Querist: MEHO – HCP Air Systems (P) Ltd.

Query 1: Presently client is paying service tax and VAT on Annual Maintenance
Contract, assuming 30% of total amount being realized from customers towards materials
and balance 70% of amount being realized from customers towards labour. Accordingly
VAT is being paid on 30% of amount and service tax is being paid on 70% of amount.
The query is whether VAT and service tax liability is being correctly discharged.

Opinion:

a) Applicability of VAT

First let us analyze whether liability of VAT is being correctly discharged. A composite
contract for supply of both labour and material is a works contract and liability of VAT
should be discharged in accordance with provisions of works contract tax as applicable
under the West Bengal VAT Act, 2003.

It was observed by the Hon’ble Supreme Court in the case of Vanguard Rolling Shutters
v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, that it is difficult to lay down any
rule of universal application to decide whether a contract is a works contract or contract
for sale of goods. If the contract is primarily for supply of materials at prices agreed and
the work or service is incidental to the execution of contract, it will be contract for sale.
On the other hand, where contract is primarily a contract of work and labour and
materials are supplied in execution of such contract, it is a works contract.

As per Section 14 and Section 18 of the the West Bengal VAT Act, 2003, liability of VAT
can be discharged in accordance with any of the following three alternatives, subject to
the conditions of the each alternative:-

1st Alternative – If the contractor maintains proper accounts and accounts maintained by
him are found by the assessing authority to be worthy of credence, than he can discharge
his liability on the value of material supplied at the rate of tax applicable to the material.

2nd Alternative - Where the works contractor does not maintain proper accounts, or the
accounts maintained by him are not found by the assessing authority to be worthy of
credence, and the amount actually incurred towards charges for labour and other services,
or profit relating to supply of labour and services, are not ascertainable, such charges for
labour and services, or such profit shall, be determined on the basis of such percentage of
the value of the works contract as is prescribed in Rule 30 of the West Bengal VAT Rules,
2005, for different types of works contract.

It has been prescribed in Rule 30 that for Annual Maintenance Contract, 20% deduction
towards labour charges for execution of works contract will be allowed from the full
value of contract. VAT at the rate of 4% will be payable on 15% of the value of contract
and VAT at the rate of 12.5% will be payable on the balance 65% of the value of contract.

3rd alternative – A work contractor may at his option, pay tax at the compounded rate of
two percentum of the aggregate of the amount received or receivable by him, provided he
is not engaged in––

(a) making sale as referred to in sub-clause (ii) of clause (g) of section 2 of the Central
Sales Tax Act, 1956; or

(b) making sale in the course of import of the goods into, or export of the goods out of,
the territory of India within the meaning of section 5 of the Central Sales Tax Act, 1956;
or

(c) transferring goods otherwise than by way of sale for execution of works contract
outside the State,

Provided further that such dealer shall not be entitled to issue tax invoice.

The work contractor opting for compounding scheme will also not be allowed to avail
Input Tax credit.

Conclusion: On the basis of analysis of above discussion of provisions relating to works

contract tax, it is advisable to make a financial evaluation of net tax outgo under all the
three alternatives and VAT should be paid on the basis of alternative having least tax
outgo. It should be kept in mind that to opt for the compounding scheme, it is essential
that both purchase and sales of material to be used in works contract should take place in
the state of West Bengal.

b) Applicability of Service Tax

In accordance with section 67 of the Finance Act, 1994, service tax is payable on the
gross amount charged by the service provider for service provided or to be provided by
him. However in accordance with notification 12/2003- S.T. dated 20.6.2003, service tax
will not be payable on so much of the value of the taxable services, as is equal to the
value of goods and materials sold by the service provider to the recipient of service,
subject to condition that there is documentary proof specifically indicating the value of
the said goods and materials.

Service tax liability is being discharged by the client on the 70% of the value of contract
assuming 30% of the value of contract towards supply of materials. However it appears
that there is no documentary proof to establish the value of material being supplied in an
individual contract. Hence in our opinion, in the absence of any documentary proof to
establish the value of material being supplied in a contract, service tax liability should be
discharged on the full value of contract.

Query 2: Liability of VAT on composite work contract for HVAC installation and
whether ‘C’ form can be supplied/ received for purchases / sales for works contract

Provisions of works contract tax is applicable under the West Bengal VAT Act, 2003 in
case of a composite contract for supply of labour and material.

It was decided in the case of State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861
(Mad HC) by the Hon’ble High Court that An air conditioner manufacturer may
undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning
equipment. Property in air conditioning equipment passes as an incidental to the works
contract. Here, there is no sale of ‘goods’. It is a ‘works contract’.

As per Section 14 and Section 18 of the the West Bengal VAT Act, 2003, liability of VAT
can be discharged in accordance with any of the following three alternatives, subject to
the conditions of the each alternative:-

1st Alternative – If the contractor maintains proper accounts and accounts maintained by
him are found by the assessing authority to be worthy of credence, than he can discharge
his liability on the value of material supplied at the rate of tax applicable to the material.
2nd Alternative - Where the works contractor does not maintain proper accounts, or the
accounts maintained by him are not found by the assessing authority to be worthy of
credence, and the amount actually incurred towards charges for labour and other services,
or profit relating to supply of labour and services, are not ascertainable, such charges for
labour and services, or such profit shall, be determined on the basis of such percentage of
the value of the works contract as is prescribed in Rule 30 of the West Bengal VAT Rules,
2005, for different types of works contract.

It has been prescribed in Rule 30 that for a Contract for supply and installation of air
conditioning equipment including deep freezers, cold storage plants, humidification plant
and de-humidors, 15% deduction towards labour charges for execution of works contract
will be allowed from the full value of contract. VAT at the rate of 4% will be payable on
5% of the value of contract and VAT at the rate of 12.5% will be payable on the balance
80% of the value of contract.

3rd alternative – A work contractor may at his option, pay tax at the compounded rate of
two percentum of the aggregate of the amount received or receivable by him, provided he
is not engaged in––

(a) making sale as referred to in sub-clause (ii) of clause (g) of section 2 of the Central
Sales Tax Act, 1956; or

(b) making sale in the course of import of the goods into, or export of the goods out of,
the territory of India within the meaning of section 5 of the Central Sales Tax Act, 1956;
or

(c) transferring goods otherwise than by way of sale for execution of works contract
outside the State,

Provided further that such dealer shall not be entitled to issue tax invoice.

The work contractor opting for compounding scheme will also not be allowed to avail
Input Tax credit.

Conclusion: On the basis of analysis of above discussion of provisions relating to works

contract tax, it is advisable to make a financial evaluation of net tax outgo under all the
three alternative and VAT should be paid on the basis of alternative having least tax
outgo. It should be kept in mind that to opt for the compounding scheme, it is essential
that both purchase and sales of material to be used in works contract should take place in
the state of West Bengal.

C’ form can be supplied/ received for purchases / sales for works contract - Many
High Courts have held that ‘C’ form can be issued for purchase of goods which are used
in works contract. The dealer is entitled to registration and he can receive sales tax forms
in respect of his sales.