Valuation Under Works Contract Service

‘Works contract” is defined in section 65B (54), which read as follows:

“works contract” means 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.

2. EXEMPTION : In the definition of works contact there are two basic ingredients which are discussed below:

2.1 Primary Condition for classifying the service under works contract is that the contract shall involve transfer of property in goods in executing such contract which should be leviable to tax as sale of goods.

2.2 The contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any movable or immovable property.

If the service provider uses the goods in execution of works contract, the property of which is transferred, it qualifies as works contract. However, if the service provider only provides the specified services without use of goods, the services will not be considered as works contract but will be considered as specified services and exemption under S No. 12, 13 & 14 of notification No. 25/2012-ST, dated 20.06.2012 would be available. In nutshell, it is not necessary that the services shall be works contract. The lists of such exemption are given below:

• S No. 12 of Notification No. 25/2012-ST dated 20.06.2012
• S No. 13 of Notification No. 25/2012-ST dated 20.06.2012
• S No. 14   of Notification No. 25/2012-ST dated 20.06.2012
• S No. 29(h) of Notification No. 25/2012-ST dated 20.06.2012

3. VALUATION AND ABATEMENT: Provisions relating to determination of value of service portion involved in the execution of a works contract are contained in Rule 2A of service tax (Determination of value) Rules, 2006. The provisions of said rule are as follows:

“2A. Determination of value of service portion in the execution of a works contract.- Subject to the provisions of section 67, the value of  service portion in the execution of a works contract , referred to in  clause (h) of section 66E of the Act, shall be determined  in the following manner, namely:-

(i) Value of service portion in the execution of a works contract  shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.

Explanation – For the purposes of this clause,-

(a)  gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;

(b)  value of works contract service shall include, –

(i)     labour charges for execution of the works;

(ii)    amount paid to a sub-contractor for labour and services;

(iii)   charges for planning, designing and architect’s fees;

(iv)   charges for obtaining on hire or otherwise, machinery and tools    used for the execution of the works contract;

(v)     cost of consumables such as water, electricity, fuel used in th execution of the works contract;

(vi)     cost of establishment of the contractor relatable to supply of labour and services;

(vii)    other similar expenses relatable to supply of labour and services; and

(viii)   profit earned by the service provider relatable to supply of labour and services;

(c)  Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the   value of service portion in the execution of works contract under this clause.

(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the  service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

 (A)  in case of  works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract;  

(B) in case of works contract entered into for maintenance or repair or    reconditioning or restoration or servicing of any goods,  service tax shall be payable on seventy percent. of the total amount charged for the works contract;

(C) in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical  fittings of an immovable property , service tax shall be payable on sixty per cent of the total amount charged for the works contract;

Explanation 1.-  For the purposes of this rule,-

(a) “original works” means-

(i)  all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

(b) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-

(i) the amount charged for such goods or services, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:

 Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

 Explanation 2.–For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”.

As per Notification No. 11/2014-ST dated 11.07.2014, w.e.f. 01.10.2010, In the Service Tax (Determination of Value) Rules, 2006, in rule 2A, in clause (ii), for sub-clauses (B) and (C), the following sub-clause shall be substituted, namely:–

“(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for, –

(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy percent of the total amount charged for the works contract”.

4. CENVAT CREDIT:

4.1 Explanation 2 to Rule 2A(ii) provides that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

4.2 CENVAT credit of service tax paid on input services and duties paid on capital goods can be availed.