COMMERCIAL CONSTRUCTION – SOME ISSUES

[Dr. Sanjiv Agarwal]

Service tax has been imposed on construction services rendered by any commercial concern by the Finance Act, 2004 with effect from 10th September, 2004. The gross amount charged to any person in relation to construction services is chargeable to service tax, i.e. services provided by commercial concern to any person.  Finance Act, 2005 has enlarged the scope of construction services and renamed this service as ‘commercial and industrial construction service’ with effect from 16-6-2005. (Finance Act, 2010 has omitted the word ‘service’ from the name of services and tax has also been levied on preferential location / builder’s services w.e.f. 1.7.2010.) 

Meaning of Construction Service (w.e.f. 16-6-2005)

Section 65(30a) defines ‘construction service’ as under – 

Construction service has been renamed as commercial and industrial construction service and scope has been enlarged by the amendment made by the Finance Act, 2005. Accordingly, new sub-section 65(25b) defines “commercial and industrial construction service’ as under –

“commercial or industrial construction service” means –

(a)   construction of a new building or a civil structure or a part thereof; or

(b)   construction of pipeline or conduit; or

(c)   completion and finishing services such as glazing, plastering, painting, floor and wall tilling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d)   repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is –

(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.” 

Construction of Roads

So far as construction of road is concerned, clause (zzq) specifically excludes construction or repair of roads and as such, construction of roads is not a construction service. Construction activities would include the following—

(a)   laying of a new road

(b)   widening of narrow road to broader road (such as conversion of a two lane road to a four lane road)

(c)   changing road surface (graveled road to a metalled road or metalled road to a black topped or black topped to concrete etc.)

(Also refer to Circular No. 110/4/2009-ST dated 23.2.2009) 

In Commissioner of Service Tax, Ahmedabad v. Shilpa Constructions Pvt. Ltd., 2010 -TMI - 77748 – (CESTAT, AHMEDABAD), the respondent filed a refund claim with regard to service tax wrongly paid for the construction of road which was not included in the definition of ‘Commercial and Industrial Construction’. However, the Department rejected the refund claim which was allowed in the appeal. Therefore, the Department preferred an appeal before the CESTAT. The respondent contended that the term ‘driveway work’ used in the agreement was in relation to road work and the respondent was not engaged in any other work. In respect of construction of road, service tax is required to be paid only if it is covered under a single contract of construction of commercial complex in terms of Circular No. B₁/6/2005-TRU, dated July 27, 2005. Since that respondent did not collect such service tax from client, the doctrine of unjust enrichment did not apply to it. Invoices and chartered accountant’s certificate were produced as proof. According to the Department, the exclusion of roads from the definition of ‘Commercial or Industrial Construction Service’ was to facilitate general public in the public interest and ‘driveway work’ could not be equated with road and therefore the stated Circular was not applicable. The Tribunal held that road constructed for public utility or not, was not the determining factor and held that construction of ‘driveway work’ amounted to construction of road and therefore, not liable for service tax.  

Tax on Laying of Cables  

Vide Circular No 123/5/2010-TRU dated 24.5.2010, CBEC has clarified that laying of electrical cables beyond the distribution point of commercial complex or residential locality shall be a taxable service. 

However, shifting of overhead cables/ wires for any reason, laying of cables alongside road or laying of electric cable between grids/ sub-stations /transformers and laying of electric cables upto distribution points of a commercial complex or a residential locality shall not be covered for the service tax purposes. 

CBEC has vide Circular No. 123/5/2010-TRU dated 24.5.2010 clarified about different activities as under –

 

S.No.	Activity	Status
1.	Shifting of overhead cables/wires for any reasons such as widening/renovation of roads	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
2.	Laying of cables under or alongside roads	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
3.	Laying of electric cables between grids/sub-stations/transformer stations en route	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
4.	Installation of transformer/ sub-stations undertaken independently	Taxable service, namely Erection, commissioning or installation services [section 65 (105] (zzd].
5.	Laying of electric cables up to distribution point of residential or commercial localities/complexes	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
6.	Laying of electric cables beyond the distribution point of residential or commercial localities/complexes.	Taxable service, namely commercial or industrial construction’ or ‘construction of complex’ service [section 65(105) (zzq)/(zzzh)], as the case may be.
7.	Installation of street lights, traffic lights flood lights, or other electrical and electronic appliances/devices or providing electric connections to them	Taxable service, namely Erection, commissioning or installation services [section 65 (105] (zzd].
8.	Railway electrification, electrification along the railway track	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994

  

Service tax on Construction of Canals  

CBEC has vide Circular No 116/01/2009-ST dated 15.9.2009 clarified that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax. 

Construction Contracts as works Contracts and Cenvat Credit

A new sub-rule (2A) is being added in rule 3 in the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 vide Notification 1/2011-ST so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning & installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme. Taxability of cable Laying and related activities. 

Construction Activities in Continental Shelf Covered

Vide Notification No 14/2010-St dated 27.3.2010, it has been provided that the construction and operation of installations, structures vessels for the purpose of prospecting or extraction or production of mineral oil and natural gas in the exclusive economic zone (EEZ) and continental shelf of India and for supply of any goods connected with such activities would be within the scope of service tax.

 

Continuous Service under Point of Taxation Rules

Construction contracts shall in most of the cases fall under the scope of continuous supply of service as defined in rule 2 (c) of the Point of Taxation Rules 2011. Notification No. 28/2011-ST dated 1.4.2011 specifies commercial and industrial construction as a notified service for continuous supply of service. Accordingly, in case of continuous supply service, that is service provided under a contract continuously for a period exceeding 3 months or notified services, the invoice has to be raised within fourteen days of the date completion of each mile stone of payment as per the contract. The point of taxation for continuous supply service shall be date of issue of the invoice (i.e within 14 days from the date of completion of the milestone for payment as per the contract). In case Invoice is not raise within 14 days of the completion of the milestone for payment, then such date of completion of milestone for payment shall be considered as point of taxation. In case of receipt of advance, to the extent such amount the point of taxation would be the date of receipt of advance.

  

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