WORKS CONTRACTS UNDER GST
By: – Srikanth Rao
Goods and Services Tax – GST
Dated:- 3-11-2017
Taxation of works contracts has been a vexed issue in India over the years leading to considerable litigation. The main reason for this has been tax jurisdiction being split between Union and States with Services being taxed by the former while goods (transfer or sale thereof) were being taxed by the latter. With works contracts being composite supply contracts involving elements of goods as well as services, identification of the amount which should suffer tax under each of the concerned jurisdictions was always an issue. This was also complicated by the fact that various States had come out deeming provisions in terms of valuation under which specific categories of works contracts could be artificially split in terms of value to identify amount to be subjected to VAT at their end where value of goods and services could not be ascertained from books individually.
These deeming
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ues had to be sorted out at the time of introduction of the new GST law if old trends in terms of litigation had to be stopped. GST introduced across the country with effect from 1st July 2017 has sought to address the problem. While one reason for the old problem in terms of tax jurisdiction has been taken care of due to goods and services now being taxed by both Union as well as States, the other significant point has been the idea of restricting operation of the concept of works contracts to immovable property related contracts alone. A reference to Section 2(119) of Central Goods & Services Tax Act (CGST) Act 2017 would reveal that works contract would mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such
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by Supreme Court in ( 2010 (10) TMI 1153 – SUPREME COURT ): – Cantilever assembly which comes into existence at the point of assembly of iron tubes of specified length in a cantilever design at a fixed place on the pole results from works contract and is not goods but a construction design. Beams, girders, bracket etc. become cantilever or cantilever assembly when fixed in a particular manner as a part of construction. Upon fixing on the iron mast/pole, this assembly becomes part of a permanent structure and cannot be called goods, as they cannot be moved about like any goods. They become part of immovable property.
* Triveni Engineering & Industries Ltd Vs CCE Nagpur (2000 (8) TMI 86 Supreme Court of India): – Installation or erection of turbo alternator on the concrete base specially constructed on the land when its removal resulted in separation of steam turbine and alternator (components of turbo alternator), meant that installation or erection of turbo alternator on the platform
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Engineering Co. Ltd Vs CCE Mumbai (2002 (8) TMI 107 Supreme Court of India): – Spray paint booth held to be immovable property as outside portions of the structure were embedded in earth and dismantling would result in damage to structure.
* Virdi Brothers Vs CCE Indore (2001 (5) TMI 918 CEGAT New Delhi) affirmed in (2006 (12) TMI 3 Supreme Court of India): – Refrigeration/cold storage plant held to be immovable property as various bought out machineries were permanently fixed to the building by concrete foundation and they formed the refrigeration plant along with the building wherein they were affixed. Some of the parts of machineries and pipes fixed therein could not be separately taken as refrigeration plant.
While we have looked at some of the decisions in the context of movability or immovability of goods, the way in which contracts are executed would also be relevant as it would alter tax impact under GST. This is owing to the fact that composite contracts/supplies in the nat
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upply component would have to be taxed considering the rates applicable to goods based on their HSN Codes while service element would be taxed separately.
Whether or not a contract would be composite works contracts or one of supply or installation would have to be gauged based on facts and circumstances of each case including the terms of the contract i.e. especially nature of property involved as well as timing of transfer of ownership/title in goods. This is where due care is needed as any error in classification could result in substantial demand for the tax payer at a later date. The classification issue would also be complicated by the fact that the peak rate as well as slab rates for services and goods respectively are not the same under GST.
We could now look at some of the past judicial precedents in India which would help us in understanding the difference between a contract for sale of goods and one for work and labour also involving transfer of property in goods meriting
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ract for sale and the one for installation would be a contract for labour and service. But, a composite contract for supply and installation, has to be treated as a works contract, for it is not a sale of goods/chattel as such. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the grounds that the components are brought to the site, i.e., building, and prepared for delivery. (M/s Kone Elevator India Pvt. Ltd Vs State of Tamil Nadu & Others (2014 (5) TMI 265 Supreme Court))
* Supply, installation, testing and commissioning of power supply, distribution and SCADA system for Delhi Metro Rail – Provision of transformers, switchgears, high voltage cables by sourcing them from vendors designated in agreement and approved by customer and as per specifications and quantities in Bill of Goods in Bid Document can be said to be supply in relation to works contract execut
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arnataka & Another (2013 (9) TMI 853 Supreme Court))
* Fabrication of rolling shutters involving installation – Fabrication of rolling shutters held to be works contract as rolling shutters came into being when affixed to walls post masonry work. Where the contract is primarily one for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract the contract is one for sale of materials. Where the materials sought under contract have no separate identity as a commercial article and it is only by bestowing work and labour upon them, (as for example, by affixing them to the building in case of window-leaves or wooden doors and windows) that they acquire commercial identity, it would be prima facie indicative of a works contract. So also where certain materials are not merely supplied but fixed to an immovable property so as to become a permanent fixture and an accretion to the
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uddas Ltd (1967 (5) TMI 61 Supreme Court of India)).
One of the issues that is likely to continue under GST is the legal position to be adopted where part of the work is sub-contracted. There have been instances where the Honorable Supreme Court has taken the view that the principal contractor would not be liable on the portion of work undertaken by the sub-contractor even if there is no privity of contract between contractee and the sub-contractor. This is on account of the fact that the property in goods passes by way of accretion to the contractee which would mean there being no deemed sale/transfer from sub-contractor to principal contractor. This view has been followed in State of Andhra Pradesh & Others Vs Larsen & Toubro & Others (2008 (8) TMI 21 Supreme Court) as well as in Larsen & Toubro Limited Vs Additional DCCT & Another (2016 (9) TMI 519 Supreme Court) with both decisions being based on decision of the Supreme Court in Builders' Association of India & Others Vs UOI & Ot
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Advances received would have to be followed by issue of receipt vouchers u/s 31(3)(d).
As far as construction related services are concerned readers may note that there are two clauses in Schedule II to CGST Act 2017 to be read in conjunction with Section 7(1)(d) of the Act. These are clauses 5(b) and 6(a) which would cover pure labour services and works contracts respectively. Clause 5 of Schedule III to be read in conjunction with Section 7(2)(a) deals with sale of land and building (other than those involving construction related service under agreement with customer). Lease, tenancy, easement or license to occupy land or rental of buildings has been covered under clause 2 of Schedule II meaning these would be within concept of supply attracting GST. This is in contrast to the view that dealing in rights pertaining to immovable property would also be akin to a transaction in immovable property itself (Salmond on Jurisprudence (12th Edition by P.J Fitzgerald)).
This would bring in
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