one composite supply, with mud engineering services being the principal supply. Accordingly, the orders of the Authority for Advance Ruling and the Appellate Authority were set aside.

BTA's COMMENT:

This judgment reiterates that the determination of composite supply depends on the intrinsic and functional relationship between goods and services and not merely on billing structure. Where goods are integral to the effective performance of a service and are supplied as part of a unified contractual obligation, the transaction qualifies as a composite supply under GST. The ruling provides clarity for industries where consumables are inherently linked with specialized services.

Case Reference: Halliburton Offshore Services Inc. Vs Union of India, Writ Petition No. 14517 of 2023, decided on 11.02.2026 by the High Court of Andhra Pradesh.

Author- Shristy Pathak

Edited by- Madhurima Bose