Works Contract viz-a-viz Commercial or Industrial Construction Services – Valuation & Abatement Issues

Bimal Jain, FCA, ACS, LLB

Recently Service Tax (Determination of Valuation Rules), 2012 vide Notification No. 11/2012 –S.T dated 17.03.2012 amended the Service Tax (Determination of Value) Rules, 2006 which were supposed to come into force from the date on which the new Section 66B (the new charging Section) comes into effect i.e. 1st July 2012 but the said Rules got superseded before coming into force vide Notification no. 24/2012-ST dated 06.06.2012 (the Notification no. 24/2012-ST).

We would like to discuss open issues even after the issuance of this new Notification no. 24/2012-ST along with new abatement Notification no. 13/2012-ST dated 17-03-2012 (the Notification no. 13/2012-ST), which will rescind old abatement Notification no. 01/2006-ST dated 01-03-2006. The Following issues are discussed for easy understanding and inviting views from Netizens, who may join in with their views in taking the discussion to next level:-

1. Whether any abatement 67% or 75% (When Value of Land is included in gross amount charged) on account of material usage will be available under the Notification no. 13/2012-ST for Commercial or Industrial Construction, Construction of Residential Complex, Erection, installation & commissioning services in the new service tax regime effective from 1^st July, 2012.

2. If no abatement available for 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 as per Section 66E (b) of the Finance Act (coming into force from 1^st July, 2012) then, whether the said services can be considered at par with the works contract services as per Section 66E (h) of the Finance Act so as to avail benefit of composition method envisaged in the Notification no. 24/2012-ST.

To answer the first point, it is clearly mentioned in the Notification no. 13/2012-ST that No abatement would be available for Commercial or Industrial Construction, Construction of Residential Complex, Erection, installation & commissioning services in the new service tax regime effective from 1^st July, 2012.

Now question comes, the method of valuation as prescribed for the works contract services of Section 66E (h) of the Finance Act in the Notification no. 24/2012-ST would also be applicable for Commercial or Industrial Construction, Construction of Residential Complex, Erection, installation & commissioning services.

There is no definition provided for Commercial or industrial Construction services, etc., as envisaged under Section 66E (b) of the Finance Act but as per Section 65B (51) of the Finance Act “works contract” is defined and 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, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

Further, it was clarified vide Para 6.4 of the Circular no. 334/1/2007-TRU dated 28-2-2007 that the following services are covered under the Works Contract services wherein transfer of property in goods involved in the execution of such works contract is leviable to VAT/ Sales tax.

–    Works contract for carrying our erection, commissioning or installation

–    Works contract for commercial or industrial construction

–    Works contract for construction of complex

–    Works contract for Turnkey project including EPC Projects

With this clarification, it looks like Commercial or Industrial Construction, Construction of Residential Complex, Erection, installation & commissioning services are covered within the definition of Works contract Services and valuation methods as suggested for Works contract services in terms of Notification no. 24/2012-ST would be applicable for above stated services as well but it is advisable that the Board should clarify this issue to avoid confusion & future litigation and their intention why Commercial or industrial Construction services, etc., as envisaged under Section 66E(b) of the Finance Act is excluded in the substituted Rule 2A of the Determination of Valuation Rules as per Notification no. 24/2012-ST.

Various Methods of Determination of Valuation Rules Vide Notification no. 24/2012 ST:- 

Option 1: Actual 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

–  Less 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

–  Add 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 the 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;

Further, 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.

Option 2: To pay service tax at composite rate:

– Pay Service Tax on 40% value of original works

– Pay Service Tax on 70% value of maintenance or repair or reconditioning or restoration or servicing of any goods e.g. AMC contract falling under Repair & Maintenance service

– Pay Service Tax on 60% value of all other works contract i.e. maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical  fittings of an immovable property

Explanation 1. for 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

It means that any goods or services provided by Contractee to Contractor either on Free of Costs basis or chargeable basis under the same contract or any other contract would be included in the gross consideration charged by Contractor on formula prescribed i.e. FMV of such goods or services less Amount charged by Contractee + VAT/ Sales tax, if any levied thereon.

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.

Open Issues:-

• The CBEC should clarify to avoid confusion & future litigation and their intention why Commercial or industrial Construction services, etc., as envisaged under Section 66E(b) of the Finance Act is excluded in the substituted Rule 2A of the Determination of Valuation Rules as per Notification no. 24/2012-ST.
• Notification no. 24/2012-ST – does not prescribe the composition rate where the gross amount charged includes the value of the land, wherein presently, the service tax is payable on twenty five per cent of the total gross amount.
• Basis of FMV calculation of goods & services provided by Contractee to Contractor as per generally accepted accounting principle may be another matter of divergent interpretations and thereby leading to litigation.

Bimal Jain
FCA, ACS, LLB, B.Com (Hons)
Mobile: +91 9810604563
email: bimaljain@hotmail.com