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Posted by on in Service Tax

2015-VIL-147-CESTAT-DEL-ST-LB

Service Tax – Larger (Special) Bench reference pertaining to works contract

  • Classification of taxable services i.e., whether components of a composite transaction amounting to supply of labour/rendition of service(s), under a works contract ought to be classified only under Section 65(105)(zzzza) of the Finance Act, 1994 (the Act) - inserted by the Finance Act, 2007, w.e.f 01-06-2007; or are also comprehended within the ambit of existing (as on 01-06-2007) taxable services such as Commercial or Industrial Construction Service (CICS); Construction of Complex Service(COCS); or Erection, Commissioning or Installation Service (ECIS) - interpretation of relevant provisions of the Act. CICS; COCS & ECIS are distinct, extant services defined and enumerated to be taxable services, prior to introduction of Works Contract Service (WCS) – Determination of Value Rules, 2006 - HELD - The President and the learned Member (Judicial) Ms. Archana Wadhwa concluded that a composite contract, involving transfer of property in goods and rendition of services, cannot be vivisected and services components thereof subject to the levy of service tax, on classification of the services under taxable services such as “Commercial or Industrial Construction”; “Construction of Complex” or “Erection, Commissioning or Installation” prior to 01.06.2007; and that service components in a works contract are taxable only under Works Contract Service defined and enumerated in Section 65(105)(zzzza) of the Finance Act, 1994 - Hon’ble Members (Technical), Shri Rakesh Kumar, Sh. P.R. Chandrasekharan and Sh. R. K. Singh (by distinct concurring orders), concluded to the contrary, that service elements in a composite contract could be subject to service tax prior to 01.06.2007 as well, if these are appropriately classifiable under “Commercial or Industrial Construction”; Construction of Complex” or “Erection, Commissioning or Installation”, as the case may be
  • In view of the majority opinions recorded, the reference is answered as: Service elements in a composite (works) contract (involving transfer of property in goods and rendition of services), where such services are classifiable under “Commercial or Industrial Construction”; “Construction of Complex” or “Erection, Commissioning or Installation” (as defined), are subject to levy of service tax even prior to (01.07.2007) insertion of sub-clause (zzzza) in Section 65(105) of the Finance Act, 1994
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CESTAT Larger Bench rules 3-2 on the issue of whether works contract service is liable to service tax prior to June 1, 2007; 3 Technical Members write majority decision, hold the same as taxable prior to June, 2007; CESTAT President Justice Goda Raghuram & another judicial member dissent, hold the same as not taxable pre 2007; Judgment delivered in the case of L&T
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Stand-alone activity of erecting border-fencing structure along the Indo-Bangladesh border, pursuant to MoU between Ministry of Home Affairs and Govt. Agencies, not taxable as “erection, commissioning or installation” service; Circular No. 80/10/2004-ST indicates that Legislature did not intend to tax erection activity separately in relation to objects of levy viz. plant, machinery or equipment, but alongwith commissioning or installation service, when charges thereof are composite; Revenue incorrect in interpreting that addition of expression “structure - pre-fabricated or otherwise” brought significant change in said entry so as to tax stand alone activity of erection of structure; Relying on SC ruling in Paper Products Ltd, CESTAT observes that Circular explaining / clarifying the meaning of ‘erection, commissioning or installation service’ cannot be ignored while interpreting and applying it to facts and circumstances of present case; Refuses to read the word ‘OR’ as ‘AND’ in the definition u/s 65(39a) of Finance Act, intention of Legislature is to tax either commissioning or installation alongwith erection under clause (i) or installation activities mentioned in subsequent part i.e. under clause (ii) therein : Kolkata Tribunal
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Particulars Tax Position before 1/04/2015 Tax Position after 1/4/2015
12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of
(a) a civil structure or  any other original works meant predominantly for  use other than for commerce, industry, or any other business or profession; Exempt Taxable
(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); Exempt Exempt
(c) a structure meant predominantly for use  as (i) an educational, (ii) a clinical, or  (iii) an art or cultural establishment; Exempt Taxable
(d) canal, dam or other irrigation works; Exempt Exempt
(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or Exempt Exempt
(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act; Exempt Taxable
13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public; Exempt Exempt
(b) a civil structure or  any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; Exempt Exempt
(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961)and meant predominantly for religious use by general public; Exempt Exempt
(d) a pollution control or effluent treatment plant, except located as a part of a factory; or Exempt Exempt
a structure meant for funeral, burial or cremation of deceased; Exempt Exempt
14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro; Exempt Exempt except Port and Airport
(b) a single residential unit otherwise than as a part of a residential complex; Exempt Exempt
(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; Exempt Exempt
(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or Exempt Exempt
(e) mechanised food grain handling system, machinery or equipment for units  processing  agricultural produce as food stuff excluding alcoholic beverages; Exempt Exempt
Reverse charge mechanism: Manpower supply and security services when provided by an individual, HUF, or partnership firm to a body corporate Partial Reverse Charge Full Reverse charge

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43

 

Tulsyan Nec Limited Vs. The Assistant Commissioner (CT) [ 2015 (2) TMI 564 – MADRAS HIGH COURT]

Works Contract executed for SEZ units cannot have the benefit of zero rating since goods transferred by a contractor are neither exported as such or used in the manufacture of other goods which are exported

Tulsyan Nec Limited (the Petitioner) was engaged in the manufacture of High Tensile Fasteners, Gear Shifters etc., and its factory was located in Special Economic Zone (SEZ). The Petitioner was awarded contracts for construction of their factory building and related infrastructure in SEZ. The Petitioner inter alia contended that in terms of Section 18(1)(ii) of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act), sale of goods to any registered dealer located in SEZ is zero rated sale, if such registered dealer has been authorised to establish such unit by the authority specified by the Central Government in this behalf and shall be entitled for Input tax credit or refund of the amount of tax paid on the purchase of goods specified in the First schedule including Capital Goods.

While on the other hand, the Revenue contended reversal of Input tax credit on the basis of the Circular No. 9 of 2013, dated July 24, 2013 (“the Circular”) issued by Commissioner of Commercial Taxes, Chepauk, Chennai stating that sale of goods, involved in the execution of Works contract, to any other registered dealer located in SEZ in the State is not zero rated sale, as the goods are not exported as such or consumed or used in the manufacture of other goods that are exported, as required under Section 18(2) of the TNVAT Act. Consequently relying upon the Circular, the Assessing Officer issued an Assessment Order to reverse the Input tax credit availed as the transaction involved is not a zero rated sale and imposed penalty. Being aggrieved, the Petitioner challenged the Circular and the Assessment Order by filing Writ Petition before the Hon’ble High Court of Madras.

The Hon’ble Madras High Court interalia held as under:

  • Zero rated sale as defined under Section 2(44) of the TNVAT Act means sale of any goods on which no tax is payable, but credit for the Input tax related to that sale is admissible;
  • To be considered as a zero rated sale and to be eligible for Input tax credit or refund, the sale transaction should fall within any of the three clauses of Section 18(1) of the TNVAT Act;
  • Section 18(2) the TNVAT Act has to be read along with Section 18(1) thereof. Hence, the Petitioners contention that Section 18(2) of the TNVAT Act will not apply to Section 18(1)(ii) thereof is not sustainable as it amounts to inserting a new provision to the statute when the statute does not contemplate of such situation/ contingency;
  • In terms of Rule 22 of the Central Special Economic Zones Rules 2006, grant of exemption, drawbacks and concession to the entrepreneur or Developer shall be subject to conditions contained therein. Therefore, the scheme of the Central Special Economic Zones Act, 2005; Tamil Nadu Special Economic Zones Act, 2005 and the Rules made thereunder makes it clear that benefit is intended to the SEZ unit for the authorised operations which essentially is the export activity for which approval has been granted;
  • In the case of Kerala State Cooperative Marketing Federation Vs. CIT, reported in [1998 (5) TMI 6 – SUPREME COURT], wherein the Hon’ble Supreme Court pointed out that while interpreting statutory provision, attention should be given to the setting in which the provision occurs and regard must be had to the language of an entire group of connected provisions which may form an integral whole;
  • It is a settled rule of interpretation that in a taxing statue one has to look merely what is clearly stated, there is no room for any intendment, there is no equity about tax, there is no presumption as to tax, nothing is to be read in, nothing is to be implied and one can only look fairly to the language used.

Thus, the Hon’ble High Court upheld the validity of the Circular stating that Works contract executed for SEZ units cannot have the benefit of zero rating since goods transferred by a contractor are neither exported as such or used in the manufacture of other goods which are exported, as not being ultra vires to the provisions of the TNVAT Act and not violative of Article 14 of the Constitution of India.

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25
HC upholds Revision order, rejects assessee’s exemption claim as ‘sub-contractor’ for construction of port, under Rule 17(1)(e) of Andhra Pradesh VAT Act pursuant to exemption granted to employer / main contractor on all inputs used under concessional agreement with State Govt; Refuses to invoke doctrine of promissory estoppel or legitimate expectation as assessee not a party to said agreement, more so, when similar claim of employer negated by this Court; Sales Tax Tribunal order interpreting proviso to Rule 17(1)(e) to pay balance tax on completion of entire works, passed in ignorance of relevant statutory provisions and contrary to law declared by SC in Gannon Dunkerly, hence Revisional Authority not barred from exercising jurisdiction u/s 32 of Act; Value of goods will be value at time of incorporation in works contract, Rule 17(1)(e) does not postpone its determination till receipt of total consideration on completion of entire work, observes that the term “finalisation of accounts” must be understood w.r.t. particular financial year, not project completion several years thereafter; Credit of tax deducted at source by employer will be available on production of relevant certificate, HC holds that benefit of composition scheme cannot be denied merely for non-disclosure of works contract turnover in returns, but Revenue can institute penal proceedings for suppression if it chooses to do so : Telangana & Andhra Pradesh HC
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HC allows appeal, printing of Annual Reports constitutes a works contract, no sales tax payable under Tamil Nadu General Sales Tax Act on printing materials used therein; Predominant intention of assessee is printing as per specifications of particular customer and such printed material has no commercial value, incapable of being sold in open market; Applies SC ratio in Anandam Viswanathan that in every case, nature of contract and transaction must be gone into to determine whether the same is works contract or sale and it is possible only when intention of parties is found out; HC observes, mere fact that in execution of contract for work, paper owned by assessee stands transferred to contractee incidentally cannot lead to inference that transaction only a sale and not works contract; Sets aside Joint Commissioner order, thereby allowing assessee’s claim u/s 3(B) of the Act : Madras HC

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Rajasthan HC upholds Single Judge bench order, sales tax payable on pre-stressed concrete (PSC) pipes supplied under work order for laying, jointing and commissioning of pipelines for State Govt Dept; Rejects assessee’s contention that primary and dominant object of contract is laying, jointing of pipes and manufacture & supply thereof is merely incidental / ancillary, hence taxable at concessional / composite rate as ‘indivisible composite works contract’; Applies SC ratio in Larsen & Toubro Ltd vs. State of Karnataka that after 46th Constitutional Amendment introducing Article 366(29A), single and indivisible contract is at par with a contract containing two separate agreements and States have power to levy sales tax on value of material in execution of works contract; Upholds Single Judge decision refusing to review Tribunal order which held assessee liable to pay tax @ 12% and not 2% of turnover deducted at source, since finding that supply of pipes nothing but sale of pipes involved in execution of works contract exigible to sales tax, not disputed by assessee; As dispute pertains to period upto AY 1999-2000, exemption benefit under Notification dated March 29, 2001, whereby laying of pipelines with material specifically categorised as ‘works contract’, unavailable to assessee  : Rajasthan HC
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43

CIT vs. Chemosyn Ltd (Bombay High Court)

(i) Even if gains have accrued on execution of the development agreement as per Chaturbhuj Dwarkadas, the subsequent modification/ supercession of the agreement means that gains are not taxable as per real income theory, (ii) expenditure on buy-back of shares of warring shareholders is business expenditure

The High Court had to consider two issues:

(a) The assessee entered into a development agreement with Dipti Builders to develop a plot owned by the assessee for a consideration of Rs.16.11 crores and construction of 18,000 sq.ft of built up area free of cost. This was rescinded by a tripartite agreement dated was entered into between Dipti Builders, a new buyer and the assessee under which the plots were transferred to the new buyer For a total consideration of Rs.29.11 crores. The assessee offered only Rs.16.11 crore to tax as capital gains. It contended that the consideration in the form of constructed area of 18000 sq.feet was neither received nor had accrued and no occasion to bring it to tax could arise. However, the AO & CIT(A) rejected the contention by relying onChatrubhuj Dwarkadas Kapadia vs. CIT 260 ITR 491 (Bom) and held that capital gains accrued on the execution of the development agreement. This was reversed by the Tribunal by relying on Kalpataru Construction Overseas 13 SOT 194 (Mum) and CIT vs. Shivsagar Estates 204 ITR 1 (Bom);

(b) There was a dispute between brothers who together owned the assessee company. As a consequence of differences between the two groups, the dispute reached the Company Law Board as well as the Supreme Court. Thereafter, a settlement was arrived at between the two warring groups of shareholders and as per directions of the Company Law Board the assessee was directed to buy 34% shareholding of one of the warring group and cancel the same. The assessee claimed the amount of Rs.6.81 crores (being the difference between consideration paid and face value of the shares acquired for cancellation) as revenue expenditure. This on the basis that in view of the dispute between its shareholders, the business was adversely affected and therefore, the payment was expected to be incurred for purposes of business. However, the AO & CIT(A) did not accept the same and held the expenditure to be of capital nature. However, the Tribunal allowed the claim by relying on Echjay Industries Ltd vs. DCIT 88 TTJ (Mumbai) 1089.

HELD by the High Court dismissing the appeal

(i) In Chaturbhuj Dwarkadas Kapadia, the issue was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset. No income is accrued or received of the value of 18000 sq.feet of constructed area under the development agreement because the said agreement was not acted upon as it came to be uperseded/modified by the Tripartite agreement. This was the position when the return of income was filed. On the application of the real income theory, there would be neither accrual nor receipt of income to warrant bringing to tax to the constructed area of 18,000 sq.ft which has not been received by the assessee (CIT vs. Shoorji Vallabhdas 46 ITR 144 (SC) followed);

(ii) The Tribunal has recorded the finding of fact that in view of the dispute between the two warring groups of shareholders the business of the assessee had suffered. After the settlement of the dispute there was a substantial increase in the sales. After settlement of the dispute new products were launched by the assessee-company. All this was evidence of the fact that the dispute between two groups of shareholders had affected the business of the company. The amount paid by the assessee for the purchase of its shares for subsequent cancellation was an expenditure incurred only to enable smooth running of the business. Thus, the expenditure was incurred for carrying on its business smoothly and was a deductible expenditure.

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48

2015-VIL-88-RAJ

THE INDIAN HUME PIPE CO. LTD. Vs STATE OF RAJASTHAN

Rajasthan Sales Tax Act, 1954 – Works Contract – Contracts for execution of civil construction works including laying of pipelines for water supply - Laying of pipelines - Assessing Authority, on the findings that the contract work executed by the appellant is a contract, which is divisible work orders imposed tax and penalties under Section 7AA of the Act – Denial of application for exemption by the assessee under Rule 10A on the ground that the contract is a divisible contract, supply of pipes and the works for contract of civil work - The work performed was not an undivided work contract – Appellant submission is the contract is an indivisible contract for the supply of pipes and for the supply of labour and services, and that the Company is not liable to pay tax at the rate of 12%, as charged on the cost of the pipes. It was only liable to pay tax @ 2% on the turnover of the works contract, which has already been deducted at source by the PHED – Single judge order in appeal - HELD - The legal proposition with regard to definition of 'works contract' in Article 366(29A)(b) of the Constitution of India, has been explained in the recent judgment in Larsen and Toubro Ltd Vs. State of Karnataka 2013-VIL-03-SC-LB. For sustaining levy of tax on goods, deemed to have been sold in execution of a works contract, three conditions namely (i) there must be a works contract; (ii) goods should have been involved in execution of a works contract; and (iii) property in those goods must be transferred to a third party, either as goods or in some other form, have been amply clarified. A contract may involve both, a contract of work and labour, and a contract for sale. A transfer of property in goods under clause 29A(b) of Article 366, is deemed to be sale of goods involved in execution of a works contract by a person making transfer and purchase of those goods to a person, to whim such transfer is made. A single and indivisible contract has been brought on par with a contract containing two separate agreements, empowering the State to levy sales tax on value of material in execution of works contract - In view of the clarification of law with regard to imposition of tax on the sale of goods in the works contract, the question of law, does not require any further discussion for its determination. The findings with regard to sale of pipes involved in the works contract, are findings of fact, which do not required any interference by us in these matters - So far as the exemption is concerned, we do not find any error in the finding recorded by learned Single Judge, that the exemption Notification having been issued on 29.03.2001, will only apply prospectively from the year 2001-2002, and that the benefit of exemption can be availed by a firm only after issuance of the Notification dated 29.03.2001. The petitioner has challenged the Assessment Year 1999-2000, and therefore, the Notification was not applicable to the dispute involved in the matter – No error of law in the judgment of learned Single Judge – Writ petition are dismissed

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