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Execution of a Work Contract [Sec 66E(h)]
Execution of a Work Contract [Sec 66E(h)]

Declared Services Page

INTRODUCED: With Effect From 1st July 2012
 
Contents
Definition
Scope
Clarification
Valuation
Person Liable To Pay Service Tax
Relevant Notifications/Circulars
 
 
DEFINITION:

According to Section 65B (22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E.

According to Section 66E (h) service portion in the execution of a works contract In terms of Article 366 (29A) of the Constitution of India transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods.

According to Section 65B (54) "works 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 movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

 
Scope
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Works contract has been defined in Section 65B of the Act as 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, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land.

Typically every works contract involves an element of sale of goods and provision of service. It is a well settled position of law, that a works contract can be segregated into a contract of sale of goods and contract of provision of service. This declared list entry has been incorporated to capture this position of law in simple terms.

 

CLARIFICATION

Applicability of Works Contract in relation to plant, machinery, equipment or structures attached to earth

Erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise would be treated as a works contract if transfer of property in goods is involved in such a contract and the machinery equipment structures are attached or embedded to earth after erection commissioning or installation.

Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth. If contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring involve provision of materials as well, would be covered under ‘works contract’.

Composition Scheme under Works Contract

In cases of composite transactions, i.e. transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction then the nature of such transaction would be determined by the application of the dominant nature test. Although the judgment was given in the context of composite transactions involving an element of transfer in title of goods by way of sale and an element of provision of service, the ratio would equally apply to other kind of composite transactions involving a provision of service and transfer in title in immovable property or actionable claim.

Under the negative list scheme, specified descriptions of taxable services have been done away with and transactions that involve transfer of title in goods or are ‘deemed to be sale of goods’ under the Constitution are excluded from the ambit of service by the very definition of service. Therefore if, in the course of providing a service, goods are also being sold by a service provider for which there is such documentary proof as to make the sale a distinct and a separate transaction then the activity of sale of such goods gets excluded from the definition of service itself.

Position in case of Separate Contracts

Even for the sale of any equipment for which a separate contract for warranty or after sales services or maintenance is entered the discernible sales portion is not to be included in the discernible portion of the value of service. For all practical purposes these will be two separate contracts. However for artificial segregation of value between goods and services, to save either of the taxes on goods or services, the benefit was neither available earlier under the stated notification and the position continues to be the same under the new regime.

 
 
SERVICE TAX VALUATION:
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A simplified manner for determining the value of service portion of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006. In brief the value of the service portion is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. As per this scheme the value of the service portion, where value has not been determined in the manner provided in Rule 2A (i), shall be determined in the following manner:-

(A) In case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract. Original works means all new constructions, all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable and erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.

(B) In case of works contracts entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent of the total amount charged for the works contract.

(C) In case of other works contracts, not covered under sub-clause (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty percent of the total amount charged for the works contract.

The Explanation (c) to Rule 2A (i) of the Valuation Rules states that where value added tax or sales tax has been paid or payable on the actual value of property transferred in 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 transfer of property in goods transferred in the execution of the said works contract, for determining the value of service portion in the execution of works contract service under this clause.

 
PERSON LIABLE TO PAY SERVICE TAX:

As per Notification No. 30/2012-ST dated 20.06.2012 issued under Section 68 (2) of the Finance Act, 1994 in respect of Works contract service provided by any individual, Hindu Undivided Family or proprietary firm or partnership firm, whether registered or not, including association of persons located in the taxable territory, to any company formed or registered under the Companies Act, 1956 or a business entity registered as body corporate located in the taxable territory, the tax liability would be shared equally by the service provider and service receiver.

 
RELEVANT SERVICE TAX NOTIFICATIONS:
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Notification No. 30/2012-S.T., dated 20-06-2012

 
RELEVANT SERVICE TAX CIRCULARS/INSTRUCTIONS/TRADE NOTICES:

Taxation of Services - An Education Guide dated 20.06.2012

 

Case Laws Related

  • STO 2006 SC 19
  • Service Tax v/s Sales Tax: Sale of Mobile Phone Connections: The question of delivery of possession which is related only to situs and not to subject-matter of taxation which is a transfer of right to use goods. In the present case, as no goods element are involved, the transaction is purely one of service. There is no transfer of right to use the goods at all. The imposition of sales tax on any facilities of the telecommunication services is untenable in law.

     
     

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