Background Material for

Seminar on Service Tax

ON SATURDAY, THE 28TH AUGUST, 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 Service1 means a) construction of a new building or a civil structure or a part thereof; or b) construction of pipeline or conduit; or c) completion and finishing services such as glazing, plastering, painting, floor and wall tilling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structures; or d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, Which is:i) used, or to be used, primarily for ; or ii) occupies, or to be occupied, primarily with : or iii) 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 service provided or to be provided to any person, by any other person, in relation to commercial or industrial construction service2 Explanation-For the purposes of this sub clause, the construction of new building which is intended for sale, wholly or partly, by a builder or any person authorised by builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall deemed to be service provided by the builder to the buyer.3

Service at a glance:
Date 10th September,
1 2

Taxable in respect of Construction/Repair/Restoration of new building or civil structure or part thereof.

The word Service is proposed to be omitted by Finance Bill, 2010 w.e.f. 1st July, 2010 The word Service is proposed to be omitted by Finance Bill, 2010 w.e.f. 1st July, 2010 3 Inserted w.e.f 1st July, 2010

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2004 16th June,2005

1st July, 2010

Scope widened to cover: a) construction/repair/alteration/renovation/restoration of pipeline or conduit b)completion & finishing service such as glazing, plastering, painting etc. c) renovation besides repair/alteration/restoration building or civil structure. Service renamed as Commercial or Industrial Construction Services Sale of commercial premises by the builder/developer to the prospective buyer before obtaining Completion certificate.

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 similar industrial establishments (Para 13.4 of Circular No.80 F.No.B2/8/2004-TRU dated 10th September,2004) Services in relation to construction of any long distance pipeline which were earlier excluded liable w.e.f. 16th June,2005. Services provided to government bodies in relation to commercial premises intended for sale or let out (Para 13.2 of Circular No.80 F.No.B2/8/2004-TRU dated 10th September,2004). Services of construction of road are liable to service tax in case there is composite and single contract for construction. (Para 14.5 of Circular 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 or institutions solely for educational, religious, charitable, health, sanitation or philanthropic purposes or non-profit purpose (Para 13.2 of Circular No.80 F.No.B2/8/2004-TRU dated 10th September,2004). Services in relation to construction of government building whether for residence, office or other civic amenities (Para 13.2 of Circular No.80 F.No.B2/8/2004-TRU dated 10th September,2004). Construction of port or other port (Notification No.16/2005-ST dated 7th June,2005 & Notification No.25/2007-ST dated 22 nd May,2007). However service such as completion and finishing, repairs, alteration, renovation, restoration, maintenance, or repairs provided in relation to existing port or other port shall be liable to Page 3 of 21

service tax. (Para 8.4 of letter no. F.NO-B1/16/2007-TRU dated 22nd May,2007)

Construction of roads, airports, railway, transport terminals, bridge, tunnel and dams. Canal Systems built by government. The canal systems built by private agencies 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 on repairs/ 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 of taxable services attracting service tax. Maintenance or repairs of road would include activities of resurfacing, renovation, strengthening, relaying, filling of potholes etc. Construction of road would include activities of laying of new road, widening of narrow road to broader road, changing road surface etc.

Central Government vide Notification No.24/2009-ST dated 27 th 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 to management, maintenance or repairs of roads from whole of the service tax. Any consideration received as advance before 1 st July, 2010 in relation to sale of premises by the builder to 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. (Notification No.19/2005-ST dated 7th June, 2005 & Notification No.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 DOF No.334/03/2010-TRU dated 1st July, 2010.)

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o No abatement for completion and finishing services as defined 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 input service 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 constituted under 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 or village or development or planning authority; who is authorised under any law for time being in force to issue completion certificate. (Central Government vide MF (DR) Order No. 1/2010 dated 22nd June, 2010.)

In case of multipurpose building (residential & commercial), service tax is leviable if property is treated as commercial under municipal law (Para 13.3 of Circular No.80 F.No.B2/8/2004-TRU dated 10 th 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 obtaining completion certificate would be liable to service tax under this category. 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 the definition of taxable service thereby the sale of premises is treated as service by deeming fiction. o Attempt to reverse the decision of Honble Gauhati High Court in the case of Magus Construction Pvt. Ltd. V/s. UOI (2008) 11 STR 225 & Circular No.108/02/2009-ST dated 29 th 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 work completed) 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 licensed Surveyor. o No service tax is payable on any amount received by builder/developer from prospective buyer on or before 30th June, 2010 in respect of service 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 buyer before 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 by Maharashtra Chamber of Housing Industry (2010-TIOL-526-HC) challenging the constitutional validity of the amendment through finance Act, 2010. The Honble Court also instructed the Department not to initiate coercive steps against the petitioners till next hearing. However it was clarified that assessment against other assessee may be 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; or b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tilling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex.

Section 65(91a) defines Residential Complex- means any complex comprising of1) a building or buildings, having more than 12 residential units; 2) a common area; and 3) 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 approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging in any other person for designing or planning of lay out and the construction of such complex is intended for personal use as residence by such person. Page 6 of 21

Explanation-For removal of doubts, it is hereby declared that for the purposes of this clausea) personal use includes permitting the complex for use as residence by 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 service provided or to be provided to any person, by any other person, in relation to construction of complex. Following explanation shall be inserted to section 65(105)(zzh) w.e.f date to be notified by central government Explanation-For the purposes of this sub clause, the construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall deemed to be service provided by the builder to the buyer.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 1 st 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. (Notification No.18/2005-ST dated 7th June, 2005 & Notification No.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 DOF No.334/03/2010-TRU dated 1st July, 2010.)

Inserted w.e.f 1st July, 2010

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o No abatement for completion and finishing services as defined 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 input service5 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 constituted under 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 or village or development or planning authority; who is authorised under any law for time being in force to issue completion certificate. (Central Government vide MF (DR) Order No. 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 hired contractors engaged by these builders who are to be taxed. In other words Service Tax is leviable only on those contractors who are engaged in construction of new residential complexes, or completion and finishing services in relation to such complexes or repair, alteration/renovation or restoration of similar services in relation to residential complexes

CBEC vide circular no. August,2007 clarified that

96/6/2007-ST

(079.01)

dated

23 rd

(a) In a case where the builder, promoter, developer or any such person builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of the said residential complex, the contractor in his capacity as a taxable service provider (to the builder/promoter/developer/any such person) shall be liable to pay service tax on the gross amount charged for the construction services under construction of complex service [section 65(105) (zzzh)]. (b) If no other person is engaged for construction work and the builder / 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 any other person, then in such cases,(i) service provider and service recipient relationship does not exist, (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-supply of services, the question of providing taxable service to any person by any other person does not arise. CBEC Vide circular No. 108/02/2009-ST Dated 29/01/2009 issued clarification as regards applicability on service tax on builders Generally, the initial agreement between the promoters/builders/ developers and the ultimate owner is in the nature of agreement to sell. 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 instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of self-service and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of residential complex. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

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

dated

26th

o Para 8.2 & 8.3..builder continue to remain legal owner of the property in case of payment made by buyer in installments as per the terms of agreement to sale. In this type of transaction, the builder is deemed to have provided services to self since the legal ownership/transfer of property from builder to buyer takes place only after completion of building and handing over the possession along 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 for construction of building thereon. This mode of transaction is devised Page 9 of 21

to pay lesser stamp duty. In order to achieve parity in tax treatment, explanation is inserted to Section 65(105)(zzq) to treat the amount received towards sale of premises as services subject to exception that entire payment is received after obtaining completion certificate from prescribed authorities.

Central Government vide Letter F.No.332/16/2010-TRU dated 24th May,2010 has clarified on the issue related to leviability of service tax on construction of residential house by National Building Construction 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 for personal use as residence by recipient of service. The term personal use is defined to include permitting the use of complex as residence by another person on rent or without consideration. In para 3, it is further clarified that the residential complex built by NBCC for personal use of Government of India is not leviable to service tax.

Few Relevant Decisions:

Honble Gauhati High Court in the case of Magus Construction Pvt.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 the department.when a builder, promoter or a developer undertakes construction activity for its own self, the question of provision of taxable service does not arise in absence of relationship of service provider and service recipient. Any advance made by a prospective buyer is against consideration for 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 or to be provided to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorized by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking space. Explanation For the purposes of this sub-clause, preferential location means any location having extra advantage which attracts extra payment over and above the basic sale price. Page 10 of 21

 exclusions:
Charges for providing parking space.

Effect Charges for facilities such as prime/preferential location such as sea facing, park facing, corner flat etc. according to the choice of the buyer, charges for developing & maintaining parks, laying of sewerage & water pipelines, providing access roads & common lighting etc., charges for fire fighting installation & power back up etc. would be liable to service tax. Charges for providing parking space are specifically excluded from the levy 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 or to 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 means contract whereini) 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 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, 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 waterproofing, lift and escalator, fire escape staircases or 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 or industry; or c) construction of a new residential complex or part thereof; or d) completion and finishing services, repairs, alteration, renovation or restoration of, or similar services in relation to (b) and (c); or e) turnkey projects including engineering, construction or commissioning (EPC) projects. procurement and

Important Elements & Clarifications:

Vide Notification No.25/2007-ST dated 22nd May,2007, exemption granted in relation to construction of port or other port under this category. CBEC vide Letter B1/16/2007-TRU dated 22 nd May,2007 has clarified that exemption only in respect of construction 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 in the 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 service provider can revise the classification to works contract service from existing classification that of erection, commissioning or installation services or commercial/residential construction services and pay service tax for the amount received on or after 1 st June,2007 under composition scheme under following circumstances: (i) contracts entered into prior to 1st June,2007 for providing erection, commissioning or installation and commercial or residential construction service, and (ii) service tax has already been paid for part of the payment received under the respective taxable service. In this regard, CBEC clarified that: classification of a taxable service is determined based on the nature of service provided whereas liability to pay service tax is depending upon receipt of consideration. Vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of the consideration is not legally sustainable. a service provider who paid service tax prior to 1 st June,2007 for the taxable service, namely, erection, commissioning or installation service, commercial or industrial construction service or construction of complex service, is not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after 1 st June,2007 and hence, is not entitled to avail the Composition Scheme.

Activity of constructing Canal Systems though undertaken as turnkey or EPC project, is not liable to service tax under Works Contract since as it is excluded from the definition itself. ( Para 3 of Circular No.116/ 10/2009-ST F.No.137/40/2009-CX4 dated 15 th September, 2009) Vide Notification No.41/2009 dt 23rd October, 2009, Central Government had exempted the services provided in relation to execution of a works contract in respect of canals used for the purpose other 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 of transfer of property in goods involved in execution of said works contract.

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o the gross amount charged shall not include VAT or Sales Tax paid, if any, on transfer of property in goods involved in the execution of the 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 in goods involved in execution of works contract, then adopted for payment of VAT to be taken as value of property for determining the value of works contract referred above. of property such value transfer of service as

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 liability on works contract service @4%6 of gross amount charged for works contract (excluding VAT/Sales Tax) instead of rate specified in Section 66. Explanation to Rule 3(1), for the gross amount charged for the works contract shall be the sum - including The Value of goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; & The value of all the services that are required to be provided for the execution of the works contract Excluding The VAT or Sales Tax paid on transfer of property in goods involved; &

2% upto 28th February,2008

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

The above explanation shall not apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made 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 paid on capital goods and service tax paid on Input Services (Circular No.96/7/2007 dated 23rd August,2007) Option once exercised by service provider to pay service tax on said works contract under composition scheme shall be applicable to entire works contract and shall not be withdrawn till completion of said works contract. Rule 3(4) restricts the option of composition scheme only to those transactions where declared value of works contract is less than the gross amount charged for such works contract8.

Few Relevant Case Laws:

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

Works contract service - Erection, commissioning and installation service Impugned contract whether to be considered as turnkey project contract or 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 and recovery 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 period prior to 1st June, 2007. The contract clause revealing the contract to be Works contract & pursuant to said contract appellant obtained Sales tax registration number for payment of sales tax on goods part.

7 8

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

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

Sepco Electric Power Construction Corpn Vs. CCE, Raipur (2007) 7 STR 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 by Supreme Court New provision in Finance Bill, 2007 indicating works contract to attract service tax only after enactment Demand not sustainable - Recovery of amounts stayed

Air Liquide Engg. India Pvt. Ltd. Vs. CCE, Hyderabad-II (2008) 9 STR 486 (Bangalore CESTAT)

Works contract service - Air separation/gas separation plants supplied and erection, installation and commissioning of such plants undertaken Impugned contracts being works contract, came into Service tax net from 01/06/2007 only Works contract not covered under Consulting Engineer service for period prior to 2007 Main contract for manufacture of plant and their supply and erection Drawing and design service for manufacture of plant only and not rendered 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 set aside Pvt. Ltd. 2010 TIOL 646 (Delhi CESTAT

CCE, Raipur Vs. M/s. BSBK -LB)

Turnkey Contracts can be vivisected. Article 366(29A)(b) to the constitution has made indivisible contracts of Works contract divisible to find value of goods. Hence the remaining part i.e. service part can be attributable to the scope of service tax provisions under the Finance Act, 1994 & thereby can be classifiable under the appropriate category. Overruled Delhi Tribunal decision in Daelim Industrial Co. Ltd (2006) 3 STR 124. Page 16 of 21

Honble Mumbai CESTAT(TM) in the case of CCE Vs. M/s. Indianoil Tanking 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 engineering services since after 46th Amendment to the constitution, works contract can be vivisected & service component could be subject to tax. Supreme Court has dismissed the SLP filed by department against decision of tribunal in the case of M/s. Daelim Industrial Co ltd. The decision of M/s. Daelim Industrial Co Ltd holding that works contract cannot be vivisected was followed consistently in various other decisions by tribunals including case of M/s. Diebold Systems Pvt Ltd. The ratio of M/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 the state to levy sales tax on the sales component of works contract. Service portion 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.Honble CESTAT (TM) decided to proceed to dispose of the present case without waiting 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 is liable to Service Tax under Works Contract Service w.e.f 01st June, 2007 The definition of Commercial & Industrial Construction service not modified 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 make construction services not taxable earlier. Appellant never contested that the services are not covered under the definition Commercial or Industrial Construction Services of service tax. It was observed that had Works Contract Services had not notified, the service would have continued to be taxable under the head Commercial or Industrial Construction Services beyond 31st May, 2007 also. Page 17 of 21

Services for works contract services would be liable to service tax even prior to 1st June, 2007 if the same falls within the ambit of Commercial or 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 to service tax under Consulting Engineering Services in case of lump sum contract. Works Contract cannot be vivisected.

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Madras High Court in the case of Larsen & Toubro Ltd. (2007) 7 STR 123

There was composite contract for commercial or industrial construction service. Free supply of cement, steel etc. whether to be included for the purpose of valuation. Explanation to Sr. No.7 of Notification No.1/2006-ST does not envisage inclusion of value of goods supplied by service recipient. Stay granted.

The above observations laid down by Madras High Court are accepted by Chennai CESTAT in the case of P. Chandran Vs. CCE (2008) 12 STR 33 & Delhi High Court in the case of Era Infra Engineering Ltd. Vs. UOI (2008) 11 STR 3 Bangalore CESTAT in the case of Cemex Engineers Vs. CST, Kochi (2009) TIOL 2208 held that

In case of commercial or industrial construction service & construction of complex service, Notification No.15/2004-ST Dt. 10/09/2004 & Notification No.1/2006-ST Dt.01/03/2006 provides for abatement of 67%. As per Section 67, value of taxable service shall be the gross amount charged by service provider for such service Cost of material supplied by service receiver can not be included for valuation in view of Section 67 and based on decision of Madras High Court in the case of Larsen & Toubro 2007 TIOL 176. Works contract liable to service tax only after 1 st June,2007. If appellant have registered & paid sales tax for execution of construction works contract, service tax is not applicable for the period prior to 1st June,2007.

Ahmedabad CESTAT in the case of Jai Hind Project Ltd Vs. CST (2010) TIOL 124 held that

In case of commercial construction, free supply of goods (pipes) by the service recipient whether to be included for the purpose of arriving at gross amount for the purpose of claiming abatement under Notification No.15/2004. The objective of explanation to Notification No.15/2004 is to bring parity among all the service providers providing similar services. Explanation to Sr.No. 7 of Notification No.1/2006 refers to gross amount charged includes value of goods or material supplied or provided or used by the provider of service.

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The service provider has used the material which is supplied free of charge by the recipient of service. Abatement of 67% shall be available only if value of free supply is included for arriving at gross amount. In case of commercial construction, free supply of goods (pipes) by the service recipient to be included for the purpose of arriving at gross amount for the purpose of claiming abatement under Notification No.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 tax liability on 70% of value of works contract in relation to construction service. Exemption available under Notification No.12/2003 for value of goods sold. The Notification No.12/2003 does not stipulate that the inputs used for the contract should be mentioned in the invoice/bills issued to the customers. Service tax is leviable only on 30% i.e. excluding the value on which state VAT 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 in conformity with the provisions of Rule 3(3) of the Composition Scheme rules. A service provider who has paid service tax prior to 1 st June,2007 for the taxable services such as erection, commissioning or installation, commercial or industrial construction or construction of complex is not entitled to avail the composition scheme under Works Contract (Composite Scheme for Payment of Service Tax) Rules, 2007 since on a true and fair construction of Rule 3(3) of the 2007 Rules, it is clear that where in respect of a works contract service tax has been paid, no option to pay service tax under the composition scheme could be exercised. The entitlement to avail the benefits of the composition scheme is only after an option is exercised under Rule 3(3) of the 2007 Rules and this provision specifically enjoins a disqualification for exercise of such option where service tax had been paid in respect of a works contract. Where service tax has been paid in respect of a works contract, the eligibility to exercise an option to avail the benefits of the composition scheme under the 2007 Rules is excluded. Page 20 of 21

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

W.e.f. 1st June, 2007 when the new service Works Contract' service was 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 part of the service was classified under the respective taxable service prior to 1st June,2007. This is because works contract describes the nature of the activity more specifically and, therefore, as per the provisions of section 65A of the Finance Act, 1994, it would be the appropriate classification for the part of the service provided after that date. In case a contract where the provision of service commenced prior to 1st June,2007 and any payment of service tax was made under the respective taxable service before 1st June,2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme. On the other hand, even if the provision of service commenced before 1st June,2007 but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 1st June,2007, such contracts would be eligible for opting of the composition scheme. The Board's previous Circular No. 98/1/2008-ST dated 04.01.2008 and the ratio of judgement of the High Court of Andhra Pradesh in the matter of M/s. Nagarjuna Construction Company Limited vs. Government of India (2010-TIOL-403-HC-AP-ST) are in line with the above interpretation.

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