vasai+branch+of+wirc construction+industry+28!08!2010

7/28/2019 Vasai+Branch+of+WIRC Construction+Industry+28!08!2010

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Background Material

forSeminar on Service Tax

ON

SATURDAY, THE 28THAUGUST, 2010

VASAI BRANCH OF WIRC OF ICAI

Shalom Hall, D-332, Shanti Shopping Centre,

Opp.Mira Road Railway Station, Mira Road (East), Thane.

By

CA RAJIV LUTHIA

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COMMERCIAL OR INDUSTRIAL CONSTRUCTION SERVICES

Notified Date: 10th September,2004

Definition:

Section 65(25b)-Commercial Or Industrial Construction Service1means -

a) construction of a new building or a civil structure or a part thereof;or

b) construction of pipeline or conduit; orc) completion and finishing services such as glazing, plastering,

painting, floor and wall tilling, wall covering and wall papering, woodand metal joinery and carpentry, fencing and railing, construction ofswimming pools, acoustic applications or fittings and other similarservices, in relation to building or civil structures; or

d) repair, alteration, renovation or restoration of, or similar services inrelation to, building or civil structure, pipeline or conduit,

Which is:-

i) used, or to be used, primarily for ; orii) occupies, or to be occupied, primarily with : oriii) engaged, or to be engaged, primarily in,

Commerce or industry, or work intended for commerce or industry, but

does not include such services provided in respect of roads, airports,railways, transport terminals, bridges, tunnels and dams.

Section 65(105)(zzq)-Taxable Services- means any serviceprovided or to be provided to any person, by any other person, inrelation to commercial or industrial construction service2

Explanation-For the purposes of this sub clause, the construction ofnew building which is intended for sale, wholly or partly, by a builderor any person authorised by builder before, during or afterconstruction (except in cases for which no sum is received from or on

behalf of the prospective buyer by the builder or the person authorisedby the builder before grant of completion certificate by the authoritycompetent to issue such certificate under any law for the time being inforce) shall deemed to be service provided by the builder to thebuyer.3

Service at a glance:

Date Taxable in respect of 10th

September,

Construction/Repair/Restoration of new building or civil

structure or part thereof.1The word Service is proposed to be omitted by Finance Bill, 2010 w.e.f. 1 st July, 20102 The word Service is proposed to be omitted by Finance Bill, 2010 w.e.f. 1 st July, 20103 Inserted w.e.f 1st July, 2010

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200416th

June,2005Scope widened to cover:a)construction/repair/alteration/renovation/restoration of

pipeline or conduitb)completion & finishing service such as glazing,

plastering, painting etc.c)renovation besides repair/alteration/restoration

building or civil structure.

Service renamed as Commercial or IndustrialConstruction Services

1st July, 2010 Sale of commercial premises by the builder/developer tothe prospective buyer before obtaining Completioncertificate.

Inclusions: Services rendered by building or civil contractors.

Services in relation to pipelines running within an industrial and

commercial establishment such as factory, refinery and similarindustrial establishments (Para 13.4 of Circular No.80F.No.B2/8/2004-TRU dated 10th September,2004)

Services in relation to construction of any long distance pipeline whichwere earlier excluded liable w.e.f. 16th June,2005.

Services provided to government bodies in relation to commercialpremises intended for sale or let out (Para 13.2 of Circular No.80F.No.B2/8/2004-TRU dated 10th September,2004).

Services of construction of road are liable to service tax in case there iscomposite and single contract for construction. (Para 14.5 ofCircular No.B1/6/2005-TRU dated 27th July,2005)

Exclusions: Estate builders (Para 13.1 of Circular No.80 F.No.B2/8/2004-TRU

dated 10th September,2004)

Services in relation to constructions used by organisation orinstitutions solely for educational, religious, charitable, health,

sanitation or philanthropic purposes or non-profit purpose (Para13.2 of Circular No.80 F.No.B2/8/2004-TRU dated 10th

September,2004).

Services in relation to construction of government building whether forresidence, office or other civic amenities (Para 13.2 of CircularNo.80 F.No.B2/8/2004-TRU dated 10th September,2004).

Construction of port or other port (Notification No.16/2005-STdated 7th June,2005 & Notification No.25/2007-ST dated 22nd

May,2007). However service such as completion and finishing,repairs, alteration, renovation, restoration, maintenance, or repairsprovided in relation to existing port or other port shall be liable to

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service tax. (Para 8.4 of letter no. F.NO-B1/16/2007-TRU dated22nd May,2007)

Construction of roads, airports, railway, transport terminals, bridge,tunnel and dams.

Canal Systems built by government. The canal systems built by privateagencies is also not liable to service tax if it is not for commercial

purpose i.e not for generating revenue. (Para 2 of Circular No.116/10/2009-ST F.No.137/40/2009-CX4 dated 15th September, 2009)

Vide Circular No.110/04/2009-ST dated 23rd February, 2009,CBEC has clarified various issues related to service tax onrepairs/ renovation/widening of roads. It clarified that:

While construction of road is not a taxable service,management, maintenance or repair of roads are in the nature oftaxable services attracting service tax.

Maintenance or repairs of road would include activities ofresurfacing, renovation, strengthening, relaying, filling of potholesetc.

Construction of road would include activities of laying of newroad, widening of narrow road to broader road, changing roadsurface etc.

Central Government vide Notification No.24/2009-ST dated 27th

July, 2009, has granted exemption to taxable services of

Management, Maintenance or Repairs (Section 65(105)(zzg))provided by any person to any other person in relation tomanagement, maintenance or repairs of roads from whole of theservice tax.

Any consideration received as advance before 1st July, 2010 in relationto sale of premises by the builder to prospective buyer. (NotificationNo.36/2010-ST dated 28th June, 2010)

Valuation of Taxable Services-Section 67:o The gross amount charged by the service provider. Abatement of

67% when the gross value includes the material cost. (NotificationNo.19/2005-ST dated 7th June, 2005 & NotificationNo.1/2006-ST dated 1st March, 2006).

o Abatement of 75% for builders when the cost of land has not been

recovered separately.

o Abatement of 75% would be applicable only if the gross value

includes cost of land. Otherwise, the rate of abatement of 67%

would continue to apply. (Para 6.2 of letter DOFNo.334/03/2010-TRU dated 1st July, 2010.)

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o No abatement for completion and finishing services asdefined U/s. 65(25b)(c).

o Abatement of 67% is allowed irrespective of quantum of

material used, which may be even less than 67%.

o No CENVAT credit of duty/tax on input, capital goods or inputservice used for providing such taxable service w.e.f. 1st March,06

(notification 1/2006 dt 1st March,06)

Clarifications: Besides any government authority, the following persons are notified

as authority competent for issuing completion certificate

i) architect registered with the Council of Architecture constitutedunder the Architects Act, 1972; or

ii) chartered engineer registered with the Institution of Engineers

(India); oriii) licensed surveyor of the respective local body of the city or town orvillage or development or planning authority;

who is authorised under any law for time being in force to issuecompletion certificate. (Central Government vide MF (DR) OrderNo. 1/2010 dated 22nd June, 2010.)

In case of multipurpose building (residential & commercial), service taxis leviable if property is treated as commercial under municipal law(Para 13.3 of Circular No.80 F.No.B2/8/2004-TRU dated 10th

September, 2004).

Effect of Amendments made w.e.f 1st July, 2010

o The transaction of sale of premises in case the buyer pays any amount

towards consideration for the same to the builder before his obtainingcompletion certificate would be liable to service tax under thiscategory.

o The transaction of sale of immovable property are covered within the

ambit of service tax w.e.f. 1st July,2010 by inserting explanation to thedefinition of taxable service thereby the sale of premises is treated asservice by deeming fiction.

o Attempt to reverse the decision ofHonble Gauhati High Court inthe case of Magus Construction Pvt. Ltd. V/s. UOI (2008) 11STR 225 & Circular No.108/02/2009-ST dated 29th January,2009.

o However, resale of premises would be out of the purview of service tax

even if completion certificate is not issued for the same since it is not

transaction between builder and prospective buyer.

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o No service tax is payable for services provided (i.e construction workcompleted) till 30th June, 2010.

o Builder/developer will have to obtain Building completion certificate as

on 30th June, 2010 from the Architect, Chartered Engineer or licensedSurveyor.

o No service tax is payable on any amount received by builder/developer

from prospective buyer on or before 30th June, 2010 in respect ofservice provided or to be provided on or after 1st July, 2010.

o No Service tax is to be paid in relation to sale of commercial property if

no sum is received by builder/developer from the prospective buyerbefore the grant of completion certificate.

o Honble Mumbai High Court has granted stay of recovery to the

members of MCHI in response to the writ petition filed byMaharashtra Chamber of Housing Industry (2010-TIOL-526-HC)

challenging the constitutional validity of the amendment throughfinance Act, 2010. The Honble Court also instructed the Departmentnot to initiate coercive steps against the petitioners till next hearing.However it was clarified that assessment against other assessee maybe initiated.

CONSTRUCTION OF RESIDENTIAL COMPLEX

Notified Date: 16th June, 2005.

Definition:

Section 65(30a) defines Construction Of Complex-means

a) construction of new residential complex or part thereof; orb) completion and finishing services in relation to residential complex

such as glazing, plastering, painting, floor and wall tilling, wallcovering and wall papering, wood and metal joinery and carpentry,fencing and railing, construction of swimming pools, acousticapplications or fittings and other similar services; or

c) repair, alteration, renovation or restoration of, or similar services inrelation to, residential complex.

Section 65(91a) defines Residential Complex- means anycomplex comprising of-

1) a building or buildings, having more than 12 residential units;2) a common area; and3) any one or more facility or services such as park, lift, parking space,

community hall, common water supply or affluent treatment system

located within a premises and the lay out of such premise is approvedby an authority under any law for the time being in force, but does not

include a complex which is constructed by a person directly engagingin any other person for designing or planning of lay out and theconstruction of such complex is intended for personal use as residenceby such person.

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Explanation-For removal of doubts, it is hereby declared that for thepurposes of this clause-

a) personal use includes permitting the complex for use as residenceby another person on rent or without consideration.

b) residential unit means a single house or a single apartment

intended for use as a place of residence.

Section 65(105)(zzzh)-Taxable Services-means any serviceprovided or to be provided to any person, by any other person, inrelation to construction of complex.

Following explanation shall be inserted to section 65(105)(zzh) w.e.fdate to be notified by central government

Explanation-For the purposes of this sub clause, the construction of acomplex which is intended for sale, wholly or partly, by a builder orany person authorised by builder before, during or after construction(except in cases for which no sum is received from or on behalf of theprospective buyer by the builder or the person authorised by thebuilder before grant of completion certificate by the authoritycompetent to issue such certificate under any law for the time being inforce) shall deemed to be service provided by the builder to thebuyer.4

Inclusions: Services of setting up home theatre within residential complex.

Completion and finishing services. Repairs, renovation and restoration.

Exclusions: Any consideration received as advance before 1st July, 2010 in relation

to sale of premises by the builder/developer from prospective buyer.(Notification No.36/2010-ST dated 28th June, 2010)

Valuation of Taxable Services-Section 67:o The gross amount charged by the service provider. Abatement of

67% when the gross value includes the material cost. (NotificationNo.18/2005-ST dated 7th June, 2005 & NotificationNo.1/2006-ST dated 1st March,2006).

o Abatement of 75% for builders when the cost of land has not been

recovered separately.

o Abatement of 75% would be applicable only if the gross value

includes cost of land. Otherwise, the rate of abatement of 67%would continue to apply. (Para 6.2 of letter DOFNo.334/03/2010-TRU dated 1st July, 2010.)

4 Inserted w.e.f 1st July, 2010

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o No abatement for completion and finishing services asdefined U/s. 65(30a)(b).

o Abatement of 67% is allowed irrespective of quantum of

material used, which may be even less than 67%.

o No CENVAT credit of duty/tax on input, capital goods or inputservice5 w.e.f 1st March,06

Clarifications: Besides any government authority, the following persons are notified

as authority competent for issuing completion certificate

i) architect registered with the Council of Architecture constitutedunder the Architects Act, 1972; or

ii) chartered engineer registered with the Institution of Engineers(India); or

iii) licensed surveyor of the respective local body of the city or town orvillage or development or planning authority;

who is authorised under any law for time being in force to issuecompletion certificate. (Central Government vide MF (DR) OrderNo. 1/2010 dated 22nd June, 2010.)

DGST vide Circlular no. F.NO.V/DGST/22/AUDIT/MISC./1/2004/Mumbai dt 16th February,2006 clarified that

The Board vide Circular No. 80/10/2004 ST dt. 17.09.2004 has

clarified that "Estate Builders" (i.e. who gets such construction done)are not covered under the ambit of these services. It is only the hiredcontractors engaged by these builders who are to be taxed. In otherwords Service Tax is leviable only on those contractors who areengaged in construction of new residential complexes, or completionand finishing services in relation to such complexes or repair,alteration/renovation or restoration of similar services in relation toresidential complexes

CBEC vide circular no. 96/6/2007-ST (079.01) dated 23rd

August,2007 clarified that

(a) In a case where the builder, promoter, developer or any suchperson builds a residential complex, having more than 12 residentialunits, by engaging a contractor for construction of the said residentialcomplex, the contractor in his capacity as a taxable service provider(to the builder/promoter/developer/any such person) shall be liable topay service tax on the gross amount charged for the constructionservices under construction of complex service [section 65(105)(zzzh)].

(b) If no other person is engaged for construction work and thebuilder / promoter / developer / any such person undertakes

5 notification 1/2006 dated 1st March,2006

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construction work on his own without engaging the services of anyother person, then in such cases,-

(i) service provider and service recipient relationship does notexist,

(ii)services provided are in the nature of self-supply of services.

Hence, in the absence of service provider and service recipient

relationship and the services provided are in the nature of self-supplyof services, the question of providing taxable service to any person byany other person does not arise.

CBEC Vide circular No. 108/02/2009-ST Dated 29/01/2009issued clarification as regards applicability on service tax onbuilders

Generally, the initial agreement between the promoters/builders/developers and the ultimate owner is in the nature of agreement tosell. Such a case, as per the provisions of the Transfer of Property Act,does not by itself create any interest in or charge on such property.The property remains under the ownership of the seller (in the instantcase, the promoters/builders/developers). It is only after thecompletion of the construction and full payment of the agreed sumthat a sale deed is executed and only then the ownership of theproperty gets transferred to the ultimate owner. Therefore, any serviceprovided by such seller in connection with the construction ofresidential complex till the execution of such sale deed would be in thenature of self-service and consequently would not attract service tax.

Further, if the ultimate owner enters into a contract for construction ofa residential complex with a promoter / builder / developer, whohimself provides service of design, planning and construction; andafter such construction the ultimate owner receives such property forhis personal use, then such activity would not be subjected to servicetax, because this case would fall under the exclusion provided in thedefinition of residential complex. However, in both these situations, ifservices of any person like contractor, designer or a similar serviceprovider are received, then such a person would be liable to payservice tax.

CBEC vide Circular No.334/1/2010-TRU dated 26thFebruary,2010 has clarified following:

o Para 8.2 & 8.3..builder continue to remain legal owner of theproperty in case of payment made by buyer in installments as perthe terms of agreement to sale. In this type of transaction, thebuilder is deemed to have provided services to self since the legalownership/transfer of property from builder to buyer takes placeonly after completion of building and handing over the possessionalong with executing conveyance deed.

o Para 8.4 & 8.6.in many cases, two agreements are executed.

One for sale of undivided portion of land and the second forconstruction of building thereon. This mode of transaction is devised

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to pay lesser stamp duty. In order to achieve parity in taxtreatment, explanation is inserted to Section 65(105)(zzq) to treatthe amount received towards sale of premises as services subject toexception that entire payment is received after obtainingcompletion certificate from prescribed authorities.

Central Government vide Letter F.No.332/16/2010-TRU dated24th May,2010 has clarified on the issue related to leviability of

service tax on construction of residential house by National BuildingConstruction Corporation Ltd. (NBCC) for Central Government officers.In para 2, it is clarified that the definition of residential complex(Section 65(91a)) does not include a complex which is intended forpersonal use as residence by recipient of service. The term personaluse is defined to include permitting the use of complex as residenceby another person on rent or without consideration. In para 3, it isfurther clarified that the residential complex built by NBCC for personaluse of Government of India is not leviable to service tax.

Few Relevant Decisions:

Honble Gauhati High Court in the case of Magus ConstructionPvt.Ltd. Vs. UOI (2008) TIOL 321-HC-GUW-ST held that

Sale of flat is not service hence not liable to service tax.

Circular dated 1st August,2006 is binding on thedepartment.when a builder, promoter or a developerundertakes construction activity for its own self, the question of

provision of taxable service does not arise in absence of relationshipof service provider and service recipient.

Any advance made by a prospective buyer is against considerationfor sale of flat and not for the purpose of obtaining service.

Special services provided by builder etc. To prospective buyer

W.e.f : 1st July, 2010

Definitions:

Section 65(105) (zzzzu)-Taxable service means any service provided orto be provided to a buyer, by a builder of a residential complex, or acommercial complex, or any other person authorized by such builder, forproviding preferential location or development of such complex but doesnot include services covered under sub-clauses (zzg), (zzq), (zzzh) and inrelation to parking space.

Explanation For the purposes of this sub-clause, preferential locationmeans any location having extra advantage which attracts extra paymentover and above the basic sale price.

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exclusions: Charges for providing parking space.

Effect

Charges for facilities such as prime/preferential location such as seafacing, park facing, corner flat etc. according to the choice of the buyer,charges for developing & maintaining parks, laying of sewerage & waterpipelines, providing access roads & common lighting etc., charges for firefighting installation & power back up etc. would be liable to service tax.

Charges for providing parking space are specifically excluded from thelevy of service tax.

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WORKS CONTRACT SERVICE

Notified Date: 1st June,2007

Definition:Section 65(105)(zzzza)-taxable service means any service provided orto be provided to any person, by any other person in relation to execution

of works contract, excluding works contract in respect of roads, airports,railways, transport terminals, bridges, tunnels and dams.

Explanation-For the purpose of this sub clause, works contract meanscontract wherein-

i) transfer of property in goods involved in the execution of such contractis leviable to tax as sale of goods; and

ii) such contract is for the purpose of carrying out;

a) erection, commissioning or installation of plant, machinery,equipment or structures, whether prefabricates or otherwise,installation of electrical and electronic devices, plumbing, drainlaying or other installations for transport of fluids, heating,ventilation or air conditioning including related pipe work, duct workand sheet metal work, thermal insulation, sound insulation, fireproofing or waterproofing, lift and escalator, fire escape staircasesor elevators; or

b) construction of new building or a civil structure or a part thereof, or

of a pipeline or conduit, primarily for the purpose of commerce orindustry; or

c) construction of a new residential complex or part thereof; or

d) completion and finishing services, repairs, alteration, renovation orrestoration of, or similar services in relation to (b) and (c); or

e) turnkey projects including engineering, procurement andconstruction or commissioning (EPC) projects.

Important Elements & Clarifications: Vide Notification No.25/2007-ST dated 22nd May,2007,

exemption granted in relation to construction of port or other portunder this category. CBEC vide Letter B1/16/2007-TRU dated 22nd

May,2007 has clarified that exemption only in respect ofconstruction of port and not for completion, finishing, repair,alteration, renovation, repairs or maintenance of existing port.

CBEC vide Circular No.98/1/2008-ST (F.No.345/6/2007-TRU)dated 4th January,2008 has clarified that service provider is not

eligible to take CENVAT credit of excise duty paid on goods involved inthe execution of works contract service.

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CBEC vide Circular No.98/1/2008-ST (F.No.345/6/2007-TRU)dated 4th January,2008 has clarified on issue whether the serviceprovider can revise the classification to works contract service fromexisting classification that of erection, commissioning or installationservices or commercial/residential construction services and payservice tax for the amount received on or after 1st June,2007 undercomposition scheme under following circumstances:

(i) contracts entered into prior to 1st June,2007 for providing erection,commissioning or installation and commercial or residentialconstruction service, and

(ii)service tax has already been paid for part of the payment receivedunder the respective taxable service.

In this regard, CBEC clarified that:

classification of a taxable service is determined based on the natureof service provided whereas liability to pay service tax is dependingupon receipt of consideration. Vivisecting a single composite serviceand classifying the same under two different taxable servicesdepending upon the time of receipt of the consideration is notlegally sustainable.

a service provider who paid service tax prior to 1st June,2007 for the

taxable service, namely, erection, commissioning or installationservice, commercial or industrial construction service orconstruction of complex service, is not entitled to change theclassification of the single composite service for the purpose of

payment of service tax on or after 1st June,2007 and hence, is notentitled to avail the Composition Scheme.

Activity of constructing Canal Systems though undertaken as turnkeyor EPC project, is not liable to service tax under Works Contract sinceas it is excluded from the definition itself. (Para 3 of CircularNo.116/ 10/2009-ST F.No.137/40/2009-CX4 dated 15th

September, 2009)

Vide Notification No.41/2009 dt 23rd October, 2009, CentralGovernment had exempted the services provided in relation toexecution of a works contract in respect of canals used for the purposeother than commerce or industries.

Special Valuation Rules:As per Rule 2A of The Service Tax (Determination of Value) Rules, 2006,value of works contract service:

shall be gross amount charged for works contract less value oftransfer of property in goods involved in execution of said workscontract.

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o the gross amount charged shall not include VAT or Sales Tax paid, ifany, on transfer of property in goods involved in the execution ofthe said works contract.

o the value of works contract service shall specifically include:

o labour charges for execution of the works;o amount paid to a sub-contractor for labour and services;

o charges for planning, designing and architects fees;

o charges for obtaining on hire or otherwise, machinery and tools

used for the execution of the works contract;

o cost of consumables such as water, electricity, fuel, used in the

execution of the works contract;

o cost of establishment of the contractor relatable to supply of

labour and services;

o other similar expenses relatable to supply of labour and services;

and

o profit earned by the service provider relatable to supply of labour

and services;

in case VAT or Sales Tax is paid on actual value of transfer of propertyin goods involved in execution of works contract, then such valueadopted for payment of VAT to be taken as value of transfer ofproperty for determining the value of works contract service asreferred above.

Composition Scheme (Notification No.32/2007): Rule 3(1) of The Works Contract (Composition Scheme for Payment of

Service Tax) Rules, 2007 gives option to discharge service tax liabilityon works contract service @4%6 of gross amount charged for workscontract (excluding VAT/Sales Tax) instead of rate specified in Section66.

Explanation to Rule 3(1), for the gross amount charged for the workscontract shall be the sum --

including

The Value of goods used in or in relation to the executionof the works contract, whether supplied under any othercontract for a consideration or otherwise; &

The value of all the services that are required to beprovided for the execution of the works contract

Excluding

The VAT or Sales Tax paid on transfer of property in goods

involved; &

6 2% upto 28th February,2008

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The cost of machinery and tools used in the execution ofthe said works contract except for the charges forobtaining them on hire.

The above explanation shall not apply to a works contract, where theexecution under the said contract has commenced or where anypayment, except by way of credit or debit to any account, has beenmade in relation to the said contract on or before the 7th July, 20097

No CENVAT credit of duty or cess on inputs used in works contract.However, no restriction on availment of CENVAT credit of duty paidon capital goods and service tax paid on Input Services (CircularNo.96/7/2007 dated 23rd August,2007)

Option once exercised by service provider to pay service tax on saidworks contract under composition scheme shall be applicable to entireworks contract and shall not be withdrawn till completion of said workscontract.

Rule 3(4) restricts the option of composition scheme only to thosetransactions where declared value of works contract is less than thegross amount charged for such works contract8.

Few Relevant Case Laws:

L & T Ltd. Vs. CCE, Vadodara-II (2007) 7 STR 224 (AhmedabadCESTAT)

Works contract service - Erection, commissioning and installation service -Impugned contract whether to be considered as turnkey project contractor divisible for levy of service tax

Works contract services brought into service tax net from 01/06/2007

Stay granted by Tribunal on identical facts in respect of another party

Strong prima facie case made out by applicant - Pre-deposit waived andrecovery thereof stayed

Soma Enterprise Ltd Vs. CCE, Hyderabad-II 2009 (15) STR 559(Bangalore CESTAT)

Appellant entered into a contract for construction of Dam for the periodprior to 1st June, 2007.

The contract clause revealing the contract to be Works contract &pursuant to said contract appellant obtained Sales tax registrationnumber for payment of sales tax on goods part.

7 substituted w.e.f 7th July, 2009 Vide notification no. 23/2009-ST Dt 7 th July, 20098 Inserted w.e.f 7th July, 2009 Vide notification no. 23/2009-ST Dt 7 th July, 2009

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Held that the service was classifiable as Works contract which camew.e.f 1st June, 2007 only & is not liable to tax under Commercial orIndustrial Construction Services prior to 1st June, 2007.

Sepco Electric Power Construction Corpn Vs. CCE, Raipur (2007) 7STR 229 (New Delhi CESTAT)

Works contract - Consulting engineer - Construction of power project -

Service tax demand on drawing and design portion of contract

Prima facie covered by Tribunal decisions and one such order upheld bySupreme Court

New provision in Finance Bill, 2007 indicating works contract to attractservice tax only after enactment

Demand not sustainable - Recovery of amounts stayed

Air Liquide Engg. India Pvt. Ltd. Vs. CCE, Hyderabad-II (2008) 9 STR486 (Bangalore CESTAT)

Works contract service - Air separation/gas separation plants supplied anderection, installation and commissioning of such plants undertaken

Impugned contracts being works contract, came into Service tax net from01/06/2007 only

Works contract not covered under Consulting Engineer service for periodprior to 2007

Main contract for manufacture of plant and their supply and erection

Drawing and design service for manufacture of plant only and notrendered directly to clients

Ratio of Tribunal decision in Daelim Industrial Co. Ltd. [2006 (3) S.T.R. 124(Tri. - Del.)] rightly followed in original order - Impugned revision order setaside

CCE, Raipur Vs. M/s. BSBK Pvt. Ltd. 2010 TIOL 646 (Delhi CESTAT

-LB)

Turnkey Contracts can be vivisected.

Article 366(29A)(b) to the constitution has made indivisible contracts ofWorks contract divisible to find value of goods.

Hence the remaining part i.e. service part can be attributable to the scopeof service tax provisions under the Finance Act, 1994 & thereby can beclassifiable under the appropriate category.

Overruled Delhi Tribunal decision in Daelim Industrial Co. Ltd (2006) 3STR 124.

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Honble Mumbai CESTAT(TM) in the case of CCE Vs. M/s. IndianoilTanking Ltd (2010) 25 STT 327

Appellant entered into contract with IOCL for construction of storage tank& certain utilities which involved drawing, designing, engineering etc. &separate price were identified for each such activity.

The department sought to levy service tax on the activity of drawing,

designing, engineering etc. under the category of consulting engineeringservices since after 46th Amendment to the constitution, works contractcan be vivisected & service component could be subject to tax.

Supreme Court has dismissed the SLP filed by department againstdecision of tribunal in the case of M/s. Daelim Industrial Co ltd.

The decision of M/s. Daelim Industrial Co Ltd holding that works contractcannot be vivisected was followed consistently in various other decisionsby tribunals including case of M/s. Diebold Systems Pvt Ltd. The ratio ofM/s. Diebold Systems Pvt Ltd is approved by Mumbai High Court in case of

M/s. Indian National Shipowners Association.

The 46th amendment to constitution was made with intent to enable thestate to levy sales tax on the sales component of works contract. Serviceportion of works contract is subject to tax only after 1st June, 2007

The decision of M/s. BSBK Ltd which is referred to Larger Bench.HonbleCESTAT (TM) decided to proceed to dispose of the present case withoutwaiting for the Larger Bench decision in the case of M/s BSBK Ltd.

M/s. URC Constructions Pvt. Ltd. Vs. CCE, Salem (2009) TIOL 596(Madras CESTAT)

Commercial or industrial construction contract inclusive of material isliable to Service Tax under Works Contract Service w.e.f 01st June, 2007

The definition of Commercial & Industrial Construction service notmodified on introduction of Works Contract Service w.e.f 1st June, 2007

Stay granted..Pre deposit waived completely

M/s. Sunil Hi-Tech Engineers Ltd Vs. CCE, Nagpur (2009) TIOL 1867(Mumbai CESTAT)

Introduction of works contract service in year 2007 does not makeconstruction services not taxable earlier.

Appellant never contested that the services are not covered under thedefinition Commercial or Industrial Construction Services ofservice tax.

It was observed that had Works Contract Services had not

notified, the service would have continued to be taxable underthe head Commercial or Industrial Construction Servicesbeyond 31st May, 2007 also.

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Services for works contract services would be liable to service tax evenprior to 1st June, 2007 if the same falls within the ambit of Commercialor Industrial Construction Services.

Honble Karnataka High Court in the case of CST, Bangalore Vs. M/s.Turbotech Precision engineering Pvt. Ltd. 2010-TIOL-498

Held that Works Contract category was notified w.e.f 1st June, 2007.

The drawing, designing, development of oil free compressor not liable toservice tax under Consulting Engineering Services in case of lump sumcontract. Works Contract cannot be vivisected.

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The service provider has used the material which is supplied free ofcharge by the recipient of service.

Abatement of 67% shall be available only if value of free supply isincluded for arriving at gross amount.

In case of commercial construction, free supply of goods (pipes) by theservice recipient to be included for the purpose of arriving at gross

amount for the purpose of claiming abatement under NotificationNo.15/2004.

Bangalore CESTAT in the case of M/s. Shobha Developers Ltd. Vs.CCE (2009) TIOL 2258 held that

The appellant is registered for payment of VAT & discharges sales taxliability on 70% of value of works contract in relation to constructionservice.

Exemption available under Notification No.12/2003 for value of goods

sold.

The Notification No.12/2003 does not stipulate that the inputs used forthe contract should be mentioned in the invoice/bills issued to thecustomers.

Service tax is leviable only on 30% i.e. excluding the value on which stateVAT is paid.

Honble Andhra Pradesh High Court in the case of M/s. Nagarjuna

Construction Company Ltd Vs. UOI 2010-TIOL-403-HC held that

Benefit of composition scheme is not available prior to 1st June,2007.

Circular No.98/1/2008-ST dated 1st January,2008 is wholly inconformity with the provisions of Rule 3(3) of the CompositionScheme rules.

A service provider who has paid service tax prior to 1st June,2007 forthe taxable services such as erection, commissioning orinstallation, commercial or industrial construction or construction

of complex is not entitled to avail the composition scheme underWorks Contract (Composite Scheme for Payment of Service Tax)Rules, 2007 since on a true and fair construction of Rule 3(3) of the2007 Rules, it is clear that where in respect of a works contract servicetax has been paid, no option to pay service tax under the compositionscheme could be exercised.

The entitlement to avail the benefits of the composition scheme is onlyafter an option is exercised under Rule 3(3) of the 2007 Rules and thisprovision specifically enjoins a disqualification for exercise of such optionwhere service tax had been paid in respect of a works contract. Whereservice tax has been paid in respect of a works contract, the eligibility toexercise an option to avail the benefits of the composition scheme underthe 2007 Rules is excluded.

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CBEC vide Circular No.128/10/2010-ST dated 24th August,2010 hasclarified as follows:

W.e.f. 1st June, 2007 when the new service Works Contract' servicewas made effective, classification of existing services (i.e. ECI,Commercial Construction & Construction of Complex) would

undergo a change in case of long term contracts even though partof the service was classified under the respective taxable serviceprior to 1st June,2007. This is because works contract describesthe nature of the activity more specifically and, therefore, as perthe provisions of section 65A of the Finance Act, 1994, it would bethe appropriate classification for the part of the service providedafter that date.

In case a contract where the provision of service commenced priorto 1st June,2007 and any payment of service tax was made underthe respective taxable service before 1st June,2007, the said

condition under rule 3(3) was not satisfied and thus no portion ofthat contract would be eligible for composition scheme.

On the other hand, even if the provision of service commencedbefore 1st June,2007 but no payment of service tax was made till thetaxpayer opted for the composition scheme after its coming intoeffect from 1st June,2007, such contracts would be eligible for optingof the composition scheme.

The Board's previous Circular No. 98/1/2008-ST dated 04.01.2008and the ratio of judgement of the High Court of Andhra Pradesh inthe matter of M/s. Nagarjuna Construction Company Limited vs.Government of India (2010-TIOL-403-HC-AP-ST) are in line with theabove interpretation.
http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=43&filename=legal/hc/2010/2010-TIOL-403-HC-AP-ST.htmhttp://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=43&filename=legal/hc/2010/2010-TIOL-403-HC-AP-ST.htm

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