Service Tax on Works Contract
TAXABLE SERVICES
Pure services,
for examples Consulting
engineer services, market
research services, rail travel
agent services etc
Services which are indivisibly
mixed with supply of goodsfor example, photo copier services,
photo studio services, services in
relation to construction of Industrial
or residential buildings etc
• The owner of a photocopier supplies photo
copies on a piece of paper to any one who
wants it.
• The customer wants just a Xerox copy and pays
for it.
• The paper on which Xerox is taken is only a tool
to complete the transaction.
• Of course the payment is for the paper and the
image content.
• The object of payment is for the service of
duplication rendered by the photo copier. The
payment is not for the mere piece of paper alone.
• Transfer of property in goods involved in the
execution of a contract. Everest copier Vs State
of Tamil Nadu (1996)103 STC 360 (SC).
Splitting up a contract for works and labour
Whether meals served at a hotel to the residents can be
subjected to sales tax.
In the case of State of Punjab Vs Associated Hotels of
India Limited 1977 1 STC 472, the Honourable Supreme
Court of India has held that unless there is a difference
distinctly shown between the goods and services the
sales tax authorities cannot split up this contract which
is a contract for works and labour.
Supply of goods is incidental to the contract.
• The Apex Court in the case of The State Of
Madras V. Gannon Dunkerley & Co., (Madras)
Ltd. (1958) 9 STC 353(SC) has held that there
is no sale as such of materials used in a building
contract, and that the Provincial Legislatures had
no competence to impose a tax thereon under
Entry 48 List II
• The 46th amendment to the Constitution was
made thereafter to provide for a definition of ‘tax
on sale or purchase of goods’, which includes
transfer of property in goods (whether as goods
or in some other form) involved in the execution
of a works contract
Issues as to the nature of contract viz.
• contract of sale vs. works contract,
• contract for work vs. works contract,
• indivisible contract vs. divisible contract,
• whether sales tax can be levied on the transfer
of property in goods involved in the execution of
works contract,
• whether service tax can be levied on the service
portion of an indivisible works contract etc.
have been considered by the Courts and Tribunals
Vivisection of Contract - Judicial pronouncements
• Issue: Levy of service tax on the design and engineering portion of
a turnkey contract.
• Decision: Appellant’s contract with IOC was a works contract on
turnkey basis and not a consultancy contract and that a works
contract cannot be vivisected and part of it subjected to service tax .
• Forum: Delhi Tribunal in the case of Daelim Industrial Co. Ltd. V.
CCE, Vadodara - (155)ELT 457 (Tri-Del)
• Similar view was held in the case of L&T Ltd. vs.CCE 2004 (174)
ELT 322 (Tri - Del).
• The Supreme Court dismissed the Special Leave petition of the
department in CCE, Vadodara vs. M/S. Daelim Industrial Co. Ltd.
2004 (170) ELT A181 (SC). The Supreme Court did not go in to the
merits of the Tribunal’s order but merely stated that they saw no
reason to interfere.
•
However, in the case of L&T Ltd., the appeal filed by the
department has been admitted by the Apex Court in
2005(182)ELT A149 (S.C).
• A lot of works contractors are relying on the principle laid
down in the Daelim case and the L& T case to contend
that the services portion of a works contract cannot
be subject to levy of service tax.
• The Supreme Court in the case of BSNL has held that
the Central government is empowered to tax on the
service portion and the state governments are
empowered to tax on goods. Recently, in CCE v. BSBK
(P) Ltd (CESTAT New Delhi), the Tribunal, on facts held
that the contracts entered into by assessee were
‘divisible’ in nature.
Introduction Service Tax levy on Works Contract
•
In this back drop Service tax on works contract was
introduced. In the Budget Speech 2007 the Honourable
Finance Minister has stated as under:
“State Govt levies tax on transfer of property in goods
involved in execution of WCT. The value of such
services in a WCT should attract service tax. Hence, I
propose to levy service tax on services involved in the
execution of WCT. I propose an optional composition
scheme under which ST will be levied at only 2% of total
value of WCT Vide clause 125 of the Finance Bill, 2007”.
• With effect from 1.6.07 the levy was notified as operative.
This strengthens the view that works contracts are not
liable to service tax prior to 1.6.07
Legal provisions
• Levy of service tax on any service provided to any
person, by any other person in relation to the execution
of a works contract, excluding works contract in respect
of roads, airports, railways, transport, terminal, bridges,
tunnels and dams was introduced in the budget 2007.
• Section 65(105) of the Finance Act, 1994 defines the
taxable service in respect of various categories of
services. The Finance Bill, 2007 introduced sub-clause
(zzzza) to clause (105) .
• “(zzzza) to any person, by any other person in relation to
the execution of a works contract ,excluding works
contract in respect of roads ,air ports, railways, transport
terminals, bridges ,tunnels and dams.
Explanation — For the purposes of this sub -clause, “works contract”
means a contract where in, —
(i) transfer of property in goods involved in the execution of such
contract is leviable to tax as sale of goods, and
(ii) such contract is for the purposes of carrying out,—
a) erection, commissioning or installation of plant, machinery,
equipment or structures, whether pre-fabricated or otherwise
installation of electrical and electronic devices , plumbing, drain
laying or other installations for transport of fluids, heating, ventilation
or air-conditioning including related pipe work, duct work and sheet
metal work, thermal insulation, sound insulation, fire proofing or
water proofing ,lift and escalator, fire escape staircases or elevators;
or
b) construction of a new building or a civil structure or a part thereof, or
of a pipe line or conduit, primarily for the purposes of commerce or
industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair ,alteration, renovation or
restoration of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering ,procurement and
construction or commissioning (EPC) projects”
Types of contracts covered
• A contract involving transfer of property in goods
involved in the execution of such contract which is
leviable to tax as sale of goods and being contracts of
the nature specified in clauses (a) to (e) above are
covered under the definition.
• Therefore, all other works contracts are not subject to
levy of service tax under this category.
• For example, printing contracts, dyeing contracts,
maintenance contracts , electrical or structural contracts
etc., which are not in the nature of services specified
above, are not taxable under this category.
Residential complex having less 12 units or less :
•
Clause (c) above covers construction of new residential complex or a part
thereof.
•
Under construction of complex service, construction of a residential complex
consisting of more than12 residential units only is taxable.
•
The issue arises as to whether construction of a residential complex
consisting of 12 residential units or less is taxable under the category of
works contract.
•
Section 65(91a) defines “residential complex”to mean any complex
comprising of —
(i) a building or buildings, having more than twelve residential units;
(ii) …………………………..
•
Wherever the term ‘residential complex’ appears in the Finance Act, it
should have more than 12 residential units.
Valuation
• As per rule 2A(1) of valuation rules, the
value of the works contract services shall
be equivalent to the gross amount charged
for works contract less the value of
transfer of property in goods involved in
the execution of works contract.
For this purpose,• Gross amount shall not include VAT or
Sales Tax
Value shall include
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Labour charges for the execution of the works
Amount paid to the sub contractors for labour and
services
Charges for planning designing and architect’s fees
Charges for obtaining machinery tools etc whether on
hire Or otherwise for the execution of the works
contract
Cost of consumables such water electricity fuel etc
used in the execution of works contract
Cost of establishment of the contractor relatable to
supply of labour and services
Other similar expenses relatable to supply of labour
and services and
Profit earned by the service provider relatable to
supply of labour and services
• It is pertinent to point out that whatever has been
excluded from value for the purpose of VAT or
sales tax in Gannon Dunkerley and Co Vs State
of Rajasthan has been included for the purpose
of service tax
• As per rule 2A(1)(ii) of Service tax valuation
rules when VAT or sales tax is paid for the
actual value of transfer of property, and the
value adopted for the purpose of payment of
VAT or Sales Tax can be deducted from the
gross value to arrive at the service component in
the works contract for the purpose of payment of
service tax.
The Government in order to provide a simple mechanism has issued works
Contract (Composition Scheme for Payment of Service Tax rules, 2007
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3.(1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the
Service (Determination of Value) Rules, 2006, the person liable to pay service tax in
relation to works contract service shall have the option to discharge his service tax
liability on the works contract service provided or to be provided, instead of paying
service tax at the rate specified in section 66 of the Act, by paying an amount
equivalent to four per cent. of the gross amount charged for the works contract.
Explanation.- For the purposes of this rule, gross amount charged for the works
contract shall not include Value Added Tax (VAT) or sales tax, as the case may be,
paid on transfer of property in goods involved in the execution of the said works
contract.
(2)
The provider of taxable service shall not take CENVAT credit of duties or
cess paid on any inputs, used in or in relation to the said works contract, under the
provisions of CENVAT Credit Rules, 2004.
(3)
The provider of taxable service who opts to pay service tax under these rules
shall exercise such option in respect of a works contract prior to payment of service
tax in respect of the said works contract and the option so exercised shall be
applicable for the entire works contract and shall not be withdrawn until the
completion of the said works contract.
(Introduced vide Notification No.32/2007-Service Tax, dated 22nd May, 2007)
Revision of rate of Service Tax
• The Government has revised the rate of service
tax from 2 per cent to 4 per cent under
composition scheme on Works Contract vide
Service Tax Notification No.7/2008 dated 1st
March 2008.
• It has been clarified by CBEC that the service
tax becomes chargeable on receipt of the
payment and on the amount for receipt.
Therefore, the rate of 4 per cent is applicable for
the work contract where the payment of service
is receipt on or after 01.03.08
Exemption from service tax
• All taxable services provided by any person to United
Nations or an internation organization are exempted from the
whole of the service tax leviable thereon with effect from
2.08.02 Notification 16/2002 ST dated 2.8.02.
• International organization means
an international
organization declared by the Central Government in
pursuance of section 3 of the United Nations (Privileges and
immunities) Act 1947.
• Full exemption is granted to any of the taxable service
provided by any person to a developer of Special Economic
zone or a unit (including a unit under construction) of Special
economic zone for the consumption of the services within
such Special Economic Zone provided the SEZ /Units are
approved by the Board of Approval and proper accounts for
receipt and utilization of the services are maintained.
Notification 4/2004 ST dated 31.3.2004.
• Value of goods and materials sold by service provider to the
receiver of the service is exempted from payment of service tax
provided no credit of duty paid on such goods and materials sold
has been taken under the provisions of the Cenvat credit rules 2004
or
• When such credit has been taken by the service provider on such
goods and materials, such service provider has paid the amount
equal to such credit availed before the sale of such goods and
materials.
• All taxable services provided or to be provided on or after 1.4.2007
by Technology Business
Incubator (TBI) or a Science and
Technology Entrepreneurship Park (STEP) recognized by the
National Science and Technology Entrepreneurship Development
Board (NSTEDB) have been allowed full exemption from service tax
leviable thereon.
Notification no 9/2007 dated 1.3.2007
• Full exemption is also granted to taxable services
provided by an entrepreneur located within the premises
of of TBI Or STEP (i.e, the incubates)
Notification No 10/2007 dated 1.4.2007
• Full exemption is granted to the taxable services
provided or to be provided under an agreement , by any
person to any other person who has the right to
authorize any person to exhibit cinematograph film ,
provided the services are in relation to the delivery of
the content of the cinematograph film and the content of
the film , being in digitized form, after its encryption, is
transmitted directly to a cinema theatre for exhibition
through the use of satellite, microwaves or terrestrial
communication line and not by any physical means
including CD and DVD.
• All taxable services provided by any person for
the official use of a foreign diplomatic mission or
consular post in India are wholly exempted from
payment of service tax. subject to the
observance of the procedure laid down therein
Notification No 33/2007 ST dated 23.5.07
• All taxable services provided by any person for
the official or personal use of the family
members of diplomatic agents or career
consular offices posted in a foreign diplomatic
mission or consular post of India is wholly
exempted subject to observance of procedure
laid down there in.
Notification 34/2007 St dated 23.5.2007
• Services provided in relation to construction of
ports or other ports have been exempted The
exemption is available for new ports or other
ports but not for services of completion and
finishing and repair alteration, renovation etc, of
existing ports.
Notification 25/2007 dated 22.5.07.
• Service provided to foreign diplomatic mission or
consular posts in India for the official use are
also covered.
Notification No 33/2007 ST dated 23.5.07
• Exemption to small service providers up to
Rs.10 lakhs in a financial is available.
Notification 6/2005 dated 1.3.2005
Boards Important references:
• Scope of levy has been Explained
DOF NO.334/1/2007 (TRU) dt 28.2.07
• Scope of exemption of Notification
25/2007 dated 22.5.07, Optional
composition scheme and valuation etc
have been explained.
F.No.B1/16/2007 TRU dated 22.5.07
Important case laws
The landmark cases are:
1. Daelim Industrial Co. Ltd. Vs. CCE (155) ELT 457 (Tri-Del)
2. CCE, Vadodara vs. M/S. Daelim Industrial Co. Ltd. 2004
(170) ELT A181 (SC) – SLP filed by department dismissed
3. Larsen & Toubro Ltd. vs. CCE 2004 (174) E.L.T. 322 (Tri. Del.)
4. Commissioner vs. Larsen & Toubro Ltd (182) ELT A149
(SC)- Supreme Court admitted the appeal filed by the
Commissioner of Central Excise against the decision of the
Tribunal
5. Emerson Process Management Power & Water Solution
Inc. vs. CCE 2006 (3) STR 508 (Tri. - Del.)
6. CCE vs. Larsen & Toubro Ltd. 2005 (69) RLT 62 (CESTATChe.)
7. CCE vs. Shapoorji Pollanji And Co. Ltd. 2005- TIOL-892CESTAT-DEL
8. Rolls Royce Industrial Power (I) Ltd. & Anr. Vs CCE 2004
(95) ECC 441 (Tri-Del),