SERVICE TAX WORKS CONTRACT AND VALUATION OF SERVICES
THE DILEMMA & EVOLUTION IN JUDICIAL THINKING Taxation of indivisible and composite contracts has not only undergone several constitutional amendments but has also has been facing judicial scrutiny ever since.
The two critical challenges being faced in taxation of indivisible composite contracts are:
1. Constitutional rights of States and Centre to levy taxes on goods and services; and
2. Valuation of goods and services embedded in such contracts.
The sale vs service debate has been examined at different judicial forum and needless to mention, it had become critical to determine whether a transaction was that of sale of goods or was that for provision of services. One landmark judgement of the Honourable Supreme Court, that led to subsequent constitutional amendment, was in the case of Gannon Dunkerly.
An incidental aspect that has more or less generally been accepted is that both VAT and Service Tax can be levied on the same contract/activity but with the safeguard that both are not levied on the same total value of the contract.
As per the Constitution of India, the taxing powers are distributed between the Sate and the Centre. Only the State has the powers to levy taxes on goods and hence VAT on transfer/sale of property is the domain of each State. However, the Centre has the authority to collect tax on services. The Larger Bench of SC in L&T Limited v. State of Karnataka has upheld levy of sales tax / VAT on construction and sale of flats, holding building contracts in the nature of works contract which involves transfer in the property of goods. This judgment is in line with the earlier judgment of the Honourable Supreme Court in the case of K. Raheja builders. However, the L&T judgment has somewhat departed from the accepted practice and has gone to clarify that construction activity undertaken by the developer would be “works contract” only from the stage when developer enters into a contract with the customer. This shift in the valuation of the indivisible composite contract for the purpose of levy of VAT can have an impact on the valuation for levy of service tax on service portion in execution of works contract, except for the fact that the inherent nature of such contracts is that they are indivisible. The issue of valuation of indivisible composite contracts has also been addressed by the Honourable Supreme Court in the case of BSNL[2006-2-STR-161].
Two recent judicial pronouncements have given a twist to the tale:
1. The Honourable Supreme Court on Works Contract in the case of Kone Elevator, and
2. The High Court of Kerala on the levy of service tax on supply of food by Restaurant.
THE JOURNEY – TILL JULY 2012
Service Tax on Construction and related activities has not been a smooth journey since the first time it was introduced in 2005 on Industrial & Commercial Construction w.e.f. 10-9-2004; immediately thereafter, we had service tax on Construction of Complex with effect from 16-6-2005. The services, as they were defined under the erstwhile provisions of Section 65(105) of the Finance Act,1994, again led to many judicial interventions, particularly on the issue of levy of service tax on sale of immovable property. In addition to the regular clarifications issued, there have been regular changes in the statutory definitions as also numerous judicial decisions on the subject. The complexity has also been compounded due to different models and nature of transactions that is generally prevalent in the construction industry.
With reference to residential construction, it was more or less accepted by the revenue authorities as also the industry that builders, per se, are not liable to pay service tax since they are selling immovable property to their customers. The spirit of this proposition was very rightly reflected in CBEC Circular 108/2/2009-ST dated 29-1-2009.
An interest twist to the tale was in the form of the landmark judgement of the Honourable Supreme Court in the case of Daelim Industrial Co Ltd [ 2004-170-ELT] which led to the levy of service tax on Works Contract services, as a separate classification. This judgement itself has been a matter of judicial scrutiny in many subsequent pronouncements on the issue of vivisection of indivisible works contracts for the purpose of levy of service tax.
The revenue authorities, realizing that service tax on sale of immovable property was a difficult proposition, introduced the following explanation to the original definition of the taxable service in Section 65(105)(zzzh) with effect from 1-7-2010:
“Explanation – For the purpose of this clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer”.
Hence, again a deeming fiction was introduced in the statutory provisions for levy of tax.
The legislative intent and levy of service tax on such constructions had also been unsuccessfully challenged in the cases of G.S.Promoters [2011-21-STR-100- P&H H.C] and Maharashtra Chamber of Housing Industry [2012-TIOL-78- Mumbai H.C.].
SERVICE TAX WORKS CONTRACT AND VALUATION OF SERVICES:
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