Taxation of Composite Contracts

Basics of Service Tax..

Tax on Services provided or to be provided Selective Services taxable
Taxable Services defined ; Service not defined Principles of Classification of Service important

Tax on the Value of Taxable Services Provided and Charged

Types of Contracts
Contracts
For Sale For Service Of Service

Divisible vs. Indivisible Contracts

A grocery store sells bread, butter & tomatoes A eating house sells a sandwich

Can it be said that:

A grocery store sells a sandwich ? A eating house sells bread, butter & tomatoes ?

Composite Contracts: Judicial Thinking

A composite contract should not be vivisected to levy a tax on a specific component of such a contract but should be analysed as a whole State of Madras vs. Gannon Dunkerley & Co 9 STC 353 (SC) Even in cases where the agreements provide for progressive payments based on individual milestones Sentinel Rolling Shutters & Engg. Co. vs. CST 4 SCC 260 (SC) Even if specific price breakup is given for individual milestones Daelim Industrial Co. Ltd. vs. CCE 155 ELT 457 (Tri) as approved by SC Even if there are separate agreements CIT vs. Sundwiger Empg & Co. 262 ITR 110 (AP)

Composite Contracts: Legislative Perspective (VAT)

Gannon Dunkerleys case 46th Constitutional Amendment to deem certain transactions to be sales The deeming fiction valid only for the said lists and not beyond that
Geo Miller & Co vs. State of MP 5 SCC 209 (SC) BSNL vs. UOI 3 SCC 1 (SC)

Works Contract: Deeming Fiction

Transfer of Property by means of:
Accretion Accession Blending

Is Works Contract:
Sale + Service Service (with a Deemed Sale) (V1) (V2) OR

Doubt is not a pleasant condition but certainty is absurd

Voltaire (1694 1778)

Service Tax: Legislative Perspective

Gradual Expansion of the Scope of Taxable Services:
Consulting Limb [1997-1998] Executionary Limb [2004-2005] Works Contracts [2007]

Whether levy of tax on works contracts is valid without a Constitutional Amendment? If yes, from which period is the levy valid?

Some Answers
Period 1997-1998 2004-2005 2007 View 1 View 2 Sale + Service Service Not Liable Not Liable Not Liable ( Blue Liable Mitigate double Star) taxation (BSNL) Not Liable ?? Liable Mitigate double taxation (BSNL)

Impact of Introduction of Works Contract Services

Lends a succinct support to View 1 Judicial Principle:
Now Said, Not Said Earlier ( L&T)

Implications on Non Specified Works Contracts Implications on CENVAT Credit for the Service Recipient

Works Contracts Services

Works Contracts (transfer of property involved in the execution of works contract is leviable to tax as sale of goods) Only Specified Works Contracts covered Infrastructure related works contracts excluded An optional composition @ 2% of the gross value of the contract

Specified Works Contracts

Construction of Residential Complex Construction of Commercial Complex Erection, Commissioning & Installation Turnkey Projects

Valuation:
Gross Contract Price (-) Value of transfer of property Excludes VAT Base Adopted for VAT purposes conclusive Fall-out of BSNL.

Those who cannot remember the past are condemned to repeat it

George Santayana (1863 1952)

Composition Scheme: Repeat Mistakes from the Past??

What about non specified works contracts? CENVAT Credit on Inputs Not Available CENVAT Credit of Input Services & Capital Goods Available Whether to Include Free Issue Materials ?

Existing Contracts: Post WC Services

Impact on availability of Composition Scheme
For past activities
Where the amounts are billed but not realized Where the amounts are not billed

for future activities

In normal course Where advances were received prior to the notified date

Existing Contracts Situations in the past

View 1 : Not Liable
If not registered If registered

View 2: Liable with effect from 2004-2005

If not registered If registered

Industrial Construction Services

Construction of New Building or Civil Structure or part thereof Construction of Pipeline or Conduit Completion and Finishing Services in relation to building or civil structure
Glazing, Plastering, Painting, Floor and Wall Tiling, Wall Covering and Papering, Wood and Metal Joinery and Carpentry, Fencing and Railing, construction of swimming pools, acoustic applications or fittings and other similar services

Repair, Alteration, Renovation or Restoration of Building, Civil Structure, pipeline or conduit

Industrial Construction Services (Contd.)

Building, Civil Structure or Pipeline:
Used or to be used Occupied or to be occupied Engaged or to be engaged In commerce or industry

Excludes
Roads, Airports, Railways, Transport Terminals, Bridges, Tunnels & Dams

Construction of Complex Services

Construction Completion & Finishing Services Repairs, etc. Of Residential Complex

Residential Complex
More than 12 residential units Common Area One or more common facilities Layout Approved Not for Personal Use

Erection, Commissioning & Installation Services

ECI of Plant, Machinery, Equipment or Structures Installation of Electrical Devices & Wiring Plumbing, etc. Heating & Airconditioning, etc. Insulation & Waterproofing Escalator Related

No Exemption for Specific Projects

Maintenance or Repairs
Management of Properties Maintenance or Repairs of Properties Maintenance or Repairs of Goods Principles of Classification No Exemption for Specific Projects

Composite Contracts (Past) : Conservative View

Service Tax on service component abatement available Service Tax abatement not available for completion and finishing services No CENVAT Credit in case of abatement Gross Contract Value to be included Whether Free Issue Material to be added?
Construction Services Erection, Commissioning and Installation Services

I was born not knowing and have had only a little time to change that here and there
Richard Feynman (1918-1988)

Thank You for a patient hearing