M/s. Harish Chandra Majhi Vs State of Odisha & Others (Orissa High Court)
Conclusion: Since Office Memorandum (OM) only prescribed the manner/procedure of calculation to determine the amount of tax in a particular eventuality in the transitional period of migration to GST Act with effect from 1st July, 2017 consequently, the Court found no merit in assessee’s challenge to quashed the said OM in law.
Held: Assessee was a registered work contractor and was stated to have executed many works contracts during the pre-GST period as well as post-GST period. He claimed to have executed twenty-one contracts for different departments in the Government of Odisha where tenders were invited and estimates made prior to 1st July, 2017 but were completed after 1st July, 2017. But on verification it was seen that four numbers of works were completed prior to 1st July, 2017 and the rest of the works were commenced and completed after 1st July, 2017. According to assessee, the Tender Call Notice for all those works were issued in pre-GST period and the estimated value of contracts were arrived basing on pre-revised SoR-2014 when Odisha Value Added Tax Act (OVAT Act) was in operation. Such rates mentioned in SoR-2014 (pre-revised) were inclusive of value added tax. After implementation of GST, revised SoR-2014 was issued with effect from 1st July, 2017 wherein the rates prescribed were exclusive of tax components. As a result the estimated value of contract was reduced. The GST component with applicable rate was required to be added over the contract value. Accordingly, assessee contended that a heavy financial burden in the form of differential tax amount falls on it as the rate quoted was according to pre-revised SoR-2014 prevailing at the time of inviting tender. According to the State-Opposite Parties, including the Finance Department, under the GST law, „works Contract‟ was subject to tax liability with effect from 1st July, 2017 at the rate of 5% or 12% or 18% of the contract value depending on the nature of contract. For effective implementation of the tax liability, the contract value as determined in the pre-GST regime using SoR-2014, was required to be revised. Accordingly, the rates mentioned in SoR-2014 were also revised with effect from 1st July, 2017 since the earlier rates were inclusive of the tax components prevailing in the pre-GST era. Correspondingly, instructions/guidelines were issued prescribing the mode and manner of calculation of GST in respect of works contract executed after 1st July, 2017, either partly or fully. Assessee complained that the procedure adopted in the preparation of the revised SoR-2014 dated 16th September, 2017 was illegal, arbitrary and contrary to the provisions of Odisha Public Works Department Code (OPWD Code) and that the rates had not been determined on the basis of actual rates prevailing in different areas of the State. It was noted that in Mathuram Agrawal v. State of M.P. (1999) 8 SCC 667, it had been held that the statute should clearly and unambiguously convey three components of the tax law i.e., the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. In the instant case, three components of the tax, i.e., subject of tax, person liable to pay the tax and rate of tax had been clearly defined in the statute. The OM dated 10th December, 2018 only prescribed the manner/procedure of calculation to determine the amount of tax in a particular eventuality in the transitional period of migration to GST Act with effect from 1st July, 2017. Consequently, the Court found no merit in assessee’s challenge to the said OM in law. It was necessary to take note of the fact that assessee had filed the present writ petition after receipt of a notice of demand of recovery of excess payment. The notice had been issued under Section 61 of the OGST Act and the order passed pursuant thereto was appealable under the OGST Act. Therefore, the Court refrained from expressing any opinion at this stage on the merits of the said notice and left open all the contentions of the parties in relation thereto to be urged at the appropriate stage in those proceedings.
FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT
1. The Office Memorandum dated 10th December, 2018 of the Finance Department under Annexure-3 prescribing guidelines for the implementation of GST (Goods and Services Tax) in works contract in post-GST regime with effect from 1st July, 2017, the Revised Schedule of Rates-2014 (Revised SoR-2014) under Annexure-8 and the demand notice issued under Section 61 of the Odisha Goods and Services Act (OGST Act) has been questioned in the present writ petition and connected batch of cases. The prayers in the present petition read as under:
“i. why the action and decision of the Opp. Parties shall not be declared illegal, unconstitutional and violative of legal right of the Petitioner on account of the Taxes being shared and borne by the Petitioner on post enactment Goods and Services Tax Act, 2017?
ii. the Opp.Parties shall not be directed to restitute the benefit of GST to the Petitioner along with interest within a stipulated period in respect of work in which the estimated was prepared under VAT law.
iii. the Office Memorandum dated 10.12.2018 issued by the Opp.Party No.4 under Annexure-3 shall not be declared illegal, arbitrary, unreasonable and same shall not be quashed.
iv. further the process adopted by the Opp.Parties in preparation of revised SoR dated 15.09.2017 under Annexure-8 shall not be declared illegal, arbitrary and same shall not be quashed.
v. why the notice issued by the Opp.Party No.9 under Annexure-9 shall not be declared illegal, arbitrary and same shall not be quashed?
vi. why the Opp. Party shall not be directed to prepare a fresh schedule of rates considering rapidly change of rate and price and calculate the differential amount of GST on the contract in which estimate was prepared under VAT?”
2. The Petitioner is a registered work contractor and is stated to have executed many works contracts during the pre-GST period as well as post-GST period. The petitioner claims to have executed twenty-one contracts for different departments in the Government of Odisha where tenders were invited and estimates made prior to 1st July, 2017 but were completed after 1st July, 2017. But on verification of the tabular chart mentioned in the writ petition as well as in the affidavit dated 14th August 2020, it is seen that four numbers of works were completed prior to 1st July, 2017 and the rest of the works were commenced and completed after 1st July, 2017.
3. According to the Petitioner, the Tender Call Notice for all those works were issued in pre-GST period and the estimated value of contracts were arrived basing on pre-revised SoR-2014 when Odisha Value Added Tax Act (OVAT Act) was in operation. Such rates mentioned in SoR-2014 (pre-revised) were inclusive of value added tax. After implementation of GST, revised SoR-2014 was issued with effect from 1st July, 2017 wherein the rates prescribed are exclusive of tax components. As a result the estimated value of contract was reduced. The GST component with applicable rate was required to be added over the contract value.
4. Accordingly the Petitioner makes a grievance that a heavy financial burden in the form of differential tax amount falls on it as the rate quoted was according to pre-revised SoR-2014 prevailing at the time of inviting tender. Such reduction in the cost of materials and labour charges in the revised SoR-2014 along with imposition of GST amount on the contract value imposes an extra financial burden on the Petitioner.
5. The State-Opposite Parties, including the Finance Department, have filed their respective replies. According to them, under the GST law, „works Contract‟ is subject to tax liability with effect from 1st July, 2017 at the rate of 5% or 12% or 18% of the contract value depending on the nature of contract. In the present case, it is 12%. For effective implementation of the tax liability, the contract value as determined in the pre-GST regime using SoR-2014, was required to be revised. Accordingly, the rates mentioned in SoR-2014 were also revised with effect from 1st July, 2017 under Annexure-8 since the earlier rates were inclusive of the tax components prevailing in the pre-GST era. Correspondingly, instructions/guidelines were issued under Annexure-3 prescribing the mode and manner of calculation of GST in respect of works contract executed after 1st July, 2017, either partly or fully.
6. The Central Goods and Services Tax Act (CGST Act) and the OGST Act came into force with effect from 1st July, 2017. The CGST & the OGST inter alia subsume the Value Added Tax and Service Tax in vogue during the pre-GST period. Sec. 2 (119) of the CGST Act defines „Works Contract‟ as follows:
“(119)“works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alternation or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;”
7. Further, Clauses 5 and 6 of Schedule-II to the CGST Act define „supply of services‟ as under:
“5. Supply of services
The following shall be treated as supply of services, namely:
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Explanation : For the purposes of this clause-(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:-
(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;
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6. Composite Supply
The following composite supplies shall be treated as a supply of services, namely:-
(a) works contract as defined in clause (119) of section 2; and
(b) xx xx xx”
8. Section 7(1)(d) and 7 (1-A) define the „scope of supply‟ as under:
“7. Scope of supply
(1) For the purposes of this Act, the expression “supply” includes-
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(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II
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(1-A) Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”
9. Further Section 17 (5) (c) specifies that:
“17. Apportionment of credit and blocked credits (5)Notwithstanding anything contained in subsection (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely
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(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.”
10. After implementation of the GST regime, works contract is treated as a composite supply of service taxable at applicable rates. It is the submission of the State-Opposite Parties that a works contractor is allowed to avail input tax credit (ITC) on the inputs used for the purchase of materials or input services, like for e.g., architect charges for the execution of works.
11. The basic price of materials as per SoR-2014 was inclusive of VAT, entry tax and other tax components. Since 1st July 2017 GST is payable on the value of the contract, the value of tax components in the price of the materials in SoR-2014 was revised and reduced by excluding such tax components prevalent during pre-GST period. As such, the revised SoR-2014 was issued on 16th September, 2017.
12. The Petitioner complains that the procedure adopted in the preparation of the revised SoR-2014 dated 16th September, 2017(Annexure-8) is illegal, arbitrary and contrary to the provisions of Odisha Public Works Department Code (OPWD Code) and that the rates have not been determined on the basis of actual rates prevailing in different areas of the State.
13. The said submission of the Petitioner is not found acceptable because the rates of materials are to be maintained uniformly all over the State. Further, if there is any difference in the actual rate and scheduled rate in any particular area, the Petitioner could submit the same to the employer and this has nothing to do with the GST.
14. A further ground urged on behalf of the Petitioner is that the tender was floated prior to 1st July, 2017. The price quoted for the items and labour was as per the then prevailing market rate. Therefore, the revised SoR-2014 brought into force on 1st July, 2017 at a reduced rate is illegal and discriminatory.
15. This contention of the Petitioner is not found convincing for the reason that, first, nothing has been brought on record to show any comparison of market rate in 2014 when SoR-2014 was issued and the market rate in 2017 when revised SoR was issued. Secondly, no dispute has been raised against the rates mentioned in pre-revised SoR-2014. The price difference in the revised SoR-2014 is to the extent of the changed tax amount only. Undoubtedly, the rates in revised SoR-2014 are applicable for the works all over the State.
16. Works contract is a composite supply of services and is taxable under the GST. The earlier SoR-2014 issued on 10th November, 2014 was inclusive of taxes like Central Excise Duty, Service Tax, VAT, Entry Tax etc. After the GST regime only some of the tax components needed to be included. This necessitated a revision of SoR-2014 to arrive at the GST exclusive work value. The GST component is to be added to the work value. As the revised SoR is exclusive of the tax components, the estimated value of the work gets reduced to that extent. This was prepared under the recommendation of a Code Revision Committee and after verification of tax rate in the pre-GST period of each of the items including the hire charges of machineries.
17. Due to migration into a new tax regime with the implementation of the GST, in order to overcome the transitional difficulty, an Office Memorandum (OM) dated 10th December, 2018 was issued setting out the guidelines. Clause-3 of the said OM, which is the subject matter of challenge here, prescribes the procedure where tender was invited before 1st July, 2017 on the basis of the pre-revised SoR-2014, but where work has been executed fully or partly after the implementation of the GST or payments have been made after 1st July, 2017. Cluase-3 is reproduced below:
“3. In case of work, where the tender was invited before 01.07.2017 on the basis of SoR-2014, but payments made for balance work or full work after implementation of GST, the following procedure shall be followed to determine the amount payable to the works contractor;
(i) Item-wise quantity of work done after 30.06.2017 (i.e. the Balance Work) and its work value as per the original agreement basing on the pre-revised SoR-2014 is to be ascertained first.
(ii) The revised estimated work value for the Balance Work is to be determined as per the Revised SoR-2014, (In case of rates of any goods or service used in execution of the balance Work not covered in the Revised SoR-2014, the tax-exclusive basic value of that goods or service shall be determined by removing the embedded tax incidences of VAT, Entry Tax, Excise Duty, Service Tax, etc. from the estimated Price/Quoted Price.)
(iii) The revised estimated work value for the Balance Work shall then be enhanced or reduced in the same proportion as that of the tender premium/discount.
(iv) Finally, the applicable GST rate (5%, 12%, or 18% as the case may be) is to be added on the revised estimated work value for the Balance Work to arrive at the GST-inclusive work value for the Balance Work.
(v) A model formant for calculation of the GST-inclusive work value for the Balance Work is attached as Annexure. The competent authority responsible for making payment to the works contractor will determine GST inclusive work value for the Balance Work for which agreement executed on the basis of SoR-2014.
(vi) A supplementary agreement shall be signed with the works contractor for the revised GST-inclusive work value for the Balance Work as determined above.
(vii) In case the revised GST-inclusive work value for the Balance Work is more than the original agreement work value for the Balance work, the works contractor is to be reimbursed for the excess amount.
(viii) In case the revised GST-inclusive work value for the Balance Work is less than the original agreement work value for the balance Work, the payment to the works contractor is to be reduced accordingly. In case excess payment has already been made to the works contractor in pursuance of the original agreement, the excess amount paid must be recovered from the works contractor.
(ix) These procedures shall be applicable to all works contract including those executed in EPC/Turn-key/Lumpsum mode.”
18. Prior to issuance of the OM dated 10th December, 2018 under Annexure-3 by the Finance Department, a notification dated 7th December, 2017 was issued. After issuance of notification dated 6th June, 2018 by National Rural Infrastructure Development Agency (NRIDA) by the Ministry of Rural Development (NORD), the earlier notification of Finance Department dated 7th December, 2017 was revised resulting in the issuance of the OM dated 10th December, 2018.
19. The submission of the Petitioner that OM dated 10th December, 2018 is not in tandem with the notification of NRIDA dated 6th June, 2018 is not found correct upon verification. A comparison of both the notifications reveals as follows:
