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3.1.c Article on Service Tax:
3.2.c CONSTRUCTION RELATED SERVICES & SERVICE TAX LIABILITIES
[Extracts from D.V.Shidhaye¶s Compilation on C.D. ³Construction Sector and service tax liabilities C.D.]
Identical is the case of another Contractor at Nashik. He constructed underground stormy water clearance
system to protect the Nashik citizen from the disasters of heavy rain fall. Department started demanding Service
tax. This demand was also ridiculous and nakedly violating the decisions of Tribunals, Courts etc. besides the
Board Circulars and ignoring the statutory provisions. There might be many more sailing in same boat. They
may refer to file No. 05. CONSTRUCTION OF PUBLIC WATER SUPPLY DRAINAGE SYSTEMS ETC
AND SERVICE TAX LIABILITY in this folder only.
If all such contractors come together and fight against the injustice collecti vely then they have chances of saving
the colossal financial loss and mental worries.
The Builders Association in the interest of their members should give circulation to this note.
Part I provides key notes for quick understanding.
Part II explains meanings of important words and expressions used in Construction Contracts. It also explains
exceptions from two main construction services where service tax is not applicable.
Part III explains ³Importance of Section 64A of the Sale of goods Act 1930. Always to be remembered and
cited in each tender or contractual offer.´
Part IV provides in tabular form a list of Taxable services which are either provided by Civil Contractors or are
concerned to their business.
Notes of Precaution: The Acts and rules are changing fast on the budget day also and in between two budgets
also. What is legal today becomes illegal tomorrow and what is illegal today becomes legal tomorrow.
Obviously information given in this long article needs updating from time to time. Further at many places
opinion or views of author are given as per his personal understanding of the statutory provisions and these may
be or may not be acceptable in legal disputes. When question of interpretation arises the ultimate authority of
correct interpretation is only Supreme Court of India and not the authors like Shri D.V.Shidhaye.
It reiterated that this Tax regime would be a reality very soon. If every thing goes well necessary constitutional
amendments are made, consensus amongst majority of states on the Rates of GST is arrived then in 2011, G.S.T.
Tax system shall be in operation replacing Excise, Service tax and CST at the Central level (CGST). VAT
system and few other taxes at State level would be replaced by SGST. For Interstate Transactions another novel
system of IGST shall be introduced.
What shall be the position of Civil Contractors in the Construction Sector? Author simply does not know
today. However in that regime also Construction sector shall have to bear the burden of Taxes as they are
bearing today.
Then this note shall have to be redrafted according to the provisions of the GST. In short, life of this note is
not long enough to cover the subject due totoo many complexities.
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3.3.c PART - I
KEY NOTES TO CONTRACTORS ENGAGED IN BUSINESS INVOLVING CONSTR UCTION OF
ANY KIND:
1)c For Civil Contractors, This note is summery of ajor output services provided normally by
majority of civil contractors. These are their output services and they have to pay service tax as output
service providers. If they get some or part of these services done from sub contractors (Outsourcing)
then these services are treated as their input services. Besides there are a number of other taxable input
services which they have to procure from others like Consulting engineers, Architects, Transporters,
Hiring of construction machinery and so on and consume these services in their output services.
2)c Tendering systems in India and Global tenders: When any kind of construction work is to be done
for Government, Semi Government and Local self government organizations, the contracts are awarded
on Tendering system. Tenders for Projects are many times in huge volumes divided in to two or more
than two Sections. Some Sections deal with technical Specifications of the project, Inspection and
quality testing norms, Inspecting authorities. (called as Technical bids). Some sections deal with
commercial aspects like earnest money, Security deposit, payment terms, manner of making payments
guarantee / warranty obligations, Manpower utilization portion, labor laws, time limit for completion
of contract, Penalties or liquidated damage clauses, inclusion or exclusion of Government Taxes, duties
and other levies involved and so on. (Called as Commercial bids).
Third Part is the estimated cost of the project in many cases particularly when invited by Government
organizations like P.W.D. etc.
Normally here the contractors are in India or even Local contractors and contracts are to be completed
in India. Payments to contractors is made in Indian Rupees.
Example- Tenders invited by State P.W.D. or Central PWD or Municipal Corporations for the Projects
like construction of Roads, Bridges, Tunnels, Flyovers, underground water supply or drainage systems,
Schools, Hospitals, Government offices, Warehouses, Transport terminals like Bus stands, Public
utility Gardens, Markets and so on. Here the Bidders are mostly Indians. All money transactions are in
Indian Rupees. Main contractors and sub contractors can be Indians.
Burden of domestic indirect Taxes and duties ± This burden falls on Main Contractors and the
subcontractors appointed by Main contractors. Fortunately these indirect taxes can be recovered from
the customers if agreed in the tender conditions. The main taxes are (a) Excise duties if goods are
manufactured in India (b) Service tax ± mostly service tax on works contract which is collected by both
State Government and Central Government on same project. Local octroi (Jakat) is also to be paid in
certain Municipal areas.
International Competitive Biddings: Some tenders involving high financial stakes and high science
and technology are invited from Contractors located all over the world. In such tenders foreign
contractors also participate. Here is the involvement of foreign currency, imported material and
imported services. Here the Main Contractors and Sub contractors can be within India as well as
outside India.
Examples- Thermal or Hydro electricity generating Projects, Mineral Oil and Gas exploration Projects,
Dams and so on. Here some projects are funded by world banks on certain terms.
Differential treatment to International competitive bidders - Here Foreign Trade Policy gives
plenty of tax incentives or immunity from the domestic taxes and duties treating them as Deemed
Exports.
In both cases the tenders are to be submitted in the prescribed formats and in prescribed
manner.
The wording of tenders in India is drafted without much consideration of the present tax structures
and the expressions used in them are used for ages traditionally. This fixes many successful bidders in
to legal disputes from tax colleting machinery especially on the indirect taxes like Service tax, Excise,
Cenvat, State Vat etc.
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3)c Free supplies of any material from customers increases tax liability:Many times customers i.e.
service receivers supply to the Contractors some material free of cost like say Cement, Steel, Glass
etc. This is to be used in the construction work. As per valuation section 67 of the Finance Act 1994
read with Service Tax (Determination of Value) Rules, 2006, value of such goods is treated as
additional consideration received in kind. Therefore, cost of such freely supplied material has to be
added in to the total value of contract and then to work out the tax liability. This so now in works
contact service also.
4)c Cum Tax Price: Sometimes contractors do not prepare proper service tax invoices indicating there in
clearly the value of taxable service provided and service tax payable separately. Whether the customers
pay the amount of service tax or does not pay, the contractors as service provider have to pay the
service tax. In such situation the service tax burden can be reduced by treating the amount received as
Gross value charged inclusive of service tax and then he has to work out back words the value without
tax. Thereby at least part of the tax burden is saved. This is as per Section 67 only.
5)c ·ust for the information of Contractors: ³Our business and Laws´ Shri D.V.Shidhaye has released
an excellent reference book ³Our business and Laws´ in November 2008. This printed book in itself is
a business compendia for all businessmen including Civil Contractors. It provides plenty of useful tips
to all Contractors who enter in to contractual agreements or participate in Government Tenders. Most
important chapters of this book for example are ±
This is yet another compilation of Shri D.V. Shidhaye for the benefit of successful bidders in
international competitive bidding. It explains how such bidders can claim deemed export benefits from
DGFT. This compilation is now available on this CD itself.
Cenvat Credit facility: Contractors have to procure inputs, capital goods and input services from
others for consumption or use in or in relation to the taxable services provided by them.
6)c Pertinent question is when Credit of Service tax can be taken by such contractors?
Straight forward yes or no answer is not possible. This decision has to be taken on facts, terms of
contractual agreements wording chosen in the agreements etc and the definitions given in Rule 2 of
Cenvat Credit Rules 2004 and so on.
(a)c If the contractors take benefit of any conditional exemption Notification where there is clear condition
putting a bar for taking cenvat credit, then contractors can not take credit e.g. if on erection, installation
and commissioning service or construction and industrial and commercial service. Here if contractor
takes benefit of exemption Notifications like say No. 1/2006-ST dated 1/3/2006, providing abatement
facility (value of taxable service = 33% of gross value charged) then no cenvat credit.
(b)c If in the service (a) above, contractor is only for labor then the question of using own material does not
arise. There is no abatement. Here credit of input service can be taken.
(c)c Credit of GTA service can be taken for bringing in inputs at the site of construction.
(d)c WCT service ± if composition is opted, and service tax is paid at 4 % of gross value then credit of
input service can be taken. [However no credit allowed on excise duty paid on inputs]
(e)c No Cenvat credit on major construction inputs like Cement and steel - Most important amendment
to Rule 2 of Cenvat Credit Rules after 2009-10 budget is the amendment to explanation 2 of the
definition of Inputs - Now it reads ³ Explanation 2. - Input include goods used in the manufacture
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of capital goods which are further used in the factory of the manufacturer; *[but does not include
cement, angles, channels, centrally twisted Deform bar (CTD) or thermo Mechanically treated bar
(TMT) and other items used for construction of factory shed, building or laying of foundation or
making of structures for support of capital goods] ³
[Comments (a) * inserted by Notification No. 16/2009-C.E.(N.T.) dated 7/7/2009.(b) The amended
explanation 2 can create legal disputes so far as providers of Construction services are concerned.
Normally for civil contractors, cement and steel items are major inputs. It appears that Contractors shall
not be allowed to take Cenvat credit of these major inputs while providing any construction services.
7)c Provisional Assessment when in doubt: The Definitions of all taxable services are very difficult to
understand. Even Courts and Tribunals give contradictory decisions adding to confusion.
The attitude of many Excise officers is hostile to the honest tax payers. They are more interested in
issuing Show Cause cum demand Notices on any flimsy grounds. While doing so they conveniently
ignore the decisions of higher Courts or even the provisions clarified in Law. The sufferers are the
contractors.
Many times the contractors and their consultants do not know what should be the correct advice ±
whether to pay service tax or not to pay. If they pay but others do not, then they lose the tenders.
Question: When contractors should ask for provisional assessment? What is the procedure for that?
Rule 6 of Service Tax Rules 1994 is important for all contractors who provide only taxable construction
services.
Sub rule No.6(4) reads ± ³Where an assessee is, for any reason, unable to correctly estimate, on the date of
deposit, the actual amount payable for any particular month or quarter, as the case may be, he may make a
request in writing to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central
Excise, as the case may be, giving reasons for payment of service tax on provisional basis and the Assistant
Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, on receipt
of such request, may allow payment of service tax on provisional basis on such value of taxable service as may
be specified by him and the provisions of the Central Excise (No.2) Rules, 2001, relating to provisional
assessment, except so far as they relate to execution of bond, shall, so far as may be, apply to such
assessment. [Comment: This sub clause is substituted w.e.f.16/7/2001 by Notification 5/2001-S.T. dated
9/7/2001]
Sub rule 6(5) ± ³Where an assessee under sub-rule (4) requests for a provisional assessment he shall file a
statement giving details of the difference between the service tax deposited and the service tax liable to be paid
for each month in a memorandum in Form ST-3A accompanying the quarterly or half yearly return, as the
case may be.
[Comment: In the opinion of author the Contractor should file both ST3A and ST3 returns simultaneously.
Example ± Mr. µX¶ has constructed compound wall for Deccan College Pune and received Payment of Rs. 6
lakhs for that. In the same period he has done construction of a factory manufacturing excisable goods worth
Rs. 50 lakhs. He has also executed some road construction contract and received Rs. 10 lakhs. Outwardly all
these appear to be Industrial and Commercial services. However there are exceptions in the definition and these
are ±
(a)c Roads can never be repaired. Construction of only new road (whether one foot long or 1000 Miles
long) is possible. Please read File No.2 Success story in this folder only.
(b)c Industrial and commercial service Construction service does not include ³,such services provided in
respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]
Here there can be doubt. In this situation Mr. µX¶ must file usual return in ST 3 form and also to file with it
ST3A return. ST3 A is nothing but a supporting statement. References of these circulars or such circulars or
Notifications should be given to strongly plead your case.
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Refer - Board Circular No. B2/8/2004-TRU dated 10/9/2004 says-
13.2 The leviability of service tax would depend primarily upon whether the building or civil structure
is used, or to be used for commerce or industry. The information about this has to be gathered
from the approved plan of the building or civil construction. Such constructions which are for the
use of organizations or institutions being established solely for educational, religious, charitable,
health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable,
being non-commercial in nature.
Generally, government buildings or civil constructions are used for residential, office purposes or for
providing civic amenities.
13.3 In case of multi-purpose buildings such as residential cum commercial construction, tax would
be leviable in case such immovable property is treated as a commercial property under the local/
municipal laws.
13.4 The definition of service specifically excludes construction of roads, airports, railway
transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified
that any pipeline other than those running within an industrial and commercial establishment such as a
factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction
of pipeline running within such an industrial and commercial establishment is within the scope of
the levy.
13.5 The gross value charged by the building contractors include the material cost, namely, the cost of
cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider
can take credit of excise duty paid on such inputs. However, it has been pointed out that these
materials are normally procured from the market and are not covered under the duty paying
documents.
Further, a general exemption is available to goods sold during the course of providing service
(Notification No. 12/2003-ST) but the exemption is subject to the condition of availability of
documentary proof specially indicating the value of the goods sold. In case of a composite contract,
bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has
been provided in case of composite contracts where the gross amount charged includes the value of
material cost. (refer notification No.15/04-ST, dated 10.09.2004) This would, however, be optional
subject to the condition that no credit of input goods, capital goods and no benefit (under
notification no. 12/2003-ST) of exemption towards cost of goods are availed.
If Construction of internal roads inside a Commercil / Industrial or Residential complex then Service
tax is payable because it is not merely construction of road service. [Refer -Board Circular No.
B1/6/2005-TRU dated 27/7/2005 says -
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³if the contractor of construction of commercial complex is a single contractor and the construction of
road is not recognized as a separate activity as per the contract, then the service tax would be leviable
on the gross amount charged for construction including the value of construction of roads¶ (All
circulars issued by CBE&C, except letters of TRU have been withdrawn vide CBEC&C Circular No
96/7/2007-ST dated 23/8/2007. thus, TRU letter are still valid.)]
If an assessee is unable to correctly estimate the actual amount payable as Service Tax for any
particular month or quarter, he may make a request in writing to the Asstt./ Dy. Commissioner of
Service Tax/Central Excise, giving reasons for seeking payment of Service Tax on provisional basis.
On receipt of such request for provisional assessment, the authority may allow payment of Service Tax
on provisional basis on such value of taxable service as may be specified by him. Upon finalization of
such assessment, if a liability of service tax arises, the differential amount be paid by the assessee. If he
has paid excess amount he would be entitled to refund. The provisions of the Central Excise Rules
relating to provisional assessment (except execution of bond), shall apply to such assessment.
The assessee requesting for provisional assessment shall file a statement giving details of the
difference between the Service Tax deposited and the Service Tax liable to be paid for each
month in a memorandum in Form ST-3A accompanying the half yearly return in Form ST-3.
3.4.c PART - II
eanings of Important words and expressions used in Construction Contracts
1)c ³Construction´ this word has many divergent meanings. It is a noun of the verb ³to construct´ To
Construct means ± ³(a) make by fitting parts together; to build. Relevant meaning in present context as
per Oxford dictionary is ± ³(a) The act or a mode of constructing (b) a thing constructed.
Normally in commercial parlance the construction means construction of - (a) Buildings (Residential or
commercial or combination of both), (b) Fabricated structure firmly erected on the earth (c) Roads, (c)
Commercial and industrial premises (e) Dams, Bridges, air ports, and so on. Such construction includes
civil engineering, mechanical engineering, welding, electrical wiring, plumbing, sanitation and so on.
Example - Road aintenance and repairs- Service tax on the Management, Maintenance and Repair service
is the taxable service even if this service relates to immovable property like building. (i) But the author ar gued
in representation to Board made by a group of some Nasik Based Road contractors that repair of roads is never
possible (ii) Management of Public Roads is done by Government or Societies and not by Road contractors
(iii) maintenance of road is nothing but cleaning of it or watering.
This was accepted by Government and the out come was first Board circular No. 110/4/2009-ST.(F. No. 345/
17 /2008-TRU) Dated 23/2/2009 and followed by Notification No. 24/2009-Service Tax dated 27/7/2009
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thereby exempting the taxable service, referred to in sub-clause (zzg) of clause (105) of section 65 of the
Finance Act,1994, provided to any person by any other person in relation to management, maintenance or
repair of roads,
3)c Definitions of common expressions used in Construction sector (reference- Section 2 of the Indian
Contract Act, 1872).
a)c Proposal: section 2(a) ³Proposal´ when one person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal; (as per Indian Contract Act, 1872).
b)c Promise: Section 2(b) of Act provides that when one person to whom proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a ³promise´;
c)c Promisor: Section 2(c) of Act the person making the proposal is called as ³promisor´ and the
person accepting the proposal is called as the ³promisee.´
d)c Consideration: Section 2(d) of Act provides that when, at the desire of the promisor, the promisee
or any other person has done or abstained from doing, or does, or abstains or promises to do or to
abstain from doing; something, such act or abstinence or promise is called a ³consideration´ for the
promise.
e)c Agreement: Section 2(e) of Act provides that every promise and set of promises, forming the
consideration for each other, is an ³Agreement.
f)c Void Agreement: Section 2(g) of Act provides an agreement not enforceable by law is said to be
³void´
g)c Contract: Section 2(h) of Act provides an agreement enforceable by law is a ³Contract´
Author observed that majority of businessmen as well as those who draft the tender documents often
neglect the existence of provisions in this section.
Section 64A (In contracts of sale, amount of increased or decreased taxes to be added or deducted)-
(1) Unless a different intention appears from the terms of contract, in the event of any tax of the nature
described in sub-section (2) being imposed, increase, decreased or remitted in respect of any goods after the
making of an contract for the sale or purchase of such goods without stipulation as to the payment of tax was
not chargeable at the time of making of contract, or for the sale or purchase of such goods tax-paid where the tax
was chargeable at that time, -
(a) if such imposition or increase so taken effect that the tax or increased tax, as case may be, or any
part of such a tax is paid or is payable, the seller may add so much to the contract price as will be
equivalent to the amount paid or payable in respect of such a tax or increase of tax, and he shall be
entitled to be paid and to so for and recover such addition; and
(b) if such a decrease or remission so takes effect that the decreased tax only, or no tax, as the case may
be, is paid or is payable, the buyer may deduct so much from the contract price as will be
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equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in
respect of, such deduction.
(2) The provision of subsection (1) applies to the following taxes, namely:-
(a) any duty of customs or excise on goods;
(b) any tax on sale or purchase of goods.
[Comments: When it is not possible to give exact cost break up (Cost of material, cost of labor, transportation,
electricity and other facilities etc.) then contractor has to quote lump sum price after adding the burden of
Central, State and local Government Taxes and Duties and Cesses etc. at the rates prevailing at the time
tendering stage itself and quote the grand total lump sum price. Thereafter to add this clause ³The lump sum
price quoted is inclusive of duties of excise, service tax, state vat, other local taxes at the rates prevailing at the
time of tender acceptance. If there is any reduction in the prevailing rates letter on the benefit shall be passed on
to the contractee. At the same time if there is any increase in the rates of the same then the contractee shall bear
the increased burden in accordance with the provisions of Section 64A of the Sale of goods Act 1930.´]
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Taxable services which are either provided by Civil Contractors or are concerned to their business
The list of major Taxable output services normally provided by civil contractors at a glance. These are the
output services on which the contractors are liable to pay the service tax. If X is the customer, Y is main
contractor and Z is sub contractor of Y then Z should pay service tax on the price received from Y, and can
recover from Y. Y being main contractor should pay service tax on entire value of the contract and recover it
from X. Here Z can be only one sub-contractor or many sub contractors.
S.No. Name of taxable Definition of taxable Service tax Remarks regarding
service & service as per relevant is amendments
relevant section section as on August 2008 applicable
under F.A. 1994 from
1 Erection, From 1-5-2006 ³erection, 1/7/2003. (a)µErection¶ word inserted
Installation and commissioning or from 10/9/2004.
commissioning installation´ means any
(b) Definition during period
Service. service provided by a
10-9-2004 to 15-6-
(zzd) commissioning and 2005.³erection,
Taxable from installation agency in commissioning,or installation´
1/7/2003. relation to ± (i) erection,
means any service provided by
³Structures commissioning or a commissioning and
whether installation of plant, installation agency in relation
fabricated or machinery or equipment or
to erection, commissioning or
otherwise ³ were structures, whether pre-
installation of plant, machinery
inserted from fabricated or otherwise; or
or equipment¶
1/5/2006 only. (ii) Installation of - (a)
electrical and electronic [(Portion (ii) inserted in the
devices, including wirings or definition from 16/6/2005.
fittings therefore; or (b) (c) This service also can be
plumbing, drain laying or classified under Works
other installations for contract service from
transport of fluids; or (c) 1/6/2007.
heating, ventilation or air-
conditioning including (d) Abatement available and
related pipe work, duct work service tax can be paid at 33%
and sheet metal work; or (d) of gross amount charged
thermal insulation, sound without benefit Cenvat Credit
insulation, fire proofing; or facility.
(e) lift and escalator, fire
escape staircases or
travelators; or (f) such other
similar service.
1A Commissioning "commissioning and The word erection is inserted
and installation installation agency" means
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Agency any agency providing from 10/9/2004
[S 65(29)[ service in relation to
erection, commissioning or
installation
2 Construction of (25b) ³commercial or 10/9/2004 (a)words ³construction of
Industrial and industrial construction pipeline or conduit´ inserted
Commercial service´ means ² (a) from 16/6/2005
complex construction of a new
(b) words ³completing or
Section 65(25b) building or a civil structure
finishing building or civil
and 65(105)(zzq) or a part thereof; or (b) structure´ inserted from
construction of pipeline or 16/6/2005. [This means pre
conduit; or construction services like
(c) completion and centering etc. is not taxable]
finishing services such as
(c) In other words the entire
glazing, plastering, painting,
service definition became
floor and wall tiling, wall
applicable from 16/6/2005.
covering and wall papering,
Abatement is available (33%)
wood and metal joinery and for this service if no cenvat
carpentry, fencing and credit facility taken.
railing, construction of
(d) This can be treated as
swimming pools, acoustic
Works contract service also
applications or fittings and
from 1/6/2007 at the option
other similar services, in
(e) Circular No.B2/8/2004-
relation to building or civil TRUdated 10/9/2004 said (i)
structure; or (d) repair, ³In case of multi purpose
alteration, renovation or buildings such as residential
restoration of, or similar cum commercial construction,
services in relation to, tax would be leviable in case
building or civil structure,
such immovable property is
pipeline or conduit, which is
treated as ³Commercial
²
Property under the local
(i) used, or to be used,
/municipal laws.
primarily for; or
(ii) ³Such construction which
(ii) occupied, or to be
are for the use of the
occupied, primarily with; or organizations or institutions
(iii) engaged, or to be being established solely for
engaged, primarily in,
educational, religious,
commerce or industry, or
charitable, being non
work intended for commerce
commercial in nature not
or industry, but does not
taxable. General Government
include such services
buildings or civil constructions
provided in respect of roads,
are used for residential, office
airports, railways, transport
purposes or for provising civic
terminals, bridges, tunnels amenities. Thus normally
and dams; Government construction
wouod not be taxable
3 Construction of (30a) ³construction of 16/6/2005 Service tax not payable if the
Residential complex´ means ² construction is done only for
complex. construction of a new 12 or less than 12 residential
S 65(30a) & residential complex or ac tenements ± may be called as
65(105)(zzzh) (a) part thereof; or bungalows or flats etc.
completion and finishing
services in relationc (b) to
residential complex such as
glazing, plastering, painting,
floor and wall tiling, wall
covering and wall papering,
wood and metal joinery and
carpentry, fencing and
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railing, construction of
swimming pools, acoustic
applications or fittings and
other similar services; or
repair, alteration, renovation
or restorationc (c) of, or
similar services in relation
to, residential complex;
4 Works Contract D.V.Shidhaye has prepared an exhaustive write up on this new service
Service brought in to service tax net w.e.f. 1/6/2007 and is updated from time to time.
This article is available in separate file No.06 WORKS CONTRACT
SERVICE´ in this folder only.
5 anagement, (64) ³management, 1/7/2003 (a) Initially this service was
maintenance maintenance or repair´ restricted to only plant and
and repair means any service provided machinery from 1/7/2003.
services by²
(b)words ³Maintenance or
S.65(64) and (i) any person under a
management of immovable
S 65(105)(zzg) contract or an agreement; or
properties´ were substituted
(ii) a manufacturer or any from 16/6/2005.
person authorized by him,
(c)´management of properties,
in relation to,²
whether immovable or not´;
(a) management of were substituted from
properties, whether 1/5/2006.
immovable or not;
(b) maintenance or
repair of properties,
whether immovable or
not; or
(c) maintenance or
repair including
reconditioning or
restoration, or
servicing of any goods,
excluding a motor
vehicle;
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any other manner, services Excise.
related to planning, design
or beautification of space,
whether man-made or
otherwise and includes a
landscape designer
(q) Taxable service means
service provided or to be
provided to any person, by
an interior decorator in
relation to planning, design
or beautification of spaces,
whether manmade or
otherwise, in any manner
Some other Important Services which should also be known to contractors because these can be their input
services. This is not a complete list but only a few are mentioned for the sake of awareness.
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w.e.f. 16th May, 2008]
5 Transportation I think elaboration on this is not necessary because normally the person who
of goods by road pays freight charges for transportation of goods has to pay service tax on 25
services % value of the freight paid and there is no exemption for this and no thresh
hold limit. Readers to read D.V.Shidhaye¶s article ³Saga of summersaults in
GTA service´ published in 2009(13) STR J 140 (STR issue of 1/3/2009).
6 Business Aux. ³business auxiliary 1/7/2003
services service´ means any service
S. 65(19) & in relation to, ²
65(105)(zzb) (i) promotion or marketing
or sale of goods produced or
provided by or belonging to
the client; or
(ii) promotion or
marketing of service
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c
provided by the client; or
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c
section 2 of the Central
Excise Act, 1944 (1 of
1944).
[Omitted vide Finance Bill
2008 w.e.f. 16th May, 2008]
Explanation. ² For the
removal of doubts, it is
hereby declared that for the
purposes of this clause, ²
(a) ´commission
agent´ means anyc person
who acts on behalf of
another person and causes
sale or purchase of goods, or
provision or receipt of
services, for a consideration,
and includes any person
who, while acting on behalf
of another person ²
(i) deals with goods or
services or documents of
title to such goods or
services; or
(ii) collects payment of
sale price of such goods or
services; or
(iii) guarantees for
collection or payment for
such goods or services; or
(iv) undertakes any
activities relating to such
sale or purchase of such
goods or services;
(b) [* * * * ]
[Omitted vide Finance Bill
2008 w.e.f. 16th May, 2008]
No doubt, the levy came as a messiah to the construction industry, which was reeling under heavy burden of
service tax, compounded further by denial of all forms of Cenvat Credit, if the benefit of abatements is claimed
(Notification 1/2006). When both main contractors and sub contractors are sought to be taxed, on the premise
that services rendered by any person to any other person are taxable, denial of service tax paid by the sub
contractor to the main contractor, virtually led to double taxation. And now, the new levy is really the saviour.
The scope of the definition of the term ³works contract´ covers all contracts which are hitherto classified under
different services, such as ³commercial or industrial construction, construction of residential complex, erection,
commissioning and installation´. The problem of classification dispute has also been avoided, by virtue of the
clarification to the effect that contracts which are recognized as Works Contract for VAT / Sales Tax purposes
would be classified only under this new category of taxable service. Considering the composition scheme
offering a 2 % service tax rate, as against the earlier levy @ 3.96 % (12 % on 33 % of gross amount ± Education
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c
CESS not considered), the service tax liability has almost been halved. That too, with the benefit of Cenvat
Credit on capital goods and input services. Kudos to the CBEC for this practical and industry friendly
dispensation. But, this levy is not free from scopes for varied interpretations and practical difficulties, which
would surface during the course of implementation of the levy. The million dollar question in the minds of the
industry is whether they can switch over to the new levy in respect of all ongoing contracts or is it applicable
only for the contracts which are to be executed only from 01.06.2007 only. The root cause of this question is
Rule 3 (3) of the Works Contract (Composition Scheme for payment of service tax) Rules, 2007, which reads as
under.
The provider of taxable service who opts to pay service tax under these rules shall exercise such option in
respect of a works contract prior to payment of service tax in respect of the said works contract and the option
so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of
the said works contract.
The above provision is widely being interpreted to mean that since service tax has already been paid on the on
going contracts under various other categories (commercial or industrial construction, construction of residential
complex, erection, commissioning and installation), they cannot have the option of switching over the
classification to Works Contract. Moreover, as per the above provision, the option is for the ³entire works
contract´ and in as much as service tax has already been paid on the said contracts under different categories,
the option of composition scheme cannot be exercised for such contracts, and they will continue to be taxed
under the earlier classification.
What if tax is paid on advance before 01.06.2007 but the work is going to be done only thereafter?
(b) A service provider has received an advance of Rs.1 Crore, against a Rs.5 Crores contract and has also paid
service tax on such advance, under commercial construction service. The construction activity is going to
commence only after 01.06.2007. Can he classify the service under Works Contract and opt for composition
scheme and seek adjustment of the service tax already paid on the advance? Value of taxable service, also
includes amount received for services to be provided. So once an advance is received, the service is classified
and appropriate service tax has been paid. Receipt of money, either by way of advance or otherwise, is the point
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c
for determination of service tax liability. Once this has already been done for the advance received, switching
over the classification can be done, only with reference to the remaining portion. In other words, classification
under Works Contract and opting for composition scheme can be made with reference to Rs. 4 Crores only and
the service tax already paid on the advance shall be final and cannot be adjusted against the Works Contract
liability. An alternative can also be thought of. The service provider can cancel the existing contract and enter
into a new contract. He may also repay the advance already received along with the service tax collected
thereon, to his client. He may enter into a fresh contract and choose the discharge service tax liability thereon,
under Works Contract Service. The service tax which has already paid on the advance received in respect of the
cancelled contract can be adjusted against his any other subsequent liability, as per Rule 6 (3) of the Service Tax
Rules, 1994, according to which the service tax paid in respect of any service, which has not been rendered
either partly or wholly, can be adjusted against any subsequent service tax liability, if the amount collected
towards and value and service tax, is refunded to the client. Considering the fact that the service tax liability
under the new Works Contract Service is almost 50 % (2.06%) when compared to the existing quantum of levy
under construction service (4.08% = 12.36 % on 33 % of gross amount), the exercise is certainly worth a
bargain!
What if the work is completed prior to 01.06.2007 but money received after 10.06.2007.
(c) A commercial construction has already been completed prior to 31.05.2007. But a major part of the
consideration therefor is being received only after 01.06.2007. Can the service provider pay service tax on such
receipts, under Works Contract levy composition scheme? When the service was provided, it was classifiable
only under commercial construction service and the levy of service tax on works contract was not at all in force
then. The service was already a taxable service and only payment of service tax has not been done, as the
consideration is not received. So, when such consideration is received after 01.06.2007, service tax has to be
paid thereon, only by considering such service as commercial construction service and not under Works
Contract service.
Service tax is payable even on the advances received prior to 01.06.2007, even if the levy is effective only
from 01.06.2007.
(d) An EPC contract has been awarded to a service provider and he has also received an advance towards it,
prior to 01.06.2007. The said contract is not covered under any of the existing taxable services, viz.,
construction services or erection, commissioning or installation service and hence no service tax has been paid
on the advance. The work is going to be carried out only after 01.06.3007. Whether the service provider would
be liable to pay service tax on the advances received prior to 01.06.2007? To attract the levy of service tax, the
time when the service is rendered is important. In this case, the service is rendered after 01.06.2007 and service
tax is payable on it under Works Contract service. Prior to 01.06.2007, it was not at all a taxable service. Hence,
service tax has to be paid even on the advances received prior to 01.06.2007, in respect of the service.
No levy, if the service was not taxable, when rendered, even if the payment is received after 01.06.2007.
(e) An EPC contract has been completed prior to 01.06.2007. The said contract is not covered under any of the
existing taxable services, viz., construction services or erection, commissioning or installation service. A part of
the consideration of the said contract is received after 01.06.3007. Whether the service provider would be liable
to pay service tax on the amounts received after 01.06.2007? The service was not at all taxable when it was
rendered. So no service tax is payable, even if the consideration for the said service is received after 01.06.2007
(f) The restriction as to availment of Cenvat credit on input services and capital goods, is not applicable for
³Works Contract Service´ even when composition scheme is opted. So, the credit so far not taken, can now be
taken?
As per Notification 1/2006, if the benefit of abatement thereunder is claimed, no CENVAT credit can be taken
in respect of the inputs, capital goods and input services ³used for providing such taxable service´ for which the
abatement is claimed. If we take the example given under (a) above, since the service provider has opted for
abatement, he would not have taken any CENVAT credit on his input services and capital goods so far (we can
forget about inputs as they are barred even under the composition scheme for Works Contract).
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c c c
c
If he opts to pay service tax on the Works Contract, on the gross amount minus value of transfer of property,
where there is no restriction as to availment of any cenvat credit, Cenvat credit can be taken on all inputs, capital
goods and input services, ³which will be used after 01.06.2007´. If any inputs / input services / capital goods
have already been used completely, Cenvat credit cannot be claimed for the same, as they have been used in
providing a taxable service, for which service tax has been paid by availing abatement under Notification
1/2006.
Similarly, if the service provider opts to pay service tax on composition scheme, with effect from 01.06.2007, he
can take CENVAT credit in respect of the input services, which will be used after 01.06.2007 as well as capital
goods. In respect of continuous services, credit can be taken proportionately, in respect of the services, which
would be used after 01.06.2007.
Before parting«
The first method of paying service tax on works contract, after excluding the value of transfer of property from
the gross amount, is akin to Notification 12/2003. But, in Notification 12/2003, there is a restriction to the effect
that no Cenvat credit shall be taken in respect of the goods which are being sold while rendering the service.
But, such restriction is conspicuously absent in Works Contract! In other words, the service provider under
Works Contract can take Cenvat credit in respect of all inputs but pay service tax after excluding the value of
transfer of property in respect of the goods sold. Is this bonanza intentional?
Since 2003, the Legislature has gradually expanded the scope of taxable services to cover various activities
involving performance of work. From an industry perspective, such performance of work could be either on a
stand-alone basis or as an element of a composite contract. While there were no doubts on the coverage of
activity done on a stand-alone basis (µlabour job¶), there was uncertainty on the coverage of the activity done as
a component of a composite µworks contract¶.
The Department interpretation at that stage was to argue on the principle of aspect theory and suggest that the
levy of service tax was, in principle, in order. To address the issue of valuation and cascading impact of taxes,
the Department provided the following alternatives :
1.c Discharge of service tax on the full value of the contract with corresponding credit of duties/taxes paid
on inputs and input services
2.c Discharge of service tax on the value of the service component (by identification and reduction of the
value of the goods sold) with corresponding credit of taxes paid on input services
3.c Discharge of service tax on a presumptive value of the service component (i.e., 33% of the gross value
of the contract) with no credit of taxes paid on inputs/input services.
Notwithstanding the abovementioned options, can it be argued that there really is no authority to levy a service
tax at all in the absence of a specific constitutional amendment ? After all, even for levy of sales tax, a
Constitutional amendment was required and it has already been held that the Constitutional amendment has only
restricted applicability vis-à-vis sales tax laws8.
c c c
c c c
c
The answers to the above questions could be debatable and would depend on whether one treats a works
contract as a whole as constituting an activity and therefore a service (View 1) or one looks at works contract as
independent of both goods and services (View 2).
In case View 1 is adopted, the levy of service tax can be said to be effective from the date the respective
category for execution was introduced, say construction service. All the three alternate options for discharging
the tax liability would ensure that there is no cascading effect. In case View 2 is adopted, the levy of service tax
would actually require a Constitutional amendment.
Before the dust could settle down on the said controversy, the judiciary was flooded with a plethora of cases
wherein the Department¶s attempt to tax the services embedded in a composite contract was challenged. In fact,
the Bangalore Tribunal went ahead and held that a composite contract cannot be vivisected to levy a tax on the
erection, commissioning and installation component of the said composite contract9.
However, as highlighted earlier, in case a view is taken that the service component is embedded within a
composite contract, the composite contract cannot be vivisected merely by insertion of a taxable category of
service. Hence the levy of service tax under the category of µWorks Contracts Services¶ can be constitutionally
challenged.
If one holds the conservative view that the entire composite contract is a service, there was really no need for the
introduction of the category of µWorks Contracts Services¶, since the basic categories were wide enough to
cover the impugned transactions. In either of the situations, the introduction of the category of µWorks Contracts
Services¶ becomes redundant. The law cannot be interpreted to bring about redundancy in any of the provisions.
Therefore it can be strongly argued that the levy of service tax is not constitutionally valid even after the
introduction of works contract services as a category, since the Legislature does not have the authority to
vivisect a composite contract.
With the introduction of a new category to tax only specified works contracts, it can be argued that the
Legislature accepts the principle that the works contracts could not be taxed under the basic category itself and
therefore the new category was created. Therefore, no service tax was payable in the past periods in cases where
works contract tax was payable. This view has already found favour with the judiciary10. Thus, one can
safeguard the liability for the past periods.
Conclusion :
The article tries to explain in a nutshell the theory of non-vivisection of composite contracts and its
ramifications vis-à-vis levy of service tax on works contracts. It does not deal with the issues concerned with
valuation and claim of credit, since they are secondary to the basic issue of levy of service tax itself.
The article also does not deal with the tax implications of other types of composite contracts wherein, say,
multiple services are bundled. Over a period of time, the law will evolve. It appears that a long-term solution
could be to have an integrated Goods and Service Tax with a comprehensive cover-age of all supplies of goods
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c
and services. Till the time such a GST regime is evolved, these issues will continue to present uncertainty for the
industry.
It is a challenge to both the profession and the business to confront and comply with uncertainty.
3.8.c Note on New Service Tax Provisions for Builders & Developers
Introduction:
The issue of the imposition of service tax on construction and sale of residential property has long been a matter
of concern for the real estate and construction industry as well as for buyers of such residential property. It has
gained much prominence after Budget 2010 because of significant amendment made therein towards taxability
of sale of flats under service tax.
A µdeemed service¶ provision has been introduced in case of construction service w.e.f. 1-7-2010. Any industrial
or commercial construction or construction of residential complex will be subject to tax if such complex or part
thereof is sold prior to obtaining µcompletion certificate¶. Consequently, installment purchases of immovable
property will become chargeable to the service tax. Notification no. 24/2010 dated 22 June 2010 has
specified the effective date of operation of certain provisions of the Finance Act 2010, which include subject
amendment, to be 1 July 2010.
Since the subject amendment is made by way of an µExplanation¶, added to the Definition of service & since
this Explanation is not merely for explaining or clarifying the scope but for expanding the scope of taxable
service, it can be safely interpreted that this amendment can not have retrospective effect prior to 1-7-2010.
Following players in real estate sector will get affected by the Amendment. A pure Developer/Builder, who
might have outsourced or contracted out the construction activities to a Contractor, in the case of a civil works
contract.
A Developer/Builder cum Contractor, who undertakes the construction himself and consequently doubles as a
Contractor. It needs to be noted however that a contractor engaged by the builder for the purpose of construction
of commercial or residential complex is anyway liable to pay the service tax under the relevant taxable category.
Dispute was only in respect of the liability of the builder to pay the service tax on sale of a flats during
construction to the prospective buyer. Recent amendment brings into service tax net, transactions of sale
effected by builders and developers.
As far as sale of flats by builders is concerned, it was more or less settled, on basis of Court decisions and
CBE&C circulars, that a builder entering into contract for sale of flat or industrial unit (gala) or shop or a
developer entering into contract for construction of an individual flat for personal residential use of client are not
liable to pay service tax.
As a result where agreements are made with the prospective buyers, builders were mostly out of service tax net
because in such cases it was considered that no service is rendered.
Explanation.² For the purposes of this sub-clause, construction of a complex which is intended for sale,
wholly or partly, by a builder or any person authorized by the 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 a
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person authorized by the builder before the grant of completion certificate by the authority competent to issue
such certificate under any law for the time being in force) shall be deemed to be service provided by the builder
to the buyer. Similar Explanation is added In case of commercial or industrial construction service, where in
place of word complex, the words used are µconstruction of a new building¶. As a result of this Explanation, an
activity which is not µservice¶ as per Court decisions and CBEC¶s own earlier circulars will now be a µdeemed
service¶ for purpose of levy of service tax, under above two categories of services.
For the two services covered, service tax will now be payable in cases of sales of flats/shops/galas, unless such
sales are made & entire consideration is received after Completion Certificate is obtained for the property sold.
Time for obtaining completion certificate thus becomes a key factor in determining taxability of sales of flats
under service tax.
Requirement about Completion Certificate is however somewhat relaxed under the Service Tax (Removal of
Difficulty) Order, 2010, made effective from 1.7.2010, whereby it is provided that such Certificate can be
obtained either from
a.c Any Government Authority including Local Authority
b.c An Architect registered with the Council of Architecture
c.c Chartered Engineer
d.c Licensed surveyor of the respective local authority
Thus even after the amendment, to remain out of service tax net, a builder need not wait for sale of flats till
Completion Certificate is obtained from Local Authorities but instead can obtain such certificate from an
Architect or Chartered Engineer and can still avoid charge of service tax. In all other cases, where such
completion certificate is not obtained before sale of flats, the builder will be liable to pay the service tax. In most
of the cases, builder constructs building by using funds from prospective buyers, paid by them on the basis of
Bookings made for major part of such building before its completion. Thus except for few flats reserved for sale
at higher price on ready possession basis, for most of the flats sold, service tax will become applicable.
As such the GOl is the service receiver and NBCC is providing services directly to the GOl for its personal use.
Therefore, as for the instant arrangement between Ministry of Urban Development and NBCC is concerned,
Board has clarified vide F.No.332/16/2010-TRU Dated: 24, May 2010 (after the Budget 21010 Amendment)
that the service tax is not leviable. In the above clarification, if NBCC and Government are replaced by builder
and individual buyer, it would mean that if an individual buyer is buying the property for his personal use from
builder, then the transaction of sale is not covered under Service Tax. Clear clarification from CBEC is required
on this interpretation, because the clarification referred to above has not been placed by CBEC in public domain.
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Transitory provisions in case of bookings made/agreements executed prior to 1.7.2010
Date of booking is not relevant. Date of provision of service is relevant as provision of service is the taxable
event. Hence, if construction service is provided after 1-7-2010, service tax will be payable.
Transitory provisions in case of advance payments made by the customer prior to 1.7.2010
A specific exemption from service tax has been provided for advances received prior to 1.7.2010 vide
Notification No. 36/2010 dt. 28.6.2010. As per Notification service tax is not payable on the amount of advance
payment received before the 1.7.2010, for taxable services to be provided, on or after 1.7.2010. Thus exception
has been made for the advances received from the customers before 1.7.2010, even though construction service
related to such advances is to be provided after the service has become taxable. It should be noted however that
this exemption is limited to amounts received as advance before 1.7.2010. For all subsequent advances liability
will arise towards service tax as per normal provisions. Service tax is payable on receipt basis and hence as one
gets payment for construction service from customer, one has to pay service tax on that amount. If service tax is
not shown separately in bill or amount received, the amount received should be taken as inclusive of service tax
and then back calculations may be made.
Thus, if the customer provides some material, its value will have to be added for purpose of payment of service
tax. Conditions for this concession are (a) No Cenvat of duty/service tax paid on inputs, input services and
capital goods and (b) No benefit of Notification No. 12/2003-ST dated 20-6-2003 If a project is covered under
Works Contract service, (where VAT is paid) the Realty players can opt to pay service tax either under
Notification No. 12/2003-ST dated 20-06-2003, or under the Composition Scheme, applicable to works
contractors.
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Though the Department has been taking a view that the benefit of Notification 12/2003-ST dated 20-06-2003
cannot be extended to Developers and Builders, the Bangalore CESTAT, in the case of Sobha Developers Ltd v.
CCE & ST (2009-TIOL-1188-CESTAT-BANG) has categorically held that the Developer is entitled to the
benefit of Notification No. 12/2003. The service provider can have benefit either under Notification 12/2003-ST
or 1/2006-ST and not both.
Important aspects for choice between the Alternatives available to Builder for Payment of Service Tax
Comparative features of different alternatives are as under.
Issue
Options of Abatement/Composition or Notification 12/2003 are available in respect of each of the contracts. It
can be said that there are as many works contracts as there are flats, in a housing project.
As for choice between the alternatives, Developers who have contracted out the construction activity can find
Notification No. 12/2003 or the Composition Scheme for Works Contractors more beneficial looking at
significant benefit arising out of availment of CENVAT credit.
The 25% scheme is simple but the liability of service tax will be high, particularly at places where land costs are
very high. Further Cenvat credit of service tax paid to contractor/sub-contractor is not available.
Different options for different contracts can be adopted depending upon the amount of tax liability under each
option.
Credit of service tax paid on various input services like telephone, courier, mobile, bank charges, audit, security,
catering etc can be utilized against service tax payable on construction services. However if certain projects are
covered under composition option, pro rata credit will get disallowed as per provisions of rule 6 of Cenvat
Credit Rules
Registration
A builder can either take separate service tax registration for each project or have centralized registration after
studying pros and cons. If proper records etc. are kept, centralized registration will be preferable. It may be
advisable to register each project separately in following cases ± (a) If some services are exempt and some
taxable or (b) valuation basis for each project is expected to be different,.
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c
If a customer who has purchased a flat/commercial unit/industrial gala/shop from builder/developer, sells it
before Completion Certificate, such sale is not laible under service tax The words used in the µExplanation¶ are
µby the builder or a person authorized by the builder¶. A customer is not a person authorized by builder to enter
into contract for construction. Hence, a customer cannot fall within that definition. Even otherwise, service tax
is payable on value of taxable service which has already been paid by builder/developer. Even if the customer
sales the flat or unit or shop at higher price, it does not mean that cost of construction has increased.
Preferential location and development of complex¶ service Note on New Service Tax Provisions for
Builders & Developers
As per section 65(105) (zzzzu) of Finance Act, 1994, 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 place, is a µtaxable service¶. Explanation. ² For the
purposes of this sub-clause, µµpreferential location¶¶ means any location having extra advantage which attracts
extra payment over and above the basic sale price. CBE&C, has clarified as follows ± (Annexure- A to JS
(TRU-II) D.O. letter F. No.334/1/2010-TRU dated 26-2-2010) It has been reported that in addition to these
activities, the builders of residential or commercial complexes provide other facilities and charge separately for
them and these charges do not form part of the taxable value for charging tax on construction. These facilities
include,--
(a)c prime/preferential location charges for allotting a flat/commercial space according to the choice of the
buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastuhaving the
bed room in a particular direction; Number- lucky numbers);
(b)c internal or external development charges which are collected for developing/maintaining parks, laying
of sewerage and water pipelines, providing access roads and common lighting etc;
(c)c fire-fighting installation charges; and
(d)c power back up charges etc. Since these charges are in the nature of service provided by the builder to
the buyer of the property over and above the construction service, such charges are being brought under
the new service. Charges for providing parking space have been specifically excluded from the scope
of this service. Development charges, to the extent they are paid to State Government or local bodies,
will be would be excluded from the taxable value levy. Further, any service provided by Resident
Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their
members would not be taxable under this service.
Partial manufacture/provision of exempted products/services ± Cenvat credit of inputs and input services is not
available if final product/output service is exempt from excise duty/service tax. In case of manufacturer
manufacturing both exempt and dutiable goods (or service provider providing taxable as well as exempt
services), it may happen that same inputs/input services are used partly for manufacture of dutiable
goods/taxable services and partly for exempted goods/services.
In such cases, the manufacturer/service provider has following four options w.e.f. 1-4-2011 ±
(a)c Maintain separate inventory and accounts of receipt and use of inputs and input services used for
exempted goods/exempted output services ± Rule 6(2) of Cenvat Credit Rules
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c
(b)c Pay amount equal to 5% of value of exempted goods (if he is µmanufacturer) and of value of exempted
services (if he is service provider) ± Rule 6(3)(i) [The µamount¶ payable was 6% of value of exempted
services during the period 7-9-2009 to 31-3-2011].
(c)c Pay an µamount¶ equal to proportionate Cenvat credit attributable to exempted final product/ exempted
output services, as provided in rule 6(3A) ± Rule 6(3)(ii) of Cenvat Credit Rules
(d)c Maintain separate accounts for inputs and pay µamount¶ as determined under rule 6(3A) in respect of
input services - ± Rule 6(3)(iii) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011.
Cenvat credit on capital goods ± If capital goods are partly used for exempted goods and party for
dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of
duty on capital goods is not allowable only when it is exclusively used for manufacture of final
products [rule 6(4)]
No reversal or payment of amount in certain cases ± If excisable goods are removed to SEZ, EOU,
EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper
or zinc by smelting, payment of 5% µamount¶ is not required [rule 6(6)].
Cenvat credit of service tax in case of supplies made by DTA to EOU - Supplies from DTA to EOU
are entitled to Cenvat credit of service tax paid ± para 6.11(v) of FTP.
(a)c the receipt, consumption and inventory of inputs used- (i) in or in relation to the manufacture
of exempted goods; (ii) in or in relation to the manufacture of dutiable final products
excluding exempted goods; (iii) for the provision of exempted services; (iv) for the provision
of output services excluding exempted services.
Assessee shall take CENVAT credit only on inputs under sub-clauses (ii) & (iv) of clause (a).
(b)c the receipt and use of input services- (i) in or in relation to the manufacture of exempted goods
and their clearance upto the place of removal; (ii) in or in relation to the manufacture of
dutiable final products, excluding exempted goods, and their clearance upto the place of
removal; (iii) for the provision of exempted services; and (iv) for the provision of output
services excluding exempted services,
Assessee shall take CENVAT credit only on input services under sub-clauses (ii) and (iv) of
clause (b).
1.1A Overriding special provisions for payment of µamount¶ in respect of banking and insurance services
In respect of banking service [section 65(105)(zm)], the Bank or NBFC is required to pay µamount¶ equal to
50% of Cenvat Credit availed on inputs and input services [Rule 6(3C) of Cenvat Credit Rules as inserted w. e.f.
1-4-2011].
In respect of general insurance services [section 65(105)(zx)] and life insurance service [section
65(105)(zzzza)], µamount¶ payable is equal to 20% of Cenvat credit availed on inputs and input services in the
month [Rule 6(3C) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011].
These are overriding provisions irrespective of any provision in rule 6(1), 6(2) and 6(3).
The purpose of the overriding provisions has been explained in Annexure C to MF(DR) DOF No. 334/3/2011-
TRU dated 28-2-2011 as follows ±
Para 1.16 A substantial part of the income of a bank or a life insurance company is from investments or by way
of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining
the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution
including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of
the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be
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equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these
taxpayers.
Payment of µamount¶ or reversal not required in case of supplies to SEZ unit or developer 1-2 Payment of
µamount¶ or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ Unit or SEZ
developer for their authorised operations. These are overriding provisions irrespective of any provision in rule
6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011].
The µamount¶ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular
No. 868/6/2008-CX dated 9-5-2008.
The option is with assessee and he cannot be forced to maintain separate inventory under rule 6(2) ± Tahir Ali
Industries v. CC (2006) 195 ELT 225 (CESTAT).
Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not
µexempted goods¶ as they are neither µgoods chargeable to 'Nil' duty as per Tariff¶ nor µgoods which are exempt
by a notification issued under section 5A¶.
'Exempted goods' do not cover goods which are not excisable at all, i.e. which are not included in Central Excise
Tariff at all. Such goods are not 'exempted goods'. Similarly, goods not specified in tariff at all are not goods
'chargeable to 'Nil' rate of duty'. Thus, rule 6(2) applies only if all the final products are 'excisable goods'. The
rule does not apply if one of the products is not 'excisable goods' at all. Goods which are not 'excisable goods'
cannot be said to be exempt from duty or chargeable to Nil rate of duty. ± view confirmed in CC v. esar
nterprises Ltd. 2001(130) ELT 93 (CEGAT).
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In my view, this provision is reasonable and should apply to period prior to 31-3-2011 also.
(a)c shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made
there under or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act,
read with rules made thereunder.
(b)c in the case of a taxable service, when the option available under sub-rules (7), (7B) or (7C) of rule 6 of
the Service Tax Rules, 1994, or the Works Contract (Composition Scheme for payment of Service Tax)
Rules, 2007 has been availed, shall be the value on which the rate of service tax under section 66 of the
Finance Act, read with an exemption notification, if any, relating to such rate, when applied for
calculation of service tax results in the same amount of tax as calculated under the option availed; or
(c)c in case of trading, shall be the difference between the sale price and the purchase price of the goods
traded.
The effect of this change has been explained in Para 1.15 of Annexure C to MF(DR) DOF No. 334/3/2011-TRU
dated 28-2-2011, as follows ±
1.15 For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of
services covered by composition schemes has been defined. The value of trading service shall be the difference
between the sale price and purchase price of goods. The value in respect of services covered by a composition
scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general
exemption. As the prevalent rate is 10% the value shall be ten times the amount of service paid or payable.
2-1 Dis-allowance of Cenvat of capital goods only if used exclusively for exempted final product/services
Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible
[rule 6(4)]. If capital goods are partly used for taxable services or dutiable final products, Cenvat credit will be
available.
Some manufacturers are entitled to exemption based on turnover or quantity (e.g. SSI units). They will be
entitled to Cenvat on capital goods. They can take Cenvat on capital goods and utilise it for payment of duty
when their exemption limit is crossed.
Inputs used in manufacture of capital goods used within the factory ± Notification No. 67/95-CE exempts
capital goods manufactured within the factory and used within the factory. In such case, a view is possible that
µamount¶ is payable on such capital goods. However, since the goods are not sold, there is no question of any
µprice¶ and hence no µamount¶ should be payable.
2-2 Some services were eligible even if partly used for manufacture of exempted goods/output services
Rule 6(5) of Cenvat Credit Rules provided that in case of specified services, full Cenvat credit of input service is
available even if these services are partly used in manufacture of exempted final product/output services. This
sub-rule has been omitted w.e.f. 1-4-2011. Thus, now the rovision of proportionate reversal applies to all the
input services.
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c When final product is exported under bond without payment of dutyc
c Gold or silver arising in course of manufacture of copper or zinc by smelting. c
c Goods supplied against International Competitive Bidding in terms of Notification No. 6/2006-CE
dated 1-3-2006 or earlier Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from
customs duty when imported in India c
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In such case, assessee need not reverse Cenvat credit or pay any µamount¶
If final product is exported, Cenvat credit cannot be denied ± CC v. F Ltd. (2006) 195 ELT 57
(CESTAT).
International competitive bidding - The last clause has been added w.e.f. 28-1-2005, with intention to exempt
goods supplied against International Competitive Bidding as specified in Notification No. 6/2006-CE dated 1-3-
2006 (Earlier Notification No. 6/2002-CE dated 1-3-2002).
Payment of µamount¶ or reversal not required in case of provision of taxable service to SEZ unit or developer
- Payment of µamount¶ or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ
Unit or SEZ developer for their authorised operations. These are overriding provisions irrespective of any
provision in rule 6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011].
The µamount¶ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular
No. 868/6/2008-CX dated 9-5-2008.
Education cess not payable - Education cess and SAH education cess is payable only on µduties of excise¶.
µAmount¶ is not µduty¶. Hence, education cess and SAH education cess is not payable on such µamount¶.
Nature of the payment of µamount¶ - The payment of µamount¶ is really in nature of reversal of Cenvat credit
availed on inputs/input services which have been used for manufacture of exempted goods or provision of
output services.
3-1 ·ob worker doing job work under Cenvat may be liable to pay 5% µamount¶
Job work done under Cenvat provisions is exempt from service tax. If the job worker is not availing any Cenvat
credit of any common input or input services, question does not arise. However, if the job worker is availing
Cenvat credit on inputs or input services, he will be liable to pay 5% µamount¶ on job charges under rule 6(3) of
Cenvat Credit Rules, or he may have to go in for proportionate reversal of Cenvat Credit as per rule 6(3A) of
Cenvat Credit Rules.
If the job worker thinks that the rule 6(3A) is cumbersome, it may be advisable to pay service tax @
10.30% on job charges, since the customer will be in a position to avail Cenvat credit.
If job worker charges 5% µamount¶, buyer cannot avail Cenvat credit, but if job worker charges regular
service tax, the customer will be eligible to avail Cenvat credit.
The view has been confirmed in Malviya Chem v. CC 2001(127) ELT 274 (CEGAT), where it has been held
that µNil duty¶ and µexemption¶ cannot co-exist with duty payment.
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3.12.c 4. Reversal of credit or payment of µamount¶ means Cenvat credit not availed
Sometimes, assessee may take Cenvat credit by mistake or because he cannot identify the material to be used for
exempted final products. This does not mean that he cannot rectify and must pay 10% µamount¶. He can rectify
by reversing Cenvat credit.
Cenvat Credit Rule 6(3D) as inserted w.e.f. 1-4-2011 specifically provides that payment of µamount¶ under rule
6(3) of Cenvat Credit Rules means Cenvat credit has not been taken, for the purpose of an exemption
notification wherin any exemption is granted on the condition that no Cenvat credit of input and input services
shall be taken.
Even earlier, Courts have been taking the same view, as discussed below.
In CC v. Bombay Dyeing Ltd. (2007) 10 STT 286 = 215 ELT 3 (SC), it was held that even when Cenvat credit
is taken, if it is reversed before utilization, it would mean that Cenvat credit has not been taken. In view of the
decision, CBE&C vide its circular No. 858/16/2007-CX dated 8-11-2007, has clarified that if Cenvat credit is
reversed before utilization, it would amount to credit not having been taken.
In Chandrapur Magnet Wire v. CC 1996(2) SCC 159 = 1996(81) ELT 3 (SC), it was held that if Cenvat credit
taken is reversed, it means no Cenvat credit has been taken. This judgment was on the basis of a specific Board
circular, but principle can still apply.
In unjab Tractors Ltd. v. CC 2005 (181) ELT 380 (SC 3 member bench), assessee paid duty on exempted
parts, availed Cenvat and reversed it when utilising it for exempted final product (junior tractors of less than 25
HP). It was held that the procedure followed was revenue neutral and hence duty is not payable. However,
penalty was held valid for violation of rules.
He has to pay µamount¶ provisionally on monthly basis, At the year end, he has to calculate exact
amount and ay difference if any or adjust excess paid.
Such option has to be exercised in respect of all exempted goods manufactured and all exempted output services
provided. The option once exercised shall not be changed in remaining part of financial year ± xplanation I to
Rule 6(3) inserted w.e.f. 1-4-2008.
If assessee intends to pay 5% µamount¶ on exempted final products/exempted final services, such intimation is
not required.
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3.14.c 5-2. ode of calculations of proportionate reversal
The mode of calculation is as follows ± Assessee should first take entire Cenvat credit of inputs and input
services used in exempted as well as taxable final products and exempted as well as taxable services.
Calculation of amount to be reversed- At the end of month, assessee should calculate Cenvat credit attributable
to exempted final products and exempted services on provisional basis, as follows ±
Amount to be reversed at end of month
(1) Rule 6(3A)(b)(i) Inputs used for exempted final products
(2) Rule 6(3A)(b)(ii) Inputs used for exempted services (On proportionate basis, based on ratio of
previous year)
(3) Rule 6(3A)(b)(iii) Input services used for exempted final products and exempted services (On
proportionate basis based on ratio of previous year).
Total 1+2+3 = amount to be reversed every month on provisional basis
Calculations at the end of the year - At end of the year, assessee should calculate the ratios on actual basis and
make fresh calculations and pay difference, if any, before 30th June. If it is found that he had paid excess
amount based on provisional ratio, he can adjust the difference himself by taking credit.
Reversal in first year of production or service only at the end of year - In the first year of production or
provision of services, ratios of previous year will not be available. In that case, the calculations need not be
made for the whole year. However, calculations should be made after the year is over and amount attributable to
Cenvat credit on exempted final products and exempted services should be calculated and paid.
The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations
are not easy and are prone to litigation. There is no provision to calculate input services used exclusively for
exempted services. This has to be done on ratio basis only.
This has to be done on basis of input-output ratio or on basis of formula similar to the one applicable in case of
inputs for exempted services on provisional basis.
Inputs used for exempted services - The amount of CENVAT credit attributable to inputs used for provision of
exempted services (provisional) is to be calculated as follows ±
B Total value of exempted services provided during the preceding financial year
C Total value of dutiable goods manufactured and removed plus the total value of
taxable services provided plus the total value of exempted services provided, during
the preceding financial year
D Total CENVAT credit taken on inputs during the month minus A (i.e. credit taken on
inputs for manufactured final products)
(B/C) x D Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(ii)
Input services used in or in relation to manufacture of exempted goods or provision of exempted services -
The amount attributable to input services used in or in relation to manufacture of exempted goods or provision
of exempted services (provisional) is calculated as follows ±
E Total value of exempted services provided plus the total value of exempted goods
manufactured and removed during the preceding financial year
F Total value of taxable and exempted services provided, and total value of dutiable
and exempted goods manufactured and removed, during the preceding financial year
G CENVAT credit taken on input services during the month
(E/F) x G Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(iii)
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-4 Calculation of µfinal amount¶ after year end
The manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT
credit attributable to exempted goods and exempted services for the whole financial year in the following
manner [Rule 6(3A)(c)] ±
Inputs used for exempted final products - The amount of CENVAT credit attributable to inputs used in or in
relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to
manufacture of said exempted goods during the financial year, denoted as H [Rule 6(3A)(c)(i)].
This has to be done on basis of input-output ratio and/or on basis of formula similar to the one applicable in case
of inputs for exempted services on actual basis.
Inputs used for exempted services- The amount of CENVAT credit attributable to inputs used for provision of
exempted services is to be calculated finally on actual basis as follows -
J Total value of exempted services provided during the financial year
K Total value of dutiable goods manufactured and removed plus the total value of
taxable services provided plus the total value of exempted services provided, during
the financial year
L Total CENVAT credit taken on inputs during the financial year minus H (i.e. credit
taken on inputs for manufactured final products)
(J/K) x L Amount to be reversed finally as per rule 6(3A)(c)(ii)
Input services used in or in relation to manufacture of exempted goods or provision of exempted services -
The amount attributable to input services used in or in relation to manufacture of exempted goods or provision
of exempted services is to be calculated on actual basis as follows -
M Total value of exempted services provided plus the total value of exempted goods
manufactured and removed during the financial year
N Total value of taxable and exempted services provided, and total value of dutiable
and exempted goods manufactured and removed, during the financial year
P CENVAT credit taken on input services during the financial year
(M/N) x P Amount to be reversed finally at end of year as per rule 6(3A)(c)(iii)
Amount of Cenvat credit to be reversed for whole year - Amount of Cenvat credit attributable to exempted
goods and exempted services is to be determined at the end of financial year. The amount is to be calculated as
follows
Total amount of Cenvat credit attributable to exempted goods and exempted services for the
financial year . . . . . .
(1) Rule Cenvat on Inputs used for exempted final products
6(3A)(c)(i)
(2) Rule Cenvat Credit on Inputs used for exempted services (On proportionate
6(3A)(c)(ii) basis, based on actual ratio of financial year)
(3) Rule Cenvat Credit on input services used for exempted final products and
6(3A)(b)(iii) exempted services (On proportionate basis based on actual ratio of financial
year).
(4) Rule 6(5) Cenvat credit on services specified in rule 6(5), which are exclusively used
for exempted goods or exempted services
Total 1+2+3+4 = Total amount attributable to exempted final products and
exempted services
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Interest payable if amount was short paid - In addition to the amount short-paid, the assessee will be liable to
pay interest at the rate of twenty-four per cent per annum from the due date, i.e., 30th June till the date of
payment, where the amount short-paid is not paid within the said due date.
Thus, no interest is payable if difference is paid by 30th June of the following year [Rule 6(3A)(e)].
Intimation of details to Range Superintendent- The manufacturer of goods or the provider of output service
shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date
of payment or adjustment, the following particulars -
1.c details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the
whole financial year, determined provisionally
2.c CENVAT credit attributable to exempted goods and exempted service for the whole financial year,
finally determined
3.c amount excess paid
4.c credit taken on account of excess payment, if any [Rule 6(3A)(g)].
5-8 If assessee does not manufacture dutiable goods or does not render taxable services
If assessee does not manufacture dutiable final products or taxable output service, he can take credit but is not
required to pay proportionate amount on provisional basis as provided in rule 6(3A)(b). However, at year end,
he should pay amount on proportionate before 30th June [Rule 6(3A)(h)].
The provision applies in case of production in first year when ratios of the previous year are not available to
calculate Cenvat attributable to exempted products and exempted services.
If the amount is not paid by 30th June, interest is payable @ 24% after 1st July [Rule 6(3A)(i)].
Thus, value is to be calculated as per provisions of Central Excise Act (in case of manufactured products) and
Finance Act, 1994 (in case of service tax).
In case of goods chargeable to specific rate of duty, value shall be determined under section 4. In case of
(partially)exempted services, value shall be gross amount charged for providing exempted services, without
abatement - para 3 CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.
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eaning of export of services ± As per explanation to rule 5, µoutput services which are exported¶ means any
output service exported in accordance with the Export of Services Rules, 2005.
Construction services provided within SEZ to SEZ unit or SEZ developer are exempt vide
Notification No. 17/2011-ST dated 1-3-2011 (Earlier Notification No. 9/2009-ST dated 3-3-
2009).
1.1c Earlier department circulars that intermediary not liable to service tax
Earlier, Department had clarified that a service provided to person in same category is not
taxable e.g. service provided by architect to another architect, as the principal person
providing service is liable to pay tax. However, service tax would be required to be paid in
case of sub-contracting to a different service category e.g. architect providing service to
consulting engineer or a market research agency providing service to an advertising agency
even if the consulting engineer/advertising agency pays service tax on total bill which
includes amount paid to provider of sub-contract ± Pune-I Commissionerate TN 8/98-ST
dated 13-10-1998 ± parallel Indore Commissionerate TN 5/98-ST dated 14-10-1998.
In view of these instructions, in Synergy Audio isual Workshop v. CST (2008) 14 STT 321
(CESTAT), it was held that when main advertising agency has paid service tax, sub-
contractor is not eligible ± same view in Ruth Shipping Agencies v. CC (2010) 26 STT 438
(CESTAT SMB).
These circulars have been withdrawn vide Para 6 of CBE&C Circular No. 96/7/2007-
ST dated 23-8-2007.
Ref Code 079.01/23.8.07 of CBE&C Circular No. 96/7/2007-ST dated 23-8-2007 states as
follows - In a case where the builder, promoter, developer or any such person builds a
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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
µconstruction of complex¶ service [section 65(105)(zzzh)].
The aforesaid view has been reiterated in CBE&C circular No. 108/02/2009-ST dated 29-1-
2009.
Issue raised- The issue raised by Jaiprakash Associates Limited, Noida was as follows - The
Works Contract Service (WCS) in respect of construction of Dams, Tunnels, Road, Bridges
etc. is exempt from service tax. WCS providers engage sub-contractors who provide services
such as Architect¶s Service, Consulting Engineer¶s Service, Construction of Complex
Service, Design Services, Erection Commissioning or Installation Service, Management,
Maintenance or Repair Service etc. The representation by assessee was that the benefit of
such exemption to main works contractor should be extended to the sub-contractors
providing various services to the WCS provider, as the service provided by the sub-
contractors are µin relation to¶ the exempted works contract service and hence they deserve
classification under WCS itself.
Department¶s view ± Department expressed following view ± µThe services received by the
WCS provider from its sub-contractors are distinctly classifiable under the respective sub-
clauses of section 65(105) of the Finance Act by their description. When a descriptive sub-
clause is available for classification, the service cannot be classified under another sub-
clause which is generic in nature. As such, the services that are being provided by the sub-
contractors of WCS providers are classifiable under the respective heads and not under
WCS.
Departments view is technically correct - Technically, what this circular says is correct.
Architect¶s service cannot be classified as µWorks Contract Service¶ simply because that
service is in relation to a works contract [If the assessees¶ vies is accepted,
telecommunication, rent-a-cab and goods transport agency service provided to works
contractor would have to be classified as a µWorks Contract Service¶].
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which is² (i) used, or to be used, primarily for; or (ii) occupied, 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.
Non-commercial work does not become commercial simply because done by sub-
contractor - Let us assume that a contractor has been awarded a contract for construction of
road or bridge. Now, he gives sub-contract to a sub-contractor for construction of road or
bridge (party or fully). The work done by sub-contractor still continues to be µroad or bridge
construction service¶ and hence should be outside the service tax net.
In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states
that service provided by the sub-contractors/consultants and other service providers are
classifiable as per section 65A of the Finance Act under respective clause of sub-clause
(105) of section 65 of Finance Act, 1994.
If the construction is not commercial or is relating to road, bridges etc., or is for personal
residential use of customer, the main person (builder or developer or main contractor) is not
liable. The definition of µconstruction service¶ refers to type of construction and not to type
of contract. The exemption/exclusion depends upon type of construction. Thus, even if the
work is done by contractor/sub-contractor, the nature of construction does not change and
hence it would not be subjected to service tax.
Service tax liability depends on nature of construction ± Some times, an argument is raised
that relation between sub-contractor is on commercial basis and hence service provided by
sub-contractor to main contractor is µcommercial¶ even if the work of contractor is not
commercial. This argument is fallacious since the taxability depends on nature of civil
construction. The nature of construction does not change simply because the work is done by
sub-contractor.
This can also be justified by µrule of purposive construction¶ as discussed later in this
Article.
Better to make disclosure ± No doubt, department may not accept this view and you may
have to enter into litigation. Hence, if you intend to take aforesaid view as explained by me,
it is advisable to make full disclosure to department in advance to avoid charge of
suppression of facts.
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Thus, the principle discussed above would apply in case of works contract service provided
by sub-contractor, since the definition of µworks contract service¶ relates to nature of
construction. This can also be justified by µrule of purposive construction¶ as discussed later
in this Article.
2.c Liability of sub contractor when the main contractor is liable to service tax
It is now well settled that if the sub-contractor is liable to pay service tax even if service tax
is paid by main contractor. In such case, the main contractor should not pay service tax
under 33% abatement scheme. The reason is that if he pays service tax under 33% scheme,
he cannot avail Cenvat credit of service tax paid by sub-contractor. He should pay service
tax under 4.12% scheme (if he is paying works contract tax). Alternatively, he can calculate
value of service and pay service tax on the value of service. In such case, he can avail the
Cenvat credit of service tax paid by the sub-contractor.
Post construction services - Post construction services of completion and finishing are
taxable w.e.f. 16-6-2005. Services of repair, alteration, renovation or restoration services in
relation to building, civil structure, pipeline or conduit of work related to commerce or
industry is also taxable.
Sub-contractors providing these services (to main contractor or to any other person) will be
liable to service tax, as services are taxable if provided to µany person¶.
Construction of part of building - In other cases, the service should be µconstruction of new
building or civil structure or a part thereof¶. Thus, if a sub-contractor undertakes work to
complete the building or part of building, his services will be taxable.
A µpart¶ should be functional and identifiable as a separate unit itself (e.g. spare part). One
flat out of the complex or one gala or shop of commercial building is a µpart¶ as it is
complete in itself.
Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating to SEZ) reads as follows ±
In exercise of the powers ± -, the Central Government, - - , hereby exempts the taxable
services specified in clause (105) of section 65 of the Finance Act, chargeable to tax under
section 66 or section 66A of the Finance Act, received by a Unit located in a Special
Economic Zone (hereinafter referred to as SEZ) or Developer of SEZ for the authorised
operations, from the whole of the service tax, education cess and secondary and higher
education cess leviable thereon.
The earlier exemption Notification No. 9/2009-ST dated 3-3-2009 relating to SEZ also used
the same words i.e. µreceived by a developer or units of a Special Economic Zone¶.
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It is learnt that Department is taking a view that the services of sub-contractor are received
by contractor and not by the developer or SEZ Unit. Hence, the exemption as given in the
notification is not available.
As per second proviso to rule 10 of SEZ Rules amended w.e.f. 3-2-2009, the exemptions,
drawbacks and concessions on goods and services allowed to developer or co-developer will
also be available to contractor or sub-contractor appointed by such developer or co-
developer. All documents shall bear name of developer or co-developer along with
contractor or sub-contractor and shall be filed jointly.
Thus, services provided to contractors for ultimate use of developer should also be exempt.
However, this proviso applies only in respect of SEZ Developer and co-developer and not in
respect of SEZ units manufacturing or providing services.
Note that SEZ Act and Rules have over-riding effect. As per section 51 of SEZ Act,
provisions of SEZ Act will apply notwithstanding anything inconsistent contained in any
other law or instrument having force of law. Moreover, SEZ Act is a special Act and other
Acts like Customs Act, Central Excise Act etc. are general Acts. Thus, SEZ Act provisions
have overriding effect.
4.3 Only one deemed sale and one taxable event even when work is done by sub-
contractor
In Larsen & Toubro Ltd. v. State of Andhra radesh (2006) 148 STC 616 (AP HC DB),
L&T were main contractors. L&T had given various work to others on sub-contract basis.
Contractee (Principal) had no agreement with sub-contractors and there was no legal
relationship between contractee (Principal) and sub-contractors. Department contended that
there are two sales i.e. one by sub-contractor to main contractor and other by main contractor
to contractee. However, High Court observed that property in goods passes through
accretion. Sub-contractor acts only as agent of Contractor. Hence, there is only one taxable
event. Property in goods directly passes on from sub-contractor to the contractee. Hence,
there is only one µsale¶. Thus, sales tax can be collected either from contractor or sub-
contractor and not both. ± view confirmed in State of Andhra radesh v. Larsen & Toubro
(2008) 16 STT 501 = 17 VST 1 (SC), where it was held that main contractor is not liable to
Vat on turnover of sub-contractor. There is only one deemed sale and not two, even if sub-
contractor had no privity of contract with the contractee. The property in goods passes to
owner/contractee on its incorporation in the works contract [Main contractor i.e. L&T had
not taken input tax credit of tax invoice of sub-contractor].
4.4 Applicability of the aforesaid decision to service tax Though aforesaid decision is
relation to Vat, it can be argued that the sub-contractors act only as agents of contractor to
pass on the service tax to the SEZ Unit or SEZ Developer. This can also be justified on the
basis of rule of purposive construction discussed below.
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3.18.c 5.Rule of Purposive Construction
The rule of purposive construction states that interpretation of statute should be done having
regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 -
1999) has evolved this rule of construction.
Lord Denning had observed ± µIt is true that the words used, even in their literal sense, are
the primary and ordinarily the most reliable source of interpreting the meaning of any
writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a
mature and developed jurisprudence not to make a fortress out of the dictionary; but to
remember that statutes always have some purpose or object to accomplish, whose
sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with
approval in arghese v. ITO - (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1)
SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) * DLF Universal Ltd. v. Appropriate
Authority 243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) ± same view in
Amrendra ratap Singh v. Tej Bahadur rajapati 2004 AIR SCW 4103 * In N annadasan
v. Ajoy hose (2009) 7 SCC 1.
If there exists some ambiguity in the language or the same is capable of two interpretations,
it is trite that the interpretation which serves the object and purpose of the Act must be given
effect to. In such a case, the doctrine of purposive construction should be adopted ± Nathi
Devi v. Radha Devi Gupta AIR 2005 SC 648 = (2005) 2 SCC 271 (SC 5 member bench).
When an expression is capable of more than one meaning, the Court would attempt to
resolve the ambiguity in a manner consistent with the purpose of the provision, having
regard to the consequences of alternative constructions - rakash umar v. State of Gujarat
AIR 2005 SC 1075 (SC 5 member bench) ± same view in South astern Coalfields v. CC
2006 (200) ELT 357 (SC).
5.1 Applicability of the rule of purposive construction The rule is applicable both in case
of construction services relating to road, bridges, tunnels, or non-commercial construction
where when contractor is not liable. The principle would also apply to services provided by
sub-contractor in SEZ.
If the main contractor providing construction service which is not subject to service tax (as
construction is non commercial or is relating to roads, bridges etc.) the sub-contractor providing
construction service itself would not be liable but other service providers would be liable.
If main contractor is providing construction service within SEZ, sub-contractor can claim
exemption on the basis that (a) service is eventually received by SEZ Unit or Developer (b) SEZ
Rules have overriding effect (c) Rule of purposive construction.
If the construction service is a taxable service, sub-contractor is liable to service tax even if
service tax has been paid on entire contract value by main contractor.
If contract is given on sub-contract basis, and the service is taxable, it is not advisable for main
contractor to pay service tax under 33% abatement scheme, as he cannot avail any Cenvat credit.
It is advisable to make disclosure to department to avoid charge of suppression of facts and wilful
mis-statement.
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