WORKS CONTRACT

ARTICLE 265

NO TAX CAN BE LEVIED OR COLLECTED EXCEPT BY AUTHORITY

OF LAW

Power of Parliament and legislature to make laws (Art 246)

•        Parliament has exclusive power to make laws on matters enumerated

  in List I of Seventh Schedule (Union List)

•        Parliament and legislature of the state, both have powers to make laws

  on matters enumerated in List III of Seventh Schedule (Concurrent

  List)

•        Legislature of the state has exclusive power to make laws for such

  state or any part there of on the matters enumerated in List II of

  Seventh Schedule (State List)

•        Parliament has power to make laws with respect to any matter for

 any part of the territory of India not included in a state

  notwithstanding that such matter is a matter enumerated in the

  State list.

Tax on Sale or purchase of Goods :Works Contract- Whether Sale ?

•          Entry 54 of State List

            Tax on sale or purchase of Goods other than newspapers subject to provisions of entry 92-A of List I (Union list).

• Entry 92A of Union List

   Tax on Sale or Purchase of Goods other than newspaper

   where such sale or purchase takes place in course of inter

  state trade or commerce

•          Analysis

-          Tax Must be on Sale or Purchase. Unless sale or purchase is proved no tax can be levied

-          Unless article or thing involved is not goods no tax can be imposed

-          No tax on newspaper

•          Supreme Court in Gannon Dunkerley AIR 1958 SC 560,

-          No tax can be levied on Works Contract

-          No sale of goods involved

•          SC in Hindustan Aeronautics 55-STC 314-SC

  “In a contract of sale, the main object is the transfer of Property and delivery of the possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works & Labor”

•          SC in Hindustan Shipyard 119 STC 533

   “If the thing to be delivered has any individual existence before the delivery as the property of the party who is to deliver it, then it is a sale. If the main object of the work undertaken is not the transfer

    of a Chattel qua Chattel, the contract is one for work and labor”

Thus through series of decisions Supreme Court held the building contracts and many other works contracts are not sale . Hence no tax can be levied.

 

Flood of  Tax Avoidance Tools

•          Indivisible Contracts for Material and labor i.e. Works Contracts

•          Hire Purchase Agreement with option to purchase goods at the end of agreement thus only depreciated value of goods got taxed.

•          Supreme Court held that to define Sale,  sale  of goods Act 1930 is to be followed . As per Sales of Goods Act, 1930 A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Now Sale with out entering into any  contract will not get axed (i.e. taxed). Held by SC in New India Sugar Mills 14STC 316 (1963) that in transfer of controlled commodities in pursuance of Control Order, there is no element of volition by the seller, hence no contract for sale

•          Unincorporated club has no separate existence from its members. Hence Sale by unincorporated club to its members is not to be taxed

•          In Associated Hotels of India 29STC 474, SC held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel.

                        Further held by SC in Northern India Caterers (India) Ltd 1978 42 STC 386 that service of meals whether in hotel or restaurant is a service. Hence tax can not be levied

 

46^th Amendment to Constitution of India passed on 2-2-1983

To overcome the situation GOI defined Tax on Sale or Purchase of Goods by inserting   Article 366(29A) as under:

Tax on sale or purchase of goods includes-

•        a) A tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration

     Note: There may or may not be a contract for sale

       It covers compulsory acquisition under law.

•        b) A tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract

    Note: Formless property is not taxable e.g. water, electricity

•        c) A tax on delivery of goods on hire purchase or any system of payments by installments

  Note: Liability of tax to arise on delivery

•        d) A tax on transfer of right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration

•        e) A tax on supply by way of or as part of any service or in any other manner whatsoever of goods being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration

•                                            And such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

•        In Punjab Vat Act, it is added that sale does not however include mortgage, hypothecation, charge or pledge

•        Note: In case of works contract and delivery under hire purchase, no requirement of transfer or delivery for cash, deferred payment or other valuable consideration. Reason may be that in case of works contract, contractor gets advance payment and in case of hire purchase, if delivery is for consideration, it will become case of outright sale and only payment is made in easy installments.

Case law on Transfer of Right to Use-Rashtriya Ispat Nigam Ltd. vs CTO  on 15

December, 1989 Equivalent citations: 1990 77 STC 182 AP

•        Rashtriya Ispat Nigam Limited owing Visakhapatnam Steel Project, for the purpose of the steel project allotted different works of the project to contractors. To facilitate the execution of work by the contractors with the use of sophisticated machinery, the petitioner has undertaken to supply the machinery to the contractors for the purpose of bring used in the execution of the contracted works of the petitioner and received charges for the same. The respondents made provisional assessment levying tax on the hire charges 

•       whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction. From a close reading of all the clauses in the agreement, it appears to us that the contractor in entitled to make use of the machinery for purposes of execution of the work of the petitioner and there is no transfer of right to use as such in favor of the contractor. We have reached this conclusion because the effective control of the machinery even while the machinery is in the use of the contractor is that of the petitioner-company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militate against the petitioners' possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of the right to use the machinery in favor of the contractor. 

•       the hire charges collected by the petitioner from the contractor are not exigible to sales tax.

 

Consequential Amendments

•         The definition given by Constitution is Inclusive definition and gives a stretched meaning to the term sale.

•         Consequent upon Constitutional Amen mend states changed the definition of sale .

•         However it took the Central Government another 20 years to change the definition of Sale under Central Sales Tax Act and the definition was amended in Finance Act 2002 only.

•         However under Central Sales tax Act, 1956 the manner of calculating sales tax on works contract was not defined till Finance Act 2005 w.e.f. 13-05-2005 which pronounced that sale price for works contract is total consideration minus prescribed deductions.

•        These deductions not yet prescribed.

•        As per decision of Supreme Court in case of Mahim Pata Ram (2007) 6 VST 248, valuations rules of state can be applied

Definition of Works Contract under Punjab Vat Act 2005

•         As per section 2(zu) of the PVAT Act, 2005; Works Contract

Includes

•         Any agreement for carrying out,

•         For cash, deferred payment or other valuable consideration

•         Building, construction, manufacturing, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning

•          of any movable or immovable property

Sale price in case of works contract
(where labor and other charges are quantifiable)

As per explanation 1, sale price means

•          In relation to the transfer of property in goods

     (Whether as goods or in some other form)

•           Involved in the execution of the works contract

•          Sale price means such amount as is arrived at

•          By deducting from the amount of valuable consideration paid or payable

•          to a person for the execution of such works contract

•           Labour and

•           Other charges incurred and

•           profit accrued other than in connection with transfer of property in goods for such execution            

Sale price in case of works contract
(where labor and other charges are not quantifiable)

•         Where labor and such other charges are not quantifiable

•         The sale price shall be

•         Cost of acquisition of the Goods and

•         The margin of profit on them plus

•          The cost of transferring the property in goods and

•         All other expenses in relation there to

          Till the property in goods

         Whether as such or in some other form passes to the contractee

•          And where the property passes in a different form, it shall include the cost of conversion

Value of Goods under Works Contract

As per Supreme Court Judgment in Gannon Dunkerley Case 88STC 204

Total Contract Value of Goods	XXXXXX
Less: Deductions
a) labor charges for execution of works contract	XXXXXX
b) Amount paid to sub contractor for labor and services	XXXXXX
C) Charges for planning, designing and architect fee	XXXXXX
c) charges for obtaining on hire or otherwise machinery and tools used for execution of works contract Including Depreciation L&T 34VST 53 (Karnataka HC)	XXXXXX
d) cost of consumables used in construction contracts e.g. water, electricity, fuel , lubricating oils	XXXXXX
e) Cost of Establishment of Contractor relatable to supply of labor and services (e.g. accommodation and other labor facilities)	XXXXXX
f) Other Similar expenses relatable to supply of labor and services	XXXXXX
g) Profit earned by contractor to the extent relatable to supply of labor and services	XXXXXX
Balance Taxable Amount

Same principles followed in Punjab Vat Act 2005 in Rule 15(4) for Determination of taxable turnover

 

Working of Value of Goods Transferred

•          Practically such working is very tedious job

•          Since progressive billing is done the vat amount is also required to be raised progressively

•          One has to distinguish between each item of expense whether it is a case of goods transferred or consumed (E.g. wood used in shuttering material)

•          One has to sit with Site Engineer and bifurcate purchases into Transferable/Non Transferable

•          The an estimated GP ratio is required to be worked out as may be applicable to the contract in progress, although at the end of contract it may deviate from actual GP from the contract, but there is no escape from the situation

Calculation of vat on Works Contract

S.NO.	ITEM	Cost	ITC	T/NT	GP @ 20% on Sale = 25% on Purchases	Deemed Sales	Vat rate	Vat payable
1	Cement	200000	27500	T	50000	250000	13.75%	34375
2	Wood used in shuttering	100000	5500	NT	25000	125000	5.50%	6875
3	Crasher	125000	6875	T	31250	156250	5.50%	8593.75
4	Sand	75000	4125	T	18750	93750	5.50%	5156.25
	TOTAL	500000	44000		125000	625000		55000
	Eligible ITC		38500					-38500
	Balance							16500

 

Rate of Tax on Works Contract

•         As per Ordinance dtd. 21.10.10, new section 8(2A) inserted as under:

-         Every person executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works contract at the rates applicable to such goods under this Act.

-         Where accounts are not made to determine correct value of goods at the time of incorporation , such person shall pay tax at the rate of 12.5% on consideration received or receivable  subject to deduction prescribed

Standard Deduction on Works Contracts under Rule 15(6)

Civil Works like construction of building, bridges, roads etc.	30%
Fixing of marble stabs, polished granite stones and tiles (other than mosaic tiles.) Fixing of Marbles slabs,	20%
Fixing of sanitary fittings for plumbing, drainage and the like	15%
Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling	20%
Painting, Polishing and White Washing	25%
General Electrical Contracts	25%
Installation of P&M, AC, deep freezers, escalators, rolling shutters, cranes	15%
Residual Contracts	30%

Amount received under Agreement entered  before completion of construction by developer

•         Taxable as Works Contract (K. Raheja Development Corporation (2005) 2 STT 178(SC))

•         In the decision of Vat Commissioner  dtd. 13-08-07, in case of SMV Agencies, Mohali, decision of K. Raheja held applicable

•         However the above said judgment of Raheja Development Corporation was referred to a larger bench of the SC in the case of Larsen & Turbo Limited vs. State of Karnataka (2008) 17 VST 460 (SC) with the following remarks:

            “However, we are of the view that if the ratio of Raheja Development case is to be accepted, then there would be no difference between works contracts and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner-company was the contractor for prospective flat purchaser. Under the definition of the term “works contract" as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractee for cash, deferred or any other valuable consideration….”

•         However under Service Tax law by inserting an explanation in definition of Construction of Complex Services, amount received by builders and developers from prospective buyers has been charged to service tax w.e.f. 01-07-2010 subject to abatement of 75% under that service

           

BOT Contracts (Build, Own, Transfer)

•          As per order of ETC dtd. 20-07-2009 in case of Chetek Enterprises (P) Ltd

•          In order to determine the quantum of deemed sales involved in the BOT project, the value of entire works contract can be taken as the total project cost and after deducting there from the above mentioned expenses towards  labor and services, we can arrive at the value of goods involved in the execution of said works contract awarded by way of concession and accordingly, the tax payable can be assessed on this amount of goods involved in the execution  of said BOT  project –cum-works contract.

There are following pre-requite of a sale

•          Existence of goods

•          Transfer of property in goods

•          Valuable consideration cash or deferred

•          Buyer competent to contract

•          Seller competent to contract

•          The BOT contract has all the above ingredients of a sale and therefore is liable to be taxed under VAT Act.     

In view of the above discussion it is clarified that “

•          The sale in the case of work contract takes place when goods are incorporated in the works. The such goods are taxable at the rates prescribed under various Schedules attached to the PVAT Act.

•          Local purchases made by company are eligible for ITC as per Section 13 of the PVAT Act, 2005.

•          As discussed above, the measure for levy of tax as contemplated in the Gannon Dunkerley case (Supra)   is value of the goods involved in the execution of work contract. Therefore, the tax will be levied irrespective of source of supply.

•         In BOT contracts the sponsor or concessionaire build the infrastructure which is the subject matter of the contract not for the purpose of transferring the same to the contractee, but to earn and enjoy the fruits of it after construction during the operation part of the BOT contract.  After the operation part of the BOT contract the infrastructure as a whole i.e an immovable property is transferred to the grantor/contractee. Hence it cannot be said that the goods incorporated in the BOT contract in the earlier building part of such contract, were deemed sales to the grantor/contractee.

•         Another thing to be noted is that one of the essential ingredient of sale is the valuable consideration. In works contract such valuable consideration should be received from the contractee or from a third person on behalf of the contractee. In BOT contracts the concessionaire generates revenue from the ultimate user of the service who pays the toll for using the infrastructure and does not pay any amount on behalf of the grantor of such BOT contract.

•         In the BOT contracts the concessionaire enjoys the right to accession of the site of infrastructure to the exclusion of the grantor for a specified period of lease and the goods used in building the infrastructure does not pass on to the grantor after construction and remains the property of the concessionaire for a specified period and the fruit of it are enjoyed by the concessionaire to the exclusion of the grantor, hence there is no deemed sales which would attract any tax in entry 54 of the State list as appended to the Constitution of India.

Applicability of CST on Works Contract

•           It should be noted that taxable event in case of works contracts is the deemed sales and such deemed sales is considered to have taken place when the goods are incorporated in the works contract. Now the question arises in mind how an inter-state  deemed sales may arise in case of works contracts.

•          This question was also raised in Gannon Dunkerley & Co. Vs State of Rajasthan (1993) 88 STC 204 (SC) , the relevant extracts of the judgment are being produced here below::

•          “On behalf of the States it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the course of inter-state trade or commerce and it cannot be an outside sale or sale in the course of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated in the work and that can take place only at the stage where the work is required to be executed.

•           On behalf of the contractors, on the other hand, it has been urged that a works contract can involve transactions constituting a sale in the course of inter-state trade and commerce as well as an outside sale or sale in the course of import and that is a matter which will have to be considered in accordance with the principles contained in section  3, 4 and 5 of the Central Sales Tax  Act, 1956 keeping in view the terms and conditions of the particular contract.”

•          The Supreme Court after considering a lot of judgments observed as follows:

`           We do not propose to go into this controversy because the question whether a deemed sale resulting from  transfer of a particular works contract amounts to a sale in the course of inter-state trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under section 4 of the Central Sales Tax Act or sale in the course of import under section 5 of Central Sales Tax Act, has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the course of inter-state trade or commerce or an outside sale or a sale in the course of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of sub-clause (b) of clause (29A) of Article 366 of the Constitution.”

Court Decisions on Applicability of CST in works contract

•         The  Punjab & Haryana High Court in Thomson Press (India) Ltd. Vs. State of Haryana (1996) 100 STC 417 (P&H) held that if the inter-state movement of goods arises due to a pre-existing contract then inputs and goods involved in the execution of the works contract shall also be deemed to have moved and the State Government cannot levy tax on deemed sales of such goods

     Printing of lottery tickets was held to be a works contract transaction because the petitioner could not have sold the lottery tickets in the market to any person and those involved not only expertise but also confidentiality. When the petitioner in Haryana prints lottery tickets, in pursuance of a contract with the State of Haryana, the provisions of the Haryana General Sales Tax Act in so far as these provide for levy of sales tax on the inputs involved in the execution of a works contract, shall be applicable. However, when the petitioner prints lottery tickets at the asking of a State other than Haryana, the position is different and provisions of Central Sales Tax Act shall apply-

•         The assessee received gray fabric from outside the State to process into dyed and printing fabric and after processing, it dispatched the same to the dispatching State. It was held that movement of cloth is occasioned by the contract of sale within the meaning of section 3 of the CST Act and the transaction amounts to an inter-state sale- East India Cotton Mfg. Co. Ltd. Vs. State of Haryana (1993) 90 STC 221 (P&H).

•         If the purchases are made specifically for the execution of the contract, then the intervention of the branch office of a contractor in the movement of the goods from outside the State, for the execution of the contract inside the State, will not change the character of a transaction and it will remain as an inter-state sale- Media Communications vs. Govt of A.P. (1997) 105 STC 227 (AP), case followed- Sahney Steel and Press Works Ltd. Vs. CTO (1985) 60 STC 301 (SC)

C Form against material used in Construction Contracts

•         Declaration by buyer in C Forms says: certified that goods are for resale or use in manufacture, processing of goods for sale or use in mining or use in generation/ distribution of power or packing of goods for sale/ resale.

•          Question arises whether C Form can be issued for such purchases by contractor purchaser consuming goods for  construction ?

•         Answer: Yes as per 60 STC 314 (Supreme Court)

•         Confirmed by Rajasthan High Court in CTO, Sirohi Vs. Aggarwal JV following judgments reported in 45 STC 210, Rajasthan State Electricity Board Vs. State of Rajasthan, so also, 30 STC 565, State of Rajasthan Vs. Jaipur Udyog Ltd . Held that works contract is covered by words “processing”

Registration of Contractor

•         A person engaged in works contract of building construction is manufacturer and is liable to be granted registration as a dealer under CST and entitled to issue C forms for effecting inter state purchases

   DLF (Kerala HC)

Works Contract assigned to Sub contractor

•          As per Section 2 (za) of Punjab Value Added Tax Act  “works contract" includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, building ,construction, manufacturing, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning of any movable or immovable property

•          As per Section 8(2-A) of Punjab VAT Act every person executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act.

•          Who is liable to pay tax, contractor who enters into agreement or sub contractor who actually executes contract:

•          Supreme court in  Larsen & Turbo Limited and another Vs. State of Andhra Pradesh and others [2006] 146 STC 616 explained that by virtue of article 366(29A)(b) of the Constitution of India, once the work was assigned by the contractor the only transfer of property in goods would be by the sub-contractor, who was registered dealer, and who claimed to have paid the taxes under the Act on the goods involved in the execution of works. Once the work was assigned by the assessee to the sub-contractor, the assessee(Contractor) ceased to execute the works contract in the sense contemplated by article 366(29A) (b) because the property passed by accretion and there was no property in the goods with the contractor which was capable of re-transfer, whether as goods or in some other form. Thus in such a case the work executed by the sub-contractor resulted only in a single transaction and not multiple transactions.

            The sub-contractor  is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the employer and therefore there can only be one sale which is recognized by the legal fiction created under Sub-article (29A) of Article 366. It therefore leads to the conclusion that there is only one taxable event of sale

of goods in such a transaction.

•         Punjab & Haryana High court in an earlier case namely DLF Industries Limited Vs. State of Haryana and Another [2000] 120 STC 569 Punjab and Haryana High Court has held that works executed by sub contractor is the part of the main works contract and the main contractor will be liable to pay tax on the whole of the works contract whether executed by the contractor himself or through the sub-contractor and sub-contractor will not be liable to pay tax on the works executed by him. Ultimately the P&H HC also held that there is only one sale (taxable event) involved in the whole works contract whenever the contract is given to sub-contractor. The tax will be payable only at one stage i.e. at the time when goods are incorporated in the works contract and in this case  P&H HC held that it’s the main contractor who will be liable to pay tax.

•         From the perusal of the above said judgments of Supreme Court and High court it can be concluded that whenever a works contract is sub-contracted there is only one sale involved in it and only the one person will be liable to pay tax on the goods involved. As per the decision of P&H HC as above it’s the contractor who will be liable to pay tax and not the sub-contractor.

But If the sub-contractor has been paying tax on the turnover of goods involved in works contract then contractor would not be liable to pay tax on such turnover on which the sub-contractor has already pad tax as there is only one deemed sales in this case

TDS from amount payable to Works Contractor (S.27 & R.46)

TDS Charging provision

•        Notwithstanding any thing contained in any of the  provision of this Act,

•        Every contractee responsible for making payment to any person (contractor)

 for the discharge of any liability on account of valuable consideration

•         > 5 lakhs in a single contract

•          for the transfer of property in goods

•         whether as goods or in some other form,

•         in pursuance  of works contract,

•         shall at the time of making such payment to the contractor,

   in cash or other manner

•         deduct an amount = 2% (4% wef 09-01-2008) of such sum

•         towards tax payable under this Act on account of such contract

Exception in Ist Proviso

Individual or HUF not registered under this Act shall not be liable for TDS

Similarly contracor making payment to sub-contractor for transfer of property in goods (whether as goods or in some other form) involved in the execution of

Work undertaken by the contractor, wholly or partly shall deduct TDS @4%

Note : In this case no exception provided

Information of the contract to the Deptt.

•        A person entering into a contract with the contractor (means contractee)

•         or contractor entering into contract with sub-contractor

•         for the transfer of property in goods in execution of works contract

•        Shall furnish particulars of the contract to the Comm. Or DO

•        With in 30 days from the date of entering into the contract

•         in Form VAT-25

VAT -25 requires particulars of

a)      Total Value of Contract b) Place where contract to be executed

c) Date by which contract to be completed d) Brief description of the

Work to be carried out e) Brief description of the goods to be supplied

Under the contract and value there of.

So take care that these particulars are mentioned in the contract so that requirements of VAT-25 may be complied

Note : VAT- 25 does not require TDN, hence VAT-25 can be

 furnished even before applying for TDN

Application for TDN

•        Application to be made in Form VAT-26

•        With in 30 days of accrual of liability to deduct tax

•        DO to allot TDN with in 7 days from the receipt of application

•        As per S. 27,DO after satisfying that application is in order allot TDN

Note : VAT-26 requires applicant to furnish VRN/TRN. However, if applicant Is not registered under PVAT, whether he will be debarred from applying For TDN. There is no such provision in S.27 or R.46

To take care of this situation an amendment made in Form VAT 26  so that Unregistered persons may also apply for TDN.

Deposit of TDS

•        As per R. 46,TDS required to be deposited in VAT-2

•        TDS to be deposited with in 15 days from the close of   month

  Note : VAT- 26 to be applied with in 30 days from

  date of accrual of liability & 7 days required for allotment of TDN. So, if first payment under contract is made after 7th of the month, it may become difficult to   comply this provision

Monthly return of TDS

•        In form of VAT-27

•        With in 15 days after date of deposit

•        Along with proof of payment of TDS

Certificate for TDS

•        To be furnished in form VAT-28

•        No time limit mentioned for furnishing VAT-28 to

 contractor/ subcontractor

However, since date of tax deposited required to be

Mentioned in Vat-28 and Rule 36 requires VAT-28 to

be furnished along return VAT-15/VAT-17 as proof

Of payment of tax, VAT-28 should be furnished after

Date of deposit of tax but before date of furnishing

Of return.

Further, in R. 36 In case of VAT-16, TDS certificate

not required to be furnished along VAT-16

Penalty for failure to deduct or deposit

•        = TDS

•         Penalty to be imposed only after giving an

  opportunity of being heard

Interest for failure to deduct or deposit

•        Simple Interest @ 1.5% per month till date of deposit

•         If amount is not deposited, then TDS + Interest

  (not penalty) shall be charge upon all the assets of

  the person concerned

Certificate for NIL or lower TDS

•        On an application being made by any contractor or

  subcontractor (no form of application prescribed)

•        If Comm. or DO is satisfied that TDS at NIL or lower

  rate is justified

•        He shall grant certificate permitting Nil or lower TDS

  (no form of certificate prescribed)

•        On furnishing of TDS, person responsible for deduction

  shall comply with such certificate.

TDS on Works Contract in course of Interstate trade or commerce

•          As per section 84 of the VAT Act, not withstanding any thing contained in this Act, no tax on sale or purchase of goods shall be imposed under this Act, where sale or purchase takes place in course of inter state trade or commerce. Hence section 27 is not applicable to such transactions.

•          There is no provision under CST law for TDS on works contract.

•          Hence there shall be no TDS on works contract in course of interstate trade or commerce.

TDS on Works Contract under PGST Struck down

•          TDS on Works Contract struck down. Argument by counsel was that  for getting refund of TDS dealer shall have to get registered, file returns even though he is

        not liable to pay tax under the ACT.

            Keshob Plants Vs.BSNL (P&H)

TDS on WCT Unconstitutional

•         The provision of TDS from payment to contractor towards sales tax is unconstitutional (VTP Constructions)

•         TDS on works contract without  any mechanism for exclusion of value of labor or value of inter state sales or export sales is ultra vires (L&T A.P.), Jai Prakash Associates (M.P.)

TDS on Taxable Turnover Only

•          The Hon’ble Punjab & Haryana High court in a latest case Larsen & Turbo

Limited Vs. The State of Haryana and others  CWP No.14797 of 2010 Decided on  26.10.2010 wherein validity of statutory provisions in Sales Tax law in Punjab

and Haryana for deduction of tax at source out of payment made to contractors for execution of works contracts involving transfer of property in goods at specified rate was challenged,  has held considering the view of Supreme court in the cases referred above that the impugned provisions i.e. section 27 of PVAT Act 2005 and section 24 of Haryana VAT act 2003 as ultra vires as it did not provide any mechanism for the exclusion of labor component or interstate sales or sales outside the sate or sales in the course of imports from the value of works contract while deduction of tax,  but instead of  striking down the impugned provisions the Hon’ble court has decided on the proposal of the petitioners in that case  that the provisions of section 27 of PVAT Act and u/s 24 of HVAT Act 2003 will be applicable only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner (Contractor) will give declaration in respect of such payments to the persons making the payment(Contractee) with a copy to the concerned assessing authority.

•          The relevant portion of the said Judgment is produced here below:

            “After due consideration of the rival stands, we find that the proposal made on behalf of the petitioners as an alternative to striking down statutory provisions being in consonance with the judgments of the Hon’ble Supreme Court has to be accepted. This is so as the States propose to do their duty of providing an appropriate mechanism to give effect to the law laid down by the Hon’ble Supreme Court. Accordingly, we hold that impugned provisions for deduction of tax at source will apply only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner will give declaration in respect of such payments to the persons making the payment with a copy to the concerned assessing authority. This will be without prejudice to the provisions of assessment, levy of interest, penalty, recovery and all other statutory provisions. This arrangement will continue till any other appropriate arrangement is worked out by the

States of Punjab and Haryana. Thus  tax u/s 27 of PVAT Act 2005 and u/s 24 of Haryana Vat  Act 2003 tax on works contract needs to be deducted only on the taxable turnover of the works contract after the said judgment as explained above

TDS on Service Contracts

•        No tax to be deducted where there is no transfer of property in goods. In the present case the appellant had entered into contract for making data entry.

            Freedom Info Systems Vs. BSNL(P&H)

ITC on goods supplied by Contractor

•          The Punjab & Haryana High Court has held in an important case namely Lajpat Rai Chanana V State of Haryana & others (2011) 38 PHT 390 (P&H) that input tax credit to a works contractor executing the works contract will be justified if the contractee has already paid the tax on the goods supplied by him to the contractor.

 

Brief on the judgment: The assessee was a works contractor for executing various works for the Government and its authorities. For executing the work, the State and its authorities supplied material to the petitioner (Contractor) which was treated as sale. Since the said authorities had paid the tax while purchasing the said material before supplying the same to the petitioner, the petitioner claimed the benefit of input tax credit. It is held by the Hon’ble High Court that in such case assessee (Contractor) is entitled to input tax credit paid by the contractee.

 

•          Thus if contractor is able to prove the tax paid by contractee on the material purchased by contractee and supplied by him to the contractor and produces the relevant bill to that effect then the contractor shall be eligible for input tax credit of such tax paid by the contractee.

 

Works Contract under Service Tax

•         Works contract services were brought into service tax net by the Finance Act, 2007, w.e.f 01-06-2007 vide notification No. 23/2007-ST, dated 22-05-2007

•         Definition of Works Contract under section 65(105)(zzzza) runs as under:

            Any service provided or to be 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 terminals, bridges, tunnels and dams.
Explanation. - For the purposes of this sub-clause, "works contract" means a contract wherein, -
(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 prefabricated 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 pipeline 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

•         Residential Complex u/s 65(91a) means any complex comprising of-

            i) A building or building, having more than twelve residential units

            ii) a common area and

            iii) any one or more of facilities such as Park, lift, parking space, community hall, common water supply, or effluent treatment system

                        located with in premises and layout of premises is approved under law for the time being in force

         but does not include complex which is constructed by a person directly engaging any other person for designing or planning of layout and construction of complex is intended for personal use as residence by such person

           “Personal Use” includes permitting the complex for use as residence by another person on rent or without consideration

            “ Residential Unit" means a single house or single apartment intended for use as a place of residence.

       

Analysis

Works Contract is a composite contract for material and labor (SC in L&T 2008 TIOL-158-SC-VAT)

Transfer of property in goods must be leviable to tax on sale of goods. Hence the works contract covered under Vat shall come with in purview of Service Tax also

However under WC under Service Tax application is limited to:

   -  Works Contract for Erection, Commissioning and Installation

   - Works Contract for Commercial or Industrial Construction

  - Works Contract for Residential Complex

   - Works Contract for Repair & renovation wrt C&I Const and Resi. Complex

 - Works contract for EPC

As per Supreme Court in Macro Marvel Projects 2008-TIOL-1927-CESTAT-MAD,construction of new residential complex is included in works contract, hence definition of residential complex u/s 65(91a) to apply.

Excluded Works Contracts:

    a) Roads

    b) Airports

    c) Railways

    d) Transport Terminals

    e) Bridges

    f) Tunnels and

    h) dams

•          Levy of Service Tax in Indivisible Contracts
Entry 54 & Entry 92A read with Article 366(29A) authorizes levy of tax on sale of goods in works contract. But service tax governed by Entry 92C without any corresponding definition  for deemed service. Plea taken in -Daelim Industrial Co. Limited v Commissioner of Central Excise, Vadodara 2003 (155) ELT 457 (Tribunal-Delhi): 2006 (3) STR 124 (Tri.-Del.), Larsen & Turbo Ltd v CCE 2004 (174) ELT 322: 2006 (3) STR 223 (Tri.-Del.) ,CCE & C, Vadodara v M/s Larsen & Turbo Ltd and M/s Petrofac International Ltd, 2006 (4) STR 63 (Tri. - Mumbai): 2006-TIOL-490-CESTAT-MUM .Hence Service tax in composite contracts under residential complex, C&I Construction, Erection-Commissioning was challenged

•          Hence Works Contract service was introduced to address the issue of vivisecting a works contract attracting vat and also getting covered under services which were challenged

•          Also, Above decisions over ruled by CCE, Raipur Vs. M/s. BSBK Pvt. Ltd-2010-TIOL-646-CESTAT-DEL-CB

The Supreme Court in the case of State of Jharkand v Voltas Ltd. 2007-TIOL-86-SC-CT (decided on 9th May 2007) held that “the State legislature under Entry 54 of List II of the Seventh Schedule can tax only on the sale or purchase of goods. If an item does not come within List II or List III of the Seventh Schedule to the Constitution, then it can only be the Central legislature i.e. the Parliament which can levy tax either under List I or under the residual provision contained in Article 248 thereof.”

 

Same Services under works contract as well as other categories

•         Whether Exemption under same service i.e. under C&I construction, Erection, Commissioning, Installation and Construction of residential Complex shall lead to exemption under Works contract when the nature of activity is same

•         Yes as per CBEC Circular No. 123/5/2010 dtd 24-5-10

Paradox of Same Services under works contract as well as other categories

•         Where to tax it ?

•         As per Section 65A (Rules of Classification),

   - the clause providing more specific description

•         Hence services falling under other categories if also involve transfer of property in goods leviable to Vat, the service shall be covered under Works Contract Service. However if it is a pure labour contract the service shall get covered under other relevant service.

•         While introducing Works Contract service no change was made in definition of Complex Construction, C&I Construction, ECI. Hence it means a new service was introduced w.e.f. 01-06-2007 which was not covered by earlier services. Hence collection of services tax on a service not covered can be challenged.

•         The above plea has been accepted in number of cases and held that no service tax can be collected on works contract service for period before 1-6-2007

- Cemex Enginners 2010 -17STR 534 (Tri- Banglore)

- Diebold Systems 2008-TIOL-489-CESTAT-MAD

-Soma Enterprises 2009-TIOL-1086-CESTAT

- Prince Foundations 2009-TIOL-1103-CESTAT

Approval by Competent Authority

•          AS per CBEC instruction dated 5-7-2006, where approval by competent authority is not required the complex construction service shall not be taxed. The same

shall apply to Works contract service also.

•          As per Order issued by Government dated MF(DR)1/2010 22-6-2010, competent

authority includes:

•          - registered architect

•          -chartered engineer

•          - licensed surveyor of respective local body

                         authorized to issue completion certificate

Repair, Restoration, Renovation of Road

•          DGST taxed the works contract for above activity vide his Instruction dated 31-10-2008. However Government issued exemption notification dated 27-7-2009 exempting the above activity.

•          However it can not be taxed even for period falling before 27-7-2009 because works contract definition covers in its ambit repair, restoration, renovation wrt to C&I construction and complex construction and roads are specifically excluded from works contract in definition of taxable service u/s 65(105)(zzzza)

Value of Taxable Service – METHOD A UNDER SERVICE TAX (DV) RULES 2006

•          Rule 2A of Valuation Rules.

•          Value of works contract = gross amount charged for the said works contract minus value of transfer of property in goods involved in the said works contract.

•          VAT paid is excluded.

Value of Taxable Service-METHOD B UNDER SERVICE TAX (DV) RULES 2006

•          Value of works contract shall include the following:

–        Labor charges;

–        Amount paid to sub-contractor for labor and services;

–        Charges for planning, designing and architect’s fees;

–        Hire charges on machinery and tools;

–        Cost of consumables viz. water, electricity, fuel etc.

–        Cost of establishment of the contractor relatable to supply of labor and services;

–        Other similar expenses relatable to supply of labour and  services;

–        Profit earned by the service provider relatable to supply of labor and services.

Value of Taxable Service
R.2A UNDER SERVICE TAX (DV) RULES 2006

•         Where Vat has  been paid on actual value of transfer of property in goods

•         Then such value adopted for payment of Vat shall be taken to be

•         Value of transfer of property in goods involved in the execution of the said works contract

•          for determining the value of works contract service

Note: It means whether value of goods transferred under Vat is arrived on actual labor basis u/R15(4) or Standards labor basis u/R15(6), the value so adopted shall be deducted from Gross Amount charged to arrive at Value of Works Contract Service

Composition Scheme

•         WCT (Composition Scheme for payment of Service Tax) Rules, 2007 vide Notification 32/2007 dtd 22-05-2007

•         Optional Scheme.

•         Option to be exercised prior to payment of service tax in respect of the WCT service.

•         Option once exercised in respect of a works contract not to be changed until completion of works contract.

•         Hence one may follow Composition Scheme for one works contract and follow Rule 2A of Service Tax (Determination of Value) Rules for another contract

•         Option is permissible only if Gross Amount charged is not less than declared value of works contract

•         2% of the gross amount charged for the works contract.

•         Composition rate increased from 2% to 4% w.e.f. 01.03.2008.

•         No Cenvat credit on inputs. Cenvat credit available on input services and capital goods. (it is pertinent to note that in Finance Minister’s Speech it was said that assesses opting for Composition Scheme shall not be entitled to avail cenvat credit on inputs, capital goods and input services.

Composition Scheme- Definition of Gross Amount Charged (GAC)

•         The definition of GAC under Composition underwent a sea change in respect of works contracts entered after 07-07-2009.

•         Before Amendment GAC= GROSS AMOUNT –VAT/SALES TAX  Paid

•         WEF 07-07-2009, GAC Includes

        i)            Value of all goods used in or in relation  to execution of works contract, whether supplied under any other contract for a consideration or otherwise (It means goods supplied by contractee free of cost to be included as well as goods supplied by contractor under sale contract to be included)

       ii)            Value of all services that are required to be provided for execution of works contract

      Excludes:

        i)            Vat/ Sales Paid Tax on transfer of property in goods

       ii)            Cost of machinery and tools used in execution of works contract except charges for obtaining them on hire

Note: Deduction is available for Vat Paid and not for Vat payable

Validity of Composition Scheme Rules

•          Delegated legislation can not over ride substantive Act (ITW Singode India Limited 2003 158 ELT 403(SC))

•           In Deepak Fertilizer 2006 203 ELT 370 DEL, held that when parent Act does not provide any limitation, it can not be introduced through Rules

•          Section 3 of Works Contract (Composition Scheme for payment of service tax) Rules 2007 begins with words “ Notwithstanding anything contained in Section 67 of Act and Rule 2A of Service Tax Rules, hence validity of these Rules can be

     challenged