Beware – Erection, Commissioning and Installation Agencies - The Service Provider

[Surender Gupta]

Before availing the exemption of 67% under notification no. 1/2006, kindly analyze the other conditions.

From 1-3-2006, an erection, commissioning or installation agency can avail the exemption of 67% of the service tax under notification no. 1/2006 dated 1-3-2006. In other words the agency is liable to pay service tax only 33%. But see the conditions for availing this exemption:

1. The contract must be for supplying a plant, machinery, equipment or structures and erection, commissioning or installation of such plant, machinery or equipment.

2. This exemption is optional.

3. The gross amount charged from the customer shall include   the   value   of   the   plant, machinery, equipment, structures or parts and any other material sold by the commissioning and installation agency, during the course of providing erection, commissioning or installation service. 

4. Cenvat Credit on inputs and capital goods is not available.

5. Cenvat Credit on input service is not available.

A careful analysis of the exemption under notification no. 1/2006 with respect to erection, commissioning or installation services reveals the followings:

i. Exemption is specific and not general in nature.

ii. Exemption is available only if supply of plant, machinery, equipment or structures is the part of service agreement.

iii. If any other material (other than plant, machinery, equipment or structures) is supplied or used in course of service, the exemption is not available. For an example, use of paint, erection of structures etc.

iv. From the agreement or contract, it must be established that such plant, machinery, equipment or structure has been sold. Mere use or consumption of plant, machinery, equipment or structure is not enough.

v. Where it is established that such plant, machinery, equipment or structure has been sold, exemption will be of 67% irrespective of the actual value or cost of such item.

vi. There are twelve exemption in the notification no. 1/2006 (as amended), but the word "sold" has been used only in 5^th Item (i.e. with erection, commissioning or installation services)

vii. Before 1/3/2006 the exemption was available under notification no. 19/2003 dated 21-8-2003

Alternatively a service provider may avail the exemption under notification no. 12/2003 dated 20-6-2003. Salient features of this notification are as under: -

1. The exemption granted in this notification is general exemption.

2. Exemption granted by this notification is not restricted merely to supply and sale of plant, machinery, equipment or structures but it covers the entire material or item supplied and sold in the course of providing such service.

3.While availing the benefit of this notification, the service provider has to maintain the documentary proof specifically indicating the value of the said goods and materials.

4. Cenvat Credit on inputs and capital goods are available.

5.  However, the benefit of Cenvat credit on input services is available under this notification.

Conclusion

Before availing exemption either under notification no. 1/2006 or 12/2006 the service provider must compare the pros and cons of the conditions prescribed in the respective notifications.