Outsource or Sub Contract, Single residential unit, Painting, Mega exemption, Service Tax

[Siva Rama]

Dear Sir,

Entry No 29(h) of Mega exemption, provides exemption to “ sub-contractor providing services by way of work contract to another contractor providing work contract services which are exempt.

Entry No 14(b) of Mega exemption, provides exemption to “Services by way of construction, erection, commissioning or installation of original works pertaining to a single residential unit otherwise than as part of residential complex”

As per clause (1) of section 66F of the Act, reference to a service by nature or description in the act will not include reference to a service used for providing such service.

Issue here

A person(Main contractor) has entered into contract with a landowner for construction of single residential unit which is eligible to claim mega exemption benefit. It is a works contract. He undertakes all the work from beginning to end i.e. Earth work excavation, Foundation, Basement, Superstructure, Roofing, Partition walls, Flooring, Plastering, Steel Reinforcement, Electrification, Painting. It is a single contract from beginning to completion.

This main contractor subcontracts painting work to a painting contractor.

My doubt is whether the painting contractor is eligible to claim Mega exemption benefit in the following different context?

1. Context 1 - Agreement between Main contractor and Painter (Pure labour charge)

Here the main contractor only pays labor charges to Painter. Main contractor himself purchases paints and provides to Painter.

In this case, first Section 66F comes to play. Reference to a “Service by way of construction of original works pertaining to single residential unit” will not include reference to a “painiting service (pure labour)” used for providing “Service by way of construction of original works pertaining to single residential unit”. So painter is not eligible to the benefit of Entry no 14(b) of Mega exemption, because of Section 66F.

Exemption to 14(b) is also not available through Entry No 29 (h). Also Entry no 29(h) is not available because, the painter is providing pure labor contract and not a work contract. Entry No 29 (h) is available only if it is works contract.

1. Context 2 - Agreeement between Main contractor and Painter (painter is a work contractor)

Here the main contractor pays both material and labour to the painter. Thus painter is a work contract service.

In this case also, section 66F comes to play. Reference to a “Service by way of construction of original works pertaining to single residential unit” will not include reference to a “work contract service of painiting” used for providing “Service by way of construction of original works pertaining to single residential unit”. So painter is not eligible to benefit of Entry no 14(b) of Mega exemption, because of Section 66F.

But he is eligible to take benefit of Entry no 29(h) because, sub-contractor (here painter) providing services by way of work contract (Here painting work contract service) to another contractor(here Main contractor) providing work contract services(here work contract of construction of single residential unit) which are exempt (here exempted by entry no 14(b).

Thus painter is exempt from service tax.

But if it interpret it as outsourcing and not sub contract, he is not eligible to take benefit of Entry No 29(h). Explained in point 4.

1. Context 3 - Agreement between land owner and painter (Whether work contracts or pure labour contract)

Suppose, if the agreement between landowner and main contractor who is constructing residential unit does not involve painting work. Landowner gives a separate agreement to a painter . In this case the painter is not eligible to take benefit of mega exemption because, his service on standalone basis is not falling in the entry no 14(b). Painting work in this context on standalone basis is not service by way of construction ofsingle residential unit.Here the painting work is service in relation to construction of single residential unit.

Difference between outsourcing and sub contract

1. In the context 2, whether the painting work is to be considered as sub- contract or outsourcing.? Because service provided by a work contractor sub-contractor to a main contractor who is providing exempt service [here 14(b)] is exempted [here 29(h)]. But if it is outsourced contract, then such outsourced contract does not take the colour of main contract and not eligible for exemption.

Suppose principal contractor gets a contract from Government for constructing road of 100KM and he subcontract 10KM to another subcontractor. This road construction work involves many parts (say A,B,C - work layout design, site formation-earth leveling, laying of foundation road, final road laying, drawing divider line speed control lines etc). Here the main contractor has to do all ABC work for 100 KM, out of which sub contractor is doing all ABC work for 10 KMs. The work of sub contractor is same as main contractor. Only difference is the number of KMs. So the sub contractor is eligible to take exemption benefit. Here the both main contractor and sub contractor is providing service by way of construction of roads.

If main contractor has allotted site formation earth leveling work to another contractor for 100 KMs. Then it is an outsourcing of work not sub contract.The outsourced contractor may be a work contractor(He may be providing both material and service). Here the outsourced work contractor is not eligible to take exemption, because the service provided by outsourcer is in relation to “construction of roads” and not “by way of construction of road”.

By reading the above 2 para, when coming to our contract of construction of single residential unit.

• If the main contractor has taken contract with different land owners (say 10 land owners – all separate agreement at different different places. Not Villa) for construction of single residential unit and he sub-contracted 2 house to another contractor , that another contractor is a sub contractor work contractor and he is eligible to take mega exemption benefit 14(b) through 29(h).

• But if the main contractor has taken contract with 10 different landowners for construction of single residential unit, and he has outsourced painting work (includes both material and labour- work contract, Not pure labour alone) to a person for all these 10 houses, then it is outsourcing of part of construction work. Hence the painter is not eligible to take benefit of mega exemption 14(b) through 29(h).

Whether the painting work is to be interpreted as sub contract or outsource. Kindly advice.

Regards,

Siva.

Posts / Replies

[KASTURI SETHI]

Dear Sir,

The high quality of your drafting, interpretation and analysis of Service Tax laws indicates that you are a highly qualified person. (must be advocate.It is my assessment in the absence of your profile not displayed on TMI). You know the answer very well. So you need not reply here. You should play the role of an expert and not of querist on TMI. You are just seeking another opinion and nothing else.That is why no expert has replied to your query.

However, I cannot resist my temptation of posting my opinion. In the scenario sketched by you, the paint work will be covered under the term of 'Sub-contractor' and not 'Outsourcing'. I mean to say the department will not allow any benefit under the guise of 'Outsourcing' notwithstanding there is a gulf of difference between both terms.

I am all praise for your understanding, interpreting, analyzing laws and drafting.

[Ganeshan Kalyani]

I am also of the view that the painting work is a sub-contracting.