Works Contact Services - Service Tax Practice Manual / Ready Reckoner - Service Tax

Chapter 8 Works Contact Services Effective date: 1.7.2012 Scope of Declared Service - Section 66E (h) Service portion in the execution of a Works Contract. Meanings and Definitions: Section 65B (54) - w orks 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, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. Analysis: This entry covers only those contracts in which transfer of property in goods involved is liable to tax as sale of goods. Means basic requirement is that the contract must attract VAT on the goods portion. To understand works contract, one important decision by Supreme Court need to be discussed: Bharat Sanchar Nigam Limited vs Union of India 2006 (3) TMI 1 - Supreme court . The relevant paras 42 and 43 of the said judgement are reproduced below: 42 .Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases, where splitting of the service and supply has been constitutionally permitted in Clauses (b) and (g) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split. For example the clauses of Article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. 43 . The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A) , unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test. The following principles emerge from the said judgment for ascertaining the taxability of Composite transactions- Except in cases of works contracts or catering contracts [exact words in article 366(29A) being - service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service ] composite transactions cannot be split into contracts of sale and contracts of service. The test whether a transaction is a composite transaction is that did the parties intend or have in mind that separate rights arise out of the constituent contract of sale and contract of service. If no then such transaction is a composite transaction even if the contracts could be disintegrated. The nature of a composite transaction, except in case of two exceptions carved out by the Constitution, would be determined by the element which determines the dominant nature of the transaction. -If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such. - If the dominant nature of such a transaction is provision of a service then such transaction would be treated as a service and taxed as such even if the transaction involves an element of sale of goods. In case of Kone Elevators India Pvt. Ltd. V. State of Tamil Nadu, 2014 (5) TMI 265 - SUPREME COURT , it was held that dominant intention of parties is not relevant anymore and that what was necessary to see is whether there are goods and services involved and noting more. It is also clear that in pure sale contract, there cannot be levy of service tax and in indivisible contracts i.e. works contracts, Central Government can levy service tax on labour/ skill portion of the contract. In case of works contracts and service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service the dominant nature test does not apply and service portion is taxable as a service This has also been declared as a service under section 66E of the Act . If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued. The principles explained above would, mutatis mutandis, apply to composite transactions involving an element of transfer of title in immovable property or transaction in money or an actionable claim. Clarification by the Board (Taxation Guide - Guidance Note - 8 - Exemptions dated 20.06.2012) 6.8.1 Would labour contracts in relation to a building or structure be 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. 6.8.2 Would contracts for repair or maintenance of motor vehicles be treated as works contracts ? If so, how would the value be determined for ascertaining the value portion of service involved in execution of such a works contract? Yes. Contracts for repair or maintenance of moveable properties are also works contracts if property in goods is transferred in the course of execution of such a contract. Service tax has to be paid in the service portion of such a contract. 6.8.3 Would contracts for construction of a pipe line 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. 6.8.4 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. 6.8.5. 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. 6.8.6 Is the definition of works contract in clause (54) of section 65B in line with the definition of works contract in various State VAT laws? The definition of works contract in clause (54) of section 65B covers such contracts which involve transfer of property in goods and are for carrying out the activities specified in the said clause (54) in respect of both moveable and immoveable properties. This is broadly in consonance with the definition of works contract in most of the State VAT laws. However, each State has defined works contracts differently while dealing with works contract as a category of deemed sales. There could, therefore, be variations from State to State. For service tax purposes the definition in clause (54) of section 65B would alone be applicable. 6.8.7 What is the way to segregate service portion in execution of a works contract from the total contract or what is the manner of determination of value of service portion involved in execution of a works contract? For detailed discussion on this topic please refer to Guidance Note 8, in particular point no 8.2.