Service Tax (Determination of Value) Rules, 2006 amended vide notification No. 11/2012-ST, DATED 17-3-2012. , to be effective after Section 66B comes into force. Section 66B comes into force w.e..f 01.07.2012 as notified by NOTIFICATION NO. 19/2012-SERVICE TAX, DATED 5-6-2012.
5.8 Service portion in execution of a works contract
Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land. Typically every works contract involves an element of sale of goods and provision of service. In terms of Article 366(29A) of the Constitution of India transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods. It is a well settled position of law, declared by the Supreme Court in BSNL’s case [2006(2) STR 161 (SC)], that a works contract can be segregated into a contract of sale of goods and contract of provision of service. This declared list entry has been incorporated to capture this position of law in simple terms.
Further, with a view to bring certainty and simplicity the manner of determining the value of service portion in works contracts will be given in the Valuation Rules.
5.8.1 Would labour contracts in relation to a building or structure treated as a works contract?
No. Labour Contracts do not fall in the definition of works contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value.
5.8.2 Would contracts for tailoring of clothes or development of photographs also be treated as works contracts as these are also for carrying out a particular work?
No. The phrase used is ‘works contract’ and not work contract. ‘Works’ has a defined and accepted legal meaning. As per Black’s Law dictionary ‘works’ means ‘buildings or structures on land’. Moreover works contract has been defined in the Act as contract for carrying our specified activity, like construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration etc., or a part thereof in relation to any building or structure on land. Therefore contracts which do not pertain to building or structures on land would be out of the ambit of works contracts.
5.8.3 Would contracts for construction of a pipeline or conduit be covered under works contract?
Yes. As pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract.
5.8.4 Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract?
Such contracts would be treated as works contracts if –
• Transfer of property in goods is involved in such a contract; and
• The machinery equipment structures are attached or embedded to earth after erection commissioning or installation.
5.8.5 What is the scope of ‘building or structure on land’?
Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.
5.8.6. Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’?
Yes, if such contracts involve provision of materials as well.
5.8.7 What is the way to segregate service portion in execution of a works contract from the total contract?
A simplified manner for determining the value of service portion of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006 ( which will be amended partially for the negative list). In brief the value of the service portion is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.
|Gross amount includes||Gross amount does not include|
|Labour charges for execution of the works
Amount paid to a sub-contractor for labour and services
|Value of transfer of property in goods involved in the execution of the said works contract.Note:Where Value Added Tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract.|
|Charges for planning, designing and architect’s fees|
|Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract|
|Cost of consumables such as water, electricity, fuel, used in the execution of the works contract|
|Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services||Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract|
|Profit earned by the service provider relatable to supply of labour and services|
5.8.8 Is there any simplified scheme for determining the value of service portion in a works contract?
Yes. The scheme will be contained in the revised Rule 2A of the Service Tax (Determination of Value) Rules, 2006.
As per this scheme the value of the service portion, where value has not been determined in the manner as explained at 5.8.7 above, shall be determined in the manner explained in the table below –
|Where works contract is for…||Value of the service portion shall be…|
|(i) execution of original works||forty per cent of the total amount charged for the works contract|
|(ii) execution of original works and the gross amount charged includes the value of land||twenty five per cent of the total amount charged including such gross amount|
|(iii) works contracts, other than contracts for execution of original works, including contracts for completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.||sixty per cent of the total amount charged for the works contract|
Important – ‘Total amount’ referred to in the second column of the table above would be the sum total of gross amount and the value of all goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract and, in case of (ii) in the table above, including the value of land charged as a part of the total consideration.
5.8.9 How is the value of goods or services supplied free of cost be determined to arrive at the total amount charged for a works contract?
If the value of goods and services supplied free of cost for use in or in relation to execution of a works contract is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have close resemblance to goods made available.
5.8.10 What are “original works”?
‘Original works’ means :
• all new constructions;
• all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
5.8.11 Is duty paid on any goods, property in which is transferred (whether as goods or in some other form) in the execution of works contract, available as Cenvat credit?
No. Such Cenvat credit is not available, irrespective of the fact that the value of service portion in execution of the works contract is determined in the manner explained at Point No. 5.8.7 or 5.8.8 above, since such goods are not inputs for the service provided. However, the goods not forming part of such transfer will be eligible for input tax credit subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in rule 6 of the said rules.
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