July 22, 2014 Works Contract Under GVAT Act, 2003 CA Prakash B Thakkar Prakash Thakkar & Co. Chartered Accountants Baroda

July 22, 2014

Works Contract Under GVAT Act, 2003

CA Prakash B Thakkar Prakash Thakkar & Co.Chartered AccountantsBaroda

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Background

Judicial Pronouncement

Statutory Meaning

Taxable Event

Calculation of Sale Price under GVAT Act

VAT Liability of Building Contractors

Input Tax Credit

Tax Deduction at Source

Interstate Works Contract

Calculation of Sale Price under CST Act

Composition Scheme of WC under GVAT Act.

Contents

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Background

Sales Tax on Indivisible Contract State of Madras v Gannon Dunkerly & Co., (1958) 9 STC 353 (SC)

• Supreme Court while interpreting the expression “sale of goods” held that, the expression "sale of goods” as used in the entries in the Seventh Schedule to the Constitution has the same meaning as in the Sale of Goods Act, 1930. In a building contract, contractor has to construct building in terms of specification of agreement and entitled to receive consideration as provided therein. There was neither contract to sale the material used in the construction nor the property passed therein as the movables.

By virtue of this judgement, in the case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of WC as it has been held that there is no sale of the materials as such and the property in them does not pass as moveables.

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Constitutional Amendment46th Amendment made to the Constitution from February 2, 1983

In Article 366 a definition of "tax on the sale or purchase of goods by inserting a new clause (29A). The definition specifically include within the scope of that expression tax on---(i) ….(ii) the transfer of property in goods involved in the execution of a works contract;(iii) …..

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By this amendment the concept of deemed sales was introduced. Under the deemed Sale, an artificial break up of indivisible works contract has to be made to arrive at the ‘material’ value and the ‘labour’ value of the contract. This permitted the States to levy tax on the Sale of goods involved in execution of a work contract.

Meaning – WC – Judicial Pronouncements

• It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and customs of trade.

• Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work.

• The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive.

State of Gujarat v. Variety Body Builders (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC).

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• When and how the property in a transaction passes to the customer : is it by transfer at the time of delivery of the finished article as a chattel or by accession during the process of work on fusion to the movable property of the customer?

• If a major component of the end product is the material consumed in producing the chattel and skill & labour are employed for converting the main components into the end products, the skill & labour incidental, the delivery of the end product would constitute a sale. On the other hand, if the main object of the contract is to avail the skill & labour of the seller, though some material and components may be incidentally used, the transaction would be a contract for works and labour.

[State of Maharashtra v Sarvodaya Printing Press, Nagpur (1999) 114 STC 242 (SC)]

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“Whether the contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract…”

[Vide Para 64 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013) 65 VST 1 (SC)]

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“In our opinion, the term works contract in Article 366(29- A)(b) is amply wide and cannot be confined to a particular understanding of the term or to a particular form. The term encompasses a wide range and many varieties of contract. The Parliament had such wide meaning of works contract in its view at the time of Forty-sixth Amendment. The object of insertion of clause 29-A in Article 366 was to enlarge the scope of the expression "tax on sale or purchase of goods" and overcome the judgement in the case of State of Madras v Gannon Dunkerly & Co; (1959) 9 STC 353 (SC)”

Vide Para 76 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013) 65 VST 1 (SC)]

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“For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract.”

Vide Para 94 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013) 65 VST 1 (SC)]

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“At this juncture, it is condign to state that four concepts have clearly emerged. They are (i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;(ii) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable; (iii) the term “works contract” as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and (iv) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.”

Vide Para 42 – Kone Elevators India Pvt. Ltd. V State of Tamilnadu and others dtd 6th May 2014

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“…. It is necessary to state here that if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. …. The conclusion, as has been reached in Kone Elevators (2010) 14 SCC 788), is based on the bedrock of incidental service for delivery. It would not be legally correct to make such a distinction in respect of lift, for the contract itself profoundly speaks of obligation to supply goods and materials as well as installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works contract are satisfied. …..

Vide Para 64 – Kone Elevators India Pvt Ltd v State of Tamilnadu & others (SC) judgement dtd 6th May 2014]

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Sale of Goods vis-a-vis WC

Sale of Goods Works Contract

Taxed as Normal Sale : Seller & Buyer Taxed as Deemed Sale : Contractor & Contractee

Absolute property of the maker until produced / manufactured. Later on sold to buyer

It is never an absolute property of the maker. Materials used in WC may be makers absolute property

The sale is ‘chattel as a chattel’ i.e. ‘goods’ are sold as ‘goods’ (Hindustan Aeronatics Ltd. [55 STC 314 (SC)]

Article produced becomes the property of buyer even sometime without first becoming property of the maker.

Primary function - supply of materials Incidental - work or service (However note L&T 65 VST 1)

Primary function - work and labour Incidental - materials are supplied

Goods remain same before and after the delivery of goods

Goods before the delivery and after execution of WC are different, many times in different form also.

TDS provisions are not applicable TDS provisions are applicable13

1. Supply of Material and Labour : Works Contract (e.g. Construction of a building, roads, bridges, dams, erection of Plant & Machinery, Processing jobs, Job works, Repair jobs, Electrical Fittings, Annual maintenance Contracts (AMCs). Installation of Elevators, Repairs of Vehicles, Re-treading of old tyres, Customized Printing Jobs, Electro Plating, electro-galvanizing, anodizing etc.)

Types of contract

2. Supply of labour and supply of materials is incidental to the contract (e.g. Painting, cleaning, overhauling, lubricating, greasing of an old machinery etc.) These types contracts were not taxable under the Sales Tax Regime (Material Value < 15%, ) but now under VAT regime consideration in relation to material used in such contract is taxable irrespective of whatever small magnitude of material is passed on.

The respondent dealer was engaged in printing of lottery tickets on papers supplied by customers. Dealer used ink and other processing materials including chemicals held taxable to the extent of value of ink, chemicals.

[2011] 41 VST 102 (All) Commissioner, Trade Tax, U.P., Lucknow V. Aristo Printers Pvt. Ltd.

Types of contract

3. Pure Labour Contract –Not a Works contract (e.g. Semi-finished material supplied to Job-worker for further processing, tailor doing stitching work)

It may involve materials for executing contract but there is no transfer of property in goods, not taxable

The respondent company undertook contracts for making aluminum alloys out of aluminum supplied by customers. Silicon and copper were consumed in the process of manufacture of aluminum alloys and lost their identity. no property could be said to pass to the customer. Thus there was no transfer of goods in execution of a works contract of aluminum alloys.

[2010] 32 VST 56 (Bom) Commissioner of Sales Tax, M.S., Mumbai V. Moonlight Metal Industries Pvt. Ltd.

Types of contract

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WC – Statutory Meaning

Works Contract – Statutory Meaning

• The GST Act, 1969 did not contain any definition of WC except in indirect way and that to partly. Sec. 55A of the GST Act, permitted payment of composition money at prescribed rates for WCs. These contracts, mentioned in the said notification, by implication, could be construed as WCs.

• For the first time vide Finance Act, 2005, definition of WC was brought into The CST Act, 1956 vide Section 2 (ja) as under:

“Works Contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property”.

Works Contract – Statutory Meaning

The GVAT Act contains the definition of the term “WC”, by way of Explanation (ii), to Sec. 2(23) while defining the term ‘Sale’. Relevant part of the defn. is reproduced as under.

Sec. 2(23) “Sale” means a sale of goods made within the State ….. -

(a) transfer, otherwise than in pursuance of a contract, …….

(b) transfer of property in goods (whether as goods or in some other form) involved in execution of a WC,

(c) to (j) ….,but does not include a mortgage, ……….. Explanation – (i)…..

(ii) for the purpose of sub-clause (b), the expression “Works Contract” means a contract for execution of works and includes such Works Contract as the State Government may, by notification in the Official Gazette, specify:

Vide Noti. (GHN-23) VAT 2006/(S.2)(23)(1)/TH dtd 31/03/06 15 types of “WCs” have been notified.

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WC – Taxable Event

Taxable Event under WC

• Taxable event is transfer of property in goods (whether as goods or in some other form) involved in the execution of WC. The rate of tax will be applicable by the nature of goods that is incorporated.

• The contractor becomes liable to pay vat ordinarily when, the goods or materials are used in the contract. It is not necessary to wait till the final bill is prepared for the entire work.

• Any stipulation in the agreement that transfer of property in the goods involved in the execution of the contract would take place only on complete execution of contract etc, would have relevance only for determining whether the contractor has fulfilled his obligation under the contract.

In WC property would pass on accretion or accession as and when it takes place and not in conglomerate..

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Works Contract –Taxable Event – Case Study

(1) K & Co., has launched a scheme for residential flats. On the first day it has received a sum of Rs. 5.00 Crores as booking advance. He has not commenced any construction activity nor has purchased any material. Whether K & Co., is liable to obtain registration under GVAT Act, in view of rule 28(e) which reads as under

(2) Rule 28 (e) The amount shall be considered to have been received as under:-

(i) from the date on which it becomes due as per the schedule of payment in respect of contracts which provided for a schedule of payment,

(ii) the date on which the bill is prepared or the amount is received whichever is earlier in respect of contracts, which do not provide for schedule of payment.

(2) In the above case if K & Co. obtains voluntary registration, what shall be the liability on the above advance of Rs. 5.00 Crore.

Works Contract –Taxable Event – Case Study• Opinion :- Taxable event is transfer of property in goods (whether as

goods or in some other form) involved in the execution of WC. VAT is payable when the goods or materials are used in the contract. It is not dependent on when the goods purchased or when the payment received or when the Bill issued.

• Tax Rate will depend upon nature of goods that is incorporated in WC.• Any stipulation in the agreement that transfer of property in the goods

involved in the execution of the contract would take place only on complete execution of contract etc, would have relevance only for determining whether the contractor has fulfilled his obligation under the contract

• In view of the above for the issue in hand K & Co., is not required to obtain registration as it has not crossed threshold limits of turnover. However, it will be liable to regn/tax when actually work is carried out.

• If K & Co. obtains voluntary registration, then also advance of Rs. 5.00 crore will be taxable when work is carried out to that extent.

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WC – Calculation of Sale Price

Calculation of Sale Price under Gujarat VAT Act

Valuation options under Works Contract

Actual Labour

deduction Standard Labour

deduction

Composition

Calculation of Sale Price of Works ContractActual labour deduction – Deductions allowed where books of accounts are maintained – Gannon Dunkerly & Co., 88 STC 204

(a) Labour charges & Service charges

(b) Sub-contract charges

(c) Planning, designing and architect's fees

(d) Machinery on hire and tools used

Depreciation – L&T 34 VST 53 Karnataka HC

(e) Cost of consumables, the property in which is not transferred ( e.g. Water Electricity, Fuel, Lubricating Oil, Electrodes etc)

(f) Cost of establishment to the extent to it is relatable to the supply of labour and services (e.g. accommodation to labour and other facilities at job site).

(g) Other expenses relatable to the supply of labour and services (in the nature of overheads, rent, salary, telephone charges)

(h) Profit earned by the contractor to the extent it is relatable to the supply of said labour and services (Difference between the value recovered from the contractee and cost incurred by the contractor)

Indivisible WC – in case separate books of A/c’s are not maintained –

Lump sum deductions Rates – Rule 18AA

Calculation of Sale Price of Works Contract* Amount to be deducted from the contract price (expressed as a percentage of contract

Description of Works Contract Percentage of Deduction

Construction, improvement, repair of any building, road, bridge, dam, canal or other immovable property

30%

Installation, fabrication, assembling, commissioning or repair of any P&M

15%

Installation, fabrication, assembling, commissioning of Air conditioner, air cooler

10%

Assembling, fitting, re-assembling, improving, producing, repairing, furniture, fixtures (interior decoration)

20%

Construction, fabrication, assembling, commissioning, repairs of bodies on chassis of motor vehicles

20%

Overhauling or repairing or dismantling of any motor vehicles, vessels of every description meant for plying on water or any vessel propelled by mechanical means, any air craft, etc

20%

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Lump sum deductions Rates - Rule 18AA

Calculation of Sale Price of Works Contract

* Amount to be deducted from the contract price (expressed as a percentage of contract pri


Fitting out, assembling, altering, ornamenting, re-assembling, blending, finishing, furnishing, improving, processing, otherwise treating, adapting or fabricating of any goods

15%

Erection, installation and commissioning of wind turbine generator 30%

Fixing of marble, slabs, polished granite stones and tiles other than mosaic tiles

20%

Fixing of sanitary fittings and plumbing 15%

Painting and polishing 20%

Laying of pipes excluding plumbing 20%

Tyre retreading 30%

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Lump sum deductions Rates - Rule 18AA

Calculation of Sale Price of Works Contract


Supply of goods in providing know-how, designs, labour, supervision, inspection, training or other services with any of the operations specified above

20%

Dyeing and printing of textiles 30%

Printing contracts 30%

Any other works contract 20%

To arrive at Taxable turnover above rates are applied after deducting payment made to sub contractor.

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Calculation of Sale Price of Works ContractComposition Option – Section 14A - For contractors who do not wish to pay tax based on the specific formula or after considering the lump sum deductions

• Section 14A provides option to pay lumpsum tax on total turnover of WC at the rates specified as under. 0.5% Processing of polyester textile fabrics including bleaching , dyeing and printing thereof 0.6%- Construction contracts relating to roads, buildings, bridges, pipeline laying, dams, etc. 2.0% -Other contracts including contracts for erection, installations etc

• Dealer can opt for composition of tax either contract wise or on yearly basis.

• Restrictions: ITC not available to contractor (also to contractee)PT on URD Purchases, in addition to Composition Tax.Contractor not to issue TAX InvoiceCannot purchase goods by way of import/interstate/BT

Goods supplied by the contractee-Free of Cost

Where the materials are issued free of cost by contractee to the contractor for ensuring project quality what will be the VAT implication?Opinion:- In a works contract where any goods supplied by the contractee to the contractor for execution of Works Contract, Value of such goods cannot be included in the taxable turnover of the contractor [Builders Association of India (88 STC 204 (SC)]

Goods supplied free of cost to be used in the works contract, there will be no sale [ONGC v CST UP 1996 102 STC 466 (All)]

Mukhya Rail Path Nirishak, Saharanpur v The commissioner of Trade Tax UP, Lucknow [2007] NTN (Vol. 33) -86 and VS Engineering Pvt. Ltd (2014) 68 VST 87 also confirms the same view.

In Ts Tech Sun (India) Limited [2008] 15 VST 559, Supreme Court held that for sales tax purpose, consideration for transfer of property in goods is to be considered and cost of manufacture is irrelevant.

Goods supplied by the contractee-Price Recovered

Where the materials are issued for a fixed price to be recovered or adjusted in the bill of the contractor what will be VAT implication?

Opinion: - Where contractee supplies goods, cement, steel etc to the contractor for use in the works contract for a fixed price to be recovered or adjusted in the bill of the contractor, such supply is sale of the contractor. [Rashtriya Ispat Nigam Ltd V/s State of A.P [1966 102 STC 454 (A.P.)] Supply of material by contractee to contractor for use in works contract, for consideration is sale [Cooch Bihar Contractor association V/s State of W.B. [1996 103 STC 477 (SC)] also refer [2010] 32 VST 355 (Cal) Gourangalal Chatterjee V. State of West Bengal and others.

To avoid tax being levied on Free Supply goods

Contractor to ensure following clauses in the contractThe free issue material supplied by the Contractee shall be held in the custody of the contractor as bailee.

Contractor to provide periodical statement of Consumption/ Stock of free material supplied.

Material in possession of the contractor shall not be diverted for any other use.

The cost of the free issue material supplied by contractee will be outside the scope of contract and shall not be the part of consideration to be paid to the contractor.

The contract may contain a stipulation to the effect that specified material will be supplied by the contractee free of cost

Whether Freight forming part of sale price?

Where Ready Mix Concrete (RMC) is supplied to the contractee on site in the vehicle/machine and RMC is filled at the requisite place as per the requirement of Contractee, whether freight charges incurred for the same will form part of the sale price and therefore liable to VAT? Opinion: -Definition of Sale Price in Sec 2(24) reads as under:“sale price” means the amount of valuable consideration paid or payable to a dealer or received or receivable by a dealer for any sale of goods made including the amount of duties lived or leviable under the Central Excise Tariff Act, 1985 or the Customs Act, 1962 and any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof and includes,- …….From the facts of the case it appears that delivery is completed only on application of RMC at requisite place, therefore Freight will be added in sale price and subject to VAT.

Deduction of payment to sub-contractors in WC Larsen & Toubro Ltd and anothers v State of AP and Ors. 148 STC 616

• The property in goods passes from sub-contractor to employer directly on theory of accretion.

• There is only one sale from sub-contractor to employer directly and not two sales (1) from sub-contractor to main contractor and (2) from main contractor to employer.

• The sub contractor is an agent of main contractor.

• Also note that amount paid to sub-contractor is available as deduction from total turnover of main contractor.

• Rule 18AA provides for deduction only if the sub-contractor is RD.

• Rule 28(8)(c) provides for deduction of payments to subcontractor in composition option also.

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Back to Back Sub Contracting

A construction contractor is giving back to back (100% work) sub-contract to another contractor, what will be the tax liability of Main Contractor and Sub-Contractor.Opinion: -A sub-contract, if granted validly and in terms of the provisions of the contract entered into between the principal and the main contractor, is a part of the main contract itself. Therefore, whether the goods are supplied by the sub-contractor or by the contractor himself, title thereto passes to the principal directly in execution of the main contract. Thus, the goods in question would be liable to sale tax only once. If the sub-contractor had already been assessed to sales tax on goods supplied by him in execution of his portion of the contract, no further sales tax would be leviable in relation thereto, on the main Contractor.75 STC 211 (Pat) Hindustan Dorr-Oliver Ltd. and Another V. Union of India and Others

Entire contract is sub-contracted – VAT Liability

Issue:- Mr. X a contractor has been awarded a contract for a total consideration of Rs. 100.00 Crores. He assigns entire contract to Mr. Y sub-contractor for Rs. 90.00 Crores. What will be VAT liability of Mr. X and Mr. Y where:-

1. X and Y both has opted composition. 2. X & Y both has not opted composition. 3. X has opted composition but Y has not opted Composition. 4. Y has opted composition but X has not opted composition.5. What shall be the consequences if Mr. X is not RD6. What shall be the consequences if Mr. Y is not RD


Opinion: - Tax liability of Mr. X – Main Contractor • Not opted for composition.

The property in goods passes from sub-contractor to employer directly on theory of accretion. The sub contractor is an agent of main contractor. There is only one sale from sub-contractor to employer directly and not two sales (i) from sub-contractor to main contractor and (ii) from main contractor to employer. (17 VST 1–L&T SC) – In view of above there is no tax liability on X as he has not made any sales. Turnover of entire 100.00 Crore is exempt.

• Opted for CompositionRule 28(8)(c): The composition money shall be payable by the dealer on the full amount received by him at any time in respect of those contracts for which permission for composition has been granted after deducting the amount paid by way of price for entire sub-contract, if any, made with sub-contractor. Liability on Rs. 10.00 Cr.


Opinion: - Tax liability of Mr. X – Main Contractor • Y is Registered/Un Registered Dealer.

Rule 18AA(1) : The value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract shall be determined by deducting the amounts paid by way of price for sub-contract made with a registered dealer, if any, pertaining to the said works contract. In view of the above Sub contractor should be RD , but no such condition should be enforced by making rule, which is inconsistent with the principle of accretion theory. The department has got right to tax URD sub-contractor, but cannot deny deduction to Main Contractor which is otherwise available.

VAT liability of Mr. Y–Sub Contractor Composition opted/not optedSub Contractor is liable for VAT on Rs. 90.00 Crores if he has opted composition, If he had not opted composition he will be entitled to get deductions of labour charges and tax will be charged only on the value of transfer of property involved in the execution of WC.

What if X is RD/URD – No difference in tax liability of Sub Contractor.

(Amt Rs. In Crores)

Particulars Income (Rs.) Exps (Rs.)Eligible Deductions

Sales 1000Purchase 300

Sub-Contractor Exps 300 Sub-Contractor Exps 300

Labour Exps 100 Labour Exps 100

Admin Exps 75 Admin Exps-relatable to supply of labour

40

Finance Charges 10 Finance Charges-relatable to supply of labour

10

Depreciation - Plant & Machinery

50 Depreciation - Plant & Machinery

50

Depreciation - Others

10 Profit on Labour - Reasonable Management Estimate

75

1000 845 Total Eligible Exps 575

Deemed Sales/Taxable Turnover 425

Rate Wise Purchase Classification Ratio

Taxable Turnover bifurcation in the ratio of Purchases Vat Payable

Purchases Taxable @ 5% 200 66.67% 283.33 14.17Purchases Taxable @ 15% 100 33.33% 141.67 21.25Total 300 100.00% 425.00 35.42Less : ITC Admissible 25 25Net Tax Payable 10.42

Project A - Financial Figures

Actual Deduction - Option

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(Amt Rs. In Crores)

Particulars Income (Rs.) Exps (Rs.)Eligible Deductions

Sales 1000Purchase 300

Sub-Contractor Exps

300 Sub-Contractor Exps (Regd under VAT Act

300

Labour Exps 100 Labour Exps @ 30% after deducting sub contractor exps

210

Admin Exps 75

Finance Charges 10

Depreciation - Plant & Machinery

50


10

1000 845 Total Eligible Exps 510

Deemed Sales/Taxable Turnover 490

Rate Wise Purchase Classification Ratio

Taxable Turnover bifurcation in the ratio of Purchases Vat Payable

Purchases Taxable @ 5% 200 66.67% 326.67 16.33Purchases Taxable @ 15% 100 33.33% 163.33 24.5Total 300 100.00% 490.00 40.83Less : ITC Admissible 25 25Net Tax Payable 15.83

Standard Deduction - Option


(Amt Rs. In Crores)

Particulars Income(Rs.) Exps (Rs.)Eligible Deductions Rs.

Sales 1000Purchase 300Sub-Contractor Exps

300 Sub-Contractor Exps (Regd under VAT Act

300

Labour Exps 100Admin Exps 75Finance Charges 10Depreciation - Plant & Machinery

50


10

1000 845 Total Eligible Exps 300Deemed Sales/ Taxable Turnover 700

Vat Payable4.20

Less : ITC Admissible 0Net Tax Payable 4.20

Composition Scheme - Option


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VAT Liability in Building

Construction

Tax liability of Builders as Works Contractor K Raheja Development Corporation v State of Karnataka 141 STC 298

The Hon’ble SC while interpreting the definition of term works contract as contained in Karnataka Sales Tax Act, held that, ‘works contract’ has an inclusive definition which includes any agreement for carrying out building for construction activity hence appellants are owner to the extent that they have entered into agreement to carry out construction activity on behalf of somebody else they would be carrying out a ‘works contract’ and would become liable to pay turnover tax on the transfer of property in the goods involved in such works contract.

"2(1)(v-i) 'works contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immoveable property.

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In Larson & Toubro Ltd. V/s. State of Karnataka ( 2008 17 VST 460 S.C.) the question was whether the appellant which was engaged in property development involving construction and building of flats and subsequent sale of completed flats would be liable to pay tax under the KST Act, 1957.

The appellant had agreed to develop the plot. There were two agreements 1) Developments agreement between the owner of plot and the developer and 2) Tripartite agreement between the owner of the plot, the developer and the prospective buyer of the flat. Dept. relied on the decision of K. Raheja took the view that appellant had constructed the flat on behalf of prospective buyers. According to them it was not the development agreement but the tripartite agreement that was the works contract.

Expressing the doubts on the ratio laid down by Raheja’s case the Lordship referred the matter for reconsideration by larger bench as the view if accepted than there would be no difference between works contract and Sale. 45

Larson & Toubro Ltd V/s. State of Karnataka

“In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner of the land, the developer and the flat purchaser where under the developer has undertaken to construct for the flat purchaser for monetary consideration. Seen thus, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract. The observation in the referral order that if the ratio in Raheja Development is to be accepted then there would be no difference between works contract and a contract for sale of chattel as chattel overlooks the legal position which we have summarized above.” Vide Para 111 in the case of L&T 65 VST 1. confirming Judgment in the case of K Raheja Development Corporation v State of Karnataka 141 STC 298 on which doubts were expressed in the judgement of Larson & Toubro Ltd. V/s. State of Karnataka ( 2008 17 VST 460 S.C.)

Larson & Toubro Ltd (SC) 65 VST 1

115. “It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.”

117. “ …. If at the time of construction and until the construction was completed, there was no contract for construction of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser. That the building is intended for sale ultimately after construction does not make any difference.”Observation of SC -Vide Para 115 and Para 117 in the case of L&T 65 VST 1.

Scope of Tax Planning in Works Contract

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TDS under Works Contract

Historical Background of TDS Larson & Toubro Ltd v Commissioner Of Sales Tax Gujarat –124 STC 162 (Guj HC)

• TDS provisions - object to check evasion of tax in case of WC.

• Gujarat High Court while examining the constitutional validity of TDS provisions under GST Act, declared the provisions of TDS as ultravires the constitution of India.

• To overcome the said judgement, the TDS liability on labour/import/OGS purchases/sales were eliminated. TDS was made applicable only on the material part transferred from contractor to contractee

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TDS Provisions under GVAT

•TDS to be deducted only in the case of Specified WC.•Specified WC means a WC the specified sale price of which > Rs. 1.00 Crore. Not Applicable on Inter-state WC

•Specified Sale Price means Contract Value less (1) labour charges in relation to WC (2) price paid/payable for interstate /import purchases.

•No TDS is required to be deducted in pure labour jobs, even though a condition for TDS is made in Contract. (30 VST 146 Jarnailsingh v BSNL, P&H High Court)

•Contractor to give self declaration in Form 702 to contractee for permissible deduction from WC turnover for TDS. (Permissible Deductions are labour/interstate/import purchases)•No TDS on amount paid to sub-contract as per section 59B(4) to avoid multistage deduction. (ideally payment to sub-contractor should have been covered as deduction in form 702)

Person responsible for payment of Specified Sale Price >Rs. 1 crore for works contract is responsible for deduction of tax.

TDS Provisions under GVAT

TDS Rate :0.5% in the case of Processing of Polyester Textile fabrics contract, 0.6% in Civil construction contract and 2% in other contracts.

Contractee is mandatorily required to obtain TAN No. Online from website in Form 706 within 30 days, he become liable for TDS deduction and to give a printed copy of application to JC office within 7 days of application. Department will issue TDN Certificate in Form 707.

Pay TDS to Government treasury within 22 days from the end of the month in which TDS is made in Form-207 and issue certificate in Form-703 Serially and mechanically numbered original copy to the contractor and duplicate copy should be retained by the contractee.

File a return within 30 days from the end of quarter in Form-704. TDS deduction account to be maintained in Form 705.

Contractor to file Form 216A for claiming TDS credit the in Return.

Liability for TDS arises on Payment and not on credit of any sum to the contractor account.

TDS – Case Study

Mr. X a construction contractor has furnished following details to A Ltd. Contractee for TDS under GVAT Act for the month of June 14.

(Rs. In Crore)Contract Bill (passed for payment) 4.00 1. Price of goods sold in the course of inter state trade

or commerce for the execution of Works contract 0.202. Labour Charges 1.00 3. Price Paid/Payable on the goods purchased in the course of inter state trade or commerce or in the course of import for the use in the execution of works contract 0.80 4. Payment to Sub Contractor 0.50

Compute TDS amount of Mr. X for June 14.

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Works Contract and Input Tax

Credit under GVAT

WC and Input Tax Credit under GVAT

• ITC available on all inputs used in works contract subject to fulfilment of conditions, except where contractor has opted for composition scheme.

• Denial of ITC to Works Contractor‒ OGS/Import/BT purchases‒ Capital goods used in works contract‒ Lease goods‒ Goods purchased from Lump sum dealer‒ Goods not connected with business‒ Non Transferable Consumable Goods.54

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Inter State Works Contract

What is Inter-State Works Contract?

Inter-State WC is often confused as those contracts which are carried out by a contractor having registered office in one state and taking up project in some another state. The contractor in such a case normally opts for VAT registration in the state where the work is being executed. Hence the turnover for the contract is offered to tax in the state where the work is being done.

E.G. If a contractor X, having registered office in Maharashtra get a project in Gujarat. he would be required to obtain registration under GVAT. And the turnover for the project would then be offered under GVAT.

Hence the contract as mentioned above is not a inter-state works contract.56

Inter-State Works Contract – Legal Provisions

• Finance Act 2002, had made amendment in the CST Act 1956, to include inter-state sales of goods involved in the execution of works contract taxable from May 11, 2002

clause (ja) in Section 2 of the CST Act was inserted vide Finance Act 2005 defines work contract as:-

“A contract for carrying out any work – Which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property”.

• Citus of taxation will come only when:

(a) Contractor executes works in another states and

(b) The property in goods passes from contractor to contractee either by transfer of document of title to the goods when they are in transit from one state to another or directly on their incorporation in the works contract.57

Essential Ingredients of Inter-State Works Contract

1. Two states involved, one where work is executed and other from where goods are being transferred to be used in WC

2. The transfer of goods takes place in pursuance of contract for carrying out operations in WC

3. The goods as transferred from one state to another are used as in the same form or condition in the execution of WC

4. The tailor made goods being used for specific WC. (Although not a strict rule, but practically this point needs to be proved to the departmental authorities to prove the element of inter-state WC)

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Inter-State Works Contract-Explained

1. Transfer of goods for specific WC in pursuance of contract received

A customer of Gujarat gives his own specification for the pollution control equipments to manufacturer in Maharashtra which thus become tailor made items and which can only be installed at that customer’s premises in Gujarat. In this case the sale would be deemed to have occasioned in the course of inter-state WC, even if delivery is taken by the Gujarat branch and kept at its premises for some days. In such a case local Gujarat VAT is not to be paid but CST in Maharashtra is payable

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Inter-State Works Contract-Explained

2. Lumpsum transfer for various contracts to be executed in another stateA dealer is engaged in the activity of supply and installation of pollution control equipments, having the manufacturing plant in Maharashtra & a branch at Gujarat. The supplier is in the regular habit of supply of equipments for execution of jobs in Gujarat. The goods are received by the Gujarat branch in the regular course and not specifically for any of the jobs. – Not a ISWC – Local VAT payable.

3. Transfer for use in manufacture of goods to be used in execution of WC.A contractor brings wooden slides to Gujarat from HO at Mumbai and from the wooden slide contractor manufactured windows and doors and used the same in execution of WC in Gujarat – Not a ISWC – Local VAT Payable.60

Case Study for Inter-State Works Contract

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A company X is engaged in the business of manufacture, supply and installation of lifts and elevators had its branch office at Bangalore which procured orders from customers in Karnataka. Lifts and elevators were manufactured in its factory at UP according to the design and specifications of the customers and the manufactured items after being tested were dismantled and dispatched to the customers' place in the State of Karnataka by way of stock transfers. The works contract was executed by the branch office by installation and commissioning of the lifts and elevators at the customers' place.

Determine whether the above contract is interstate Works Contract?


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Hint : Merely, because the lifts and the elevators are installed and commissioned in the State, it cannot be said that it is a local sale exigible to levy tax under section 5-B of the Act on the ground that the actual transfer of property used in the works contract took place in the State of Karnataka

State of Karnataka and others vs. ECE Industries [(2006) 144 STC 605] Also refer, ECE Industries Ltd. vs State of Tamilnadu [2013] 66 VST 163 (Mad)


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Suzlon Energy Ltd. (SEL) was having a unit manufacturing wind mills at Diu in (UT) registered under the sales tax law applicable to Diu. SEL was also registered dealer under the GST/CST Act having Sales Office at Ahmedabad. SEL had installed 4 wind mills as per the order of IPCL, in Gujarat. The works was relating to sale, erection and commissioning as per the Purchase Order. The wind mills were specifically manufactured at Diu and consigned to IPCL by way of sale. Thereafter, erection and commissioning was done through sub contractor.”

During assessment proceeding the STO took a view that since the works contract as aforesaid was executed by the SEL in the state of Gujarat. The property in goods was transferred to IPCL in the state of Gujarat and therefore there was deemed local sale in respect of the goods, taxable under the GST Act.Whether AO was justified?


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Hint : There was no local sale or deemed sale in respect of the goods used for erection of the said wind mills. Required materials and parts of wind mill were sold to IPCL by way of inter state sales as the movement of the goods occasioned on account of WC between SEL & IPCL.

The only process undertaken by SEL was the process of assembling different parts. This being inter state sale of goods, there was no sale of goods in GujaratSuzlon Energy Ltd v State of Gujarat-2009-GSTB-I-214

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Calculation of Sale Price under

CST Act.

Sale Price of WC under CST Act? Proviso to Section 2(h) of the CST Act provides the

meaning of sale price as under:- ‘sale price’ in relation to transfer of property in goods

(whether as goods or in some other form) involved in the execution of a works contract, shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to the sale price for the purpose of this clause.

However no deductions has been prescribed under the CST Act .

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Sale Price of WC under CST Act? Sec 8A of the CST Act does not prescribe any mechanism to

determine the turnover in case of a works contract.

Sec 13(1)(aa) of the CST Act empowers the Central Govt. to make rules providing for “the manner of determination of the sale price and the deductions from the total consideration for a works contract under the proviso to Section 2(h)”.

No rules has been framed by the Central Govt. in this regard.

Sec 13(3) of the CST Act empowers the State Govt. to make Rules, not inconsistent with the provisions of this Act and the Rules made under sub-section (1), to carry out the purpose of this Act.

No specific rules has been framed by the State Govt. in respect of inter-state works contract.

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Sale Price of WC under CST Act

Supreme Court judgment in the case of “M/s. Mahim Patram Private Limited v. Union of India 6 VST 248 wherein it is held that local VAT law should be applied for calculating turnover of WC under CST Act. (Also Refer Commercial of VAT New Delhi v. State of Haryana 23 VST 10 (CSTAA)).

Brief facts of the case:-• Appellant was engaged in the printing of question papers for

various universities and boards situated outside the State of Uttar Pradesh;

• As the goods have moved from one State to another, it was an inter-state works contract;

• The appellant had contended that in absence of the provisions for determining the ‘sale price’; taxable turnover cannot be computed under Section 8A and CST cannot be levied.

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Rate of CST on Interstate WC

Section 8 of the CST Act provides the following rates in case of an inter-state sale

• If sale is made to a RD against Form ‘C’ – 2%• If sale is made to a RD/URD without form ‘C’ – Local

Rate applicable.

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Benefits of claim of Inter-State Works Contract

Why is it advisable to offer a sale transaction as Inter-state Works Contract rather than sale under local VAT Act in the state where the project is executed?• To avail Input Tax Credit on goods used in ISWC.• Rate of CST is 2% which would always be lesser as

compared to local VAT rate

ISSUE - Whether the client would accept a separate invoice for sale occasioned in the course of the works contract, when there is a composite/indivisible works contract.Opinion - If the sale is foreseen in advance, there can be a separate terms for major items to be used in WC which is advisable and adequate convincing records be kept.

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Composition schemes under

GVAT Act

Prakash Thakkar & Co.

Optional Scheme for Composition of Tax on

Works Contract–Sec 14A• This is optional Scheme in lieu of tax payable under normal VAT

Provisions• Composite Tax is payable on entire sale price, No Labour Charges

deduction is available.• Prevailing composite tax rates are as under

• 0.50% of total value of Works Contract in case of processing of polyester textile Fabrics including bleaching, dyeing and printing thereof

• 0.60% of total value of prescribed construction Works Contracts.• 2.00% for All other kinds of works contracts.

• Conditions • Dealers are not entitled to ITC• Cannot issue Tax Invoice/cannot collect VAT • PT is payable on URD Purchases U/s. 9(1) and also PT U/s. 9(3)

Composition of Tax on Works Contract – Section 14A

• Composition Tax – Qua Contract • Procedure – Application is to be made for each contract

separately in Form 214, within 30 days from the beginning of the contract.

• Permission in Form 215 in respect of the contracts for which option to pay composition money is exercised and such permission shall be effective from the date of the beginning of the contract and till its completion.

• Conditions – W.e.f from 11-10-2006• From 11-10-2006 OGS/import purchases or BT/Consignment

of Goods from outside of state is not permitted.• Goods consumed must have suffered tax under VAT Act

• RM for paver blocks used in WC Purchased from RD- Composition benefit allowable. (Gujarat VAT Tribunal in the case of Super Tiles & Marbles P Ltd)

• ITC claimed on Stock if any, has to be reversed by the dealer

Composition of Tax on Works Contract – Section 14A

• Composition Tax Qua Financial Year

• Works contractor engaged in Tyre Retrading, Vehicle Repairing, Printers etc can get permission for composition of tax for a Financial year

• Newly registered dealers to apply for composition within 90 days from the date of the effect of such registration to Jurisdictional CTO in Form 214A and permission shall be granted within 15 days in Form 215A. Whereas already Registered Dealers to apply for composition within 30 days before the commencement of the year.

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CA Prakash B Thakkar, FCA, DISA (ICA)M/s. Prakash Thakkar & Co., Chartered Accountants202, Mangaldhara Complex, 83, Sampatrao Colony, RC Dutt Road, Vadodara-390007(O) 0265-2351253/54, (M) 9898061675Email: [email protected]

Documents

July 22, 2014 Works Contract Under GVAT Act, 2003 CA Prakash B Thakkar Prakash Thakkar & Co. Chartered Accountants Baroda