Service Tax on Works Contract

Service Tax on Works Contract Presentation by P. Mahalingam, Superintendent of Central Excise, Coimbatore I-A Range

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 goods- for 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 • 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 • 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 (CESTAT-Che.) 7. CCE vs. Shapoorji Pollanji And Co. Ltd. 2005- TIOL-892-CESTAT-DEL 8. Rolls Royce Industrial Power (I) Ltd. & Anr. Vs CCE 2004 (95) ECC 441 (Tri-Del),

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Service Tax on Works Contract