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- Dealers executing works contracts need to plan their VAT liabilities in such a way that they are able to mitigate the taxes to the maximum incurring least amount of risk.
- As far as VAT is concerned, the works contractor normally has three basic options under each of the state VAT – Regular Scheme (offering actual value of material), Standard Deduction Scheme (offering value as per standard tables) and the Composition Scheme (offering a lumpsum percentage on the gross turnover).
- So whenever one is quoting for a job, one normally tends to find out the best of these options for the total project. But what one needs to think is that whether there could be a hybrid scheme devised as a combination of two or all the three options to further optimise the component of VAT.
- Lets take an example from the state of Gujarat – In Gujarat the composition scheme of 0.6% comes with a condition that the goods can-not be imported from outside the state of Gujarat. Now if a project of Supply and Civil Foundation requires import of goods under the supply contract, then the two contracts can be taken separately and the composition can be applied for the civil foundation project.
- Further, lets say in the state of Tamil Nadu, an interior decoration project is obtained with interior decoration, supply of modular furniture, HVAC installation, Electrical fitting and other miscellaneous activities. Now Tamil Nadu offers a very high standard deduction percentage of 30% under the residual category. Besides the tax under regular and standard deduction scheme is discharged by application of scheduled rates which are either 5% or 14.5%. So the Interior and Modular furniture can be taken as a separate works contract making it eligible for 30% deduction if labour can-not be separately traced for the project. Secondly separate order may be obtained for items falling in the lower rate schedule of 5% in case the items are to be used in a manner that their identity may get lost and it may be difficult to separately identify and bill the same in a composite contract.
- Another example may be taken from the Union Territory of Daman and Diu, where the single rate of 4% applies to works contracts, irrespective of the actual goods and their respective VAT rates as may get incorporated in the contract. In such cases even if a separate supply is being done to the client, but the same should be made part of the single works contract to take benefit of the lower rate.
- Thus it can be seen that with the combination of state, nature of contract, client, source of procurement, role of sub-contractor and finally flexibility on offer with both client and suppliers, different solutions can be devised with a view to identify the most optimum one.
Maharashtra Govt explains salient features of amendments to various Act administered by Sales Tax Dept. including MVAT Act pursuant to State Budget 2015-16; Inter alia, states that benefit of deduction of service tax collected separately from “sale price” and “purchase price” shall not be allowed in case of works contract transactions for which composition has been opted u/s 42(3) or u/s 42(3A); However, clarifies that for all periods prior to April 2015, service tax shall not form part of “sale price” in works contract transaction, where Rule 58 has been invoked and service tax has been collected separately, by virtue of Maharashtra Sales Tax Tribunal judgment in Sujata Painters; Further, states that since statutory bar for filing multiple returns u/s 20(4)(c) has been removed w.e.f April 2015, a dealer can file revised returns more than once if he agrees with audit observations in Forms 604 and 605; Benefit of reduced late fee (from Rs 2000/- to Rs 1000/-) where return is filed within 30 days from due date, shall also be available for return period ending March 31, 2015; Also clarifies that issuance of notice in Form 603 no longer a pre-requisite for commencing transaction-wise assessment proceedings u/s 23(5), however, Assessing Authority must clearly state the reasons on proceeding sheet before issuing notice in Form 302 : MVAT Trade Circular
Bombay HC rejects challenge to amendment to Rule 58 of Maharashtra VAT (MVAT) Rules vide Notification dated January 29, 2014 and ensuing Trade Circulars 7T of 2014 and 12T of 2014, dismisses petitioners' claim of the same being in express conflict with SC dictum in the case of Larsen & Toubro Ltd; Rejects petitioners’ contention that amended Rule 58 tends to indirectly tax immovable property and does not allow deductions on account of consideration for acquisition of FSI / TDR, payments towards eviction of tenants, and clearance of land encroachment; Observes, prescription under the provisions may be inadequate and falling short but its incorporation would not be bad or illegal or ultra vires the Constitution; Perusing the history of litigation on subject matter, observes, new provisions determine the value on basis of elimination and deductions and the value arrived at is charged / chargeable in respect of transfer of goods in works contract, when such specific value is determined, fundamental basis of petitioners’ arguments does not survive; Conceptual nature of measure of subject of tax occurs as neither the identity of seller of goods nor identity of goods sought to be charged, nor the actual cost charged by seller can be determining factor, such conceptual value governs the assessment of levy; Rejecting petitioners’ stand that value of goods must be limited to cost plus profit, observes, “While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself… A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.”; Incidence of MVAT ultimately will always be on consumer and as such, said tax can be levied at a convenient stage so long as character of the impost - ‘it is a tax on transfer of goods’ - is not lost, observes, “….the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax.” ; It is open for legislature to adopt any basis for determining the value of a taxable article, holds “…The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge.” ; Where in construction contracts element of transfer of interest in land is involved, Rule 58(1A) provides for mandatory method of computing assessable value, and therefore, Trade Circulars being only clarificatory, cannot be said to have travelled beyond the contours of said Rule; Observes that SC in Larsen & Toubro Ltd had held that it would be permissible for State legislature to prescribe a formula for determination of charges and to allow deductions of amount, the proviso to Rule 58 (1A) and 58 (1B) have been enacted to deal with such situation; Moreover, SC, while directing Govt to bring clarity in the Rules, had not disturbed Rule 58(1A) requiring valuation of land pursuant to Annual Statement of Rates of Bombay TMV Rules, 1995, thus application of same not open for re-examination / challenge; Observes, “It is to be borne in mind that defining the subject of tax is a simple task and devising measure for tax is far more complex exercise…..and the legislature has to be given much more flexibility in the latter field.” ; Relies on a catena of landmark rulings of apex court including Bombay Tyre International, State of West Bengal vs Kesoram Industries, Commissioner of Wealth Tax vs Shravan Kumar & Sons and division bench rulings of Bombay HC in Maharashtra Chamber of Housing Industry vs State of Maharashtra, Builders Association of India vs State of Maharashtra and Hyva (India) Pvt Ltd vs UoI, rejects petitioners reliance on ratio laid down in A.V. Fernandez vs State of Kerala and Bhawani Cotton Mills vs State of Punjab : Bombay HC
Delhi HC grants relief to Delhi Transport Corporation (DTC) bus operator, agreement with DTC to give bus on hire for plying on specified routes, as per specified schedule, not a ‘transfer of right to use of goods’, hence not liable to VAT; Bus owner bears responsibility for any mishappening or accident, commits to be bus owner at all times, holds registration and licenses in its favour, in which case, it cannot be said that effective control and possession of vehicles transferred to DTC; Tribunal erred by declining to apply ratio of International Travel House Ltd. as facts of that case similar to present case; Fact that DTC has control over ticket collections, absolutely collects all revenues, bus maintenance and repair subject to its prior approval, ipso facto not decisive in concluding that there is a transfer of right to use vehicles, as, control / possession remains with owner and rights conferred on DTC, do not result in goods being “delivered” to DTC at any stage; Hence, contract in question does not pass muster of Article 366(29A)(d) as held by SC in BSNL case so as to be treated as ‘transfer of a right to use the goods’ or a ‘deemed sale’, as both majority and concurring opinion therein emphasized that goods should be “ultimately delivered” : Delhi HC
HC sets aside CESTAT order, allows input credit of cement & steel used in construction of jetty, to a port service provider; Rejects Revenue contention that construction of jetty being exempt service, credit unavailable under Rules 2(k) and 2(l) of CENVAT Credit Rules; Since assessee has constructed jetty through a contractor in port premises by supplying said material, input credit available thereon; Amendment to Rule 2(k) w.e.f. July 7, 2009 not clarificatory and would operate prospectively, wherever legislature wants to clarify the position, intention clearly mentioned in the Notification itself; View taken by CESTAT based on conjectures and surmises as CESTAT Larger Bench in Vandana Global Ltd used the expression that intention behind amendment was to clarify, however, there is no material to show legislative intent to clarify an existing provision : Gujarat HC
Case of M/s. Shetusha Engineering and Construction Pvt. Ltd
R.A. No 69 of 2013:- Decided on 06/01/2014 reported at 2014 GSTB Page 5 it was held that the expenses incurred for execution of the works contract is held admissible in view of the definition of sale price as provided in section 2(24)(b) of the VAT Act.
Case of Quippo Oil & Gas Infrastructure Ltd & NEWSCO Directional & Horizontal Drilling Services Inc Canada
[WP (c) Nos. 315 of 2010 & 277-278 of 2011 Dated 03.11.2014] it was held that when contract is not divisible. Central Law would prevail and service tax would be payable. No Vat would be payable where major portion is service and it is not possible to divide the contract in service and transfer of right to use goods.
Service Tax – EPC contract – Works contract service - Taxability of contracts executed for water supply projects/ pipelines / irrigation /canals for Government for non-commercial purposes
HELD - Laying of pipelines/ conduits for lift irrigation systems for transmission of water or for sewerage disposal, undertaken for Government/ Government undertakings and involving associated activities like trenching, soil preparation and filling, supporting masonry work, jointing of pipes, electro-mechanical works or pumping stations and like activity, is classifiable only under Commercial or Industrial Construction Service (CICS) for the period upto 01.06.2007 and not under Erection, Commissioning or Installation Service (ECIS);
Construction of canals for irrigation or water supply; construction or laying of pipelines/ conduits for lift irrigation conceived and integrated into a dam project, must be classified as works contract "in respect of dam" and is thus excluded from the scope of "Works Contract Service" defined in Section 65(105)(zzzza) of the Act, in view of the exclusionary clause in the provision;
Construction of canals/ pipelines/ conduits to support irrigation, water supply or for sewerage disposal, when provided to Government/ Government undertakings would be for non-commercial, non-industrial purposes, even when executed under turnkey/ EPC contractual mode and would fall within the ambit of clause (b), Explanation (ii) of Section 65(105)(zzzza); and would consequently not be exigible to service tax, in view of the exclusion enacted in clause (b);
Where under an agreement, whether termed as works contract, turnkey or EPC, the principal contractor, in terms of the agreement with the employer/ contractee, assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such works passes on accretion to or incorporation into the works on the property belonging to the employer/ contractee, the principal contractor cannot be considered to have provided the taxable (works contract) service enumerated and defined in Section 65(105)(zzzza) of the Ac
- P&H HC upholds constitutional validity, but reads down Rule 25(2) of Haryana VAT Rules, holds that VAT payable on value of goods at time of incorporation in works contract, not on transfer of immovable property and other things done prior to date of entering sale agreement; Refers to apex court’s LB ruling in L&T to hold that developer / builder / promoter covered under ‘works contract’ while entering into an agreement with purchaser to construct flat and ultimately to sell the same with fraction of land;
- However, States only empowered to levy sales tax on sale of goods in an agreement to sell flats, which also has a component of deemed sale of goods in terms of Entry 54 of List II of Seventh Schedule to Constitution of India; Observes, “rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act....without doing any violence to the language of the provision...
- The rule of reading down is to construe a provision harmoniously and to straighten crudities or ironing out creases to make a statute workable”; Explanation (i) to Sec 2(1)(zg) of Haryana VAT Act provides for deduction on account of labour, material and services related charges from gross turnover to arrive at “sale price” in a works contract; Observes that section not a charging provision which creates liability for assessing VAT in a “works contract”, but a definition clause which does not embrace something otherwise prohibited by law, and therefore does not suffer from any vice or defect of unconstitutionality; Observes, “In case the provisions of law are seeking to charge sales tax on any amount other than the value of goods transferred in course of execution of works contract, the provisions would be ultra vires the Constitution of India”; Where 'deductive method' under Rule 25(2) has been prescribed for ascertaining taxable turnover, it should include a residuary clause in consonance with mandate of law, so as to cover all situations which can be envisaged; Assertion in State’s affidavit that dealers required to pay a lump sum in lieu of tax on consideration receivable for execution of works contract without providing any deduction for value of land, would not give it a statutory flavour, as said action would not meet test of requisite amendment in Rules, which needs to be done by competent authority in accordance with law; Sec 42(1) casting joint and several liability on contractor and sub-contractor, only a provision to safeguard interests of revenue that in event of failure on part of sub-contractor, contractor liable to tax, same neither arbitrary nor discriminatory;
- Further, rejects assessee’s challenge to validity of Sec 9, Rule 49 and Circular dated February 10, 2014 which provides for payment of lump sum tax under composition tax scheme, stating that said scheme purely optional in nature and dealer not duty bound to subscribe to same; Refuting State’s objection to maintainability of writ in presence of alternate appeal remedy, HC holds that, in present case, remedy of writ jurisdiction cannot be shut down, particularly when vires of Explanation (i) to Sec 2(1)(zg), Rule 25(2) and Circulars issued by Excise and Taxation Commissioner challenged : Punjab & Haryana HC